Start with the structural advantages. Commanding a territory that is nine times larger than Germany and a population that will soon overtake China’s as the world’s largest, India is one of the few countries that is big enough to house many large-scale industries, producing initially for global markets and ultimately for the burgeoning domestic market. Moreover, it is an established democracy with a long legal tradition and a notably young, talented, and English-speaking work force. And India also has some considerable achievements to its credit: its physical infrastructure has improved dramatically in recent years, while its digital infrastructure—particularly its financial payments system—has in some ways surpassed that of the United States.
If India really is the promised land, however, these examples should be joined by many others. International firms should be lining up to shift their production to the subcontinent, while domestic firms boost their investments to cash in on the boom. Yet there is little sign that either of these things is happening. By many measures, the economy is still struggling to regain its pre-pandemic footing.
Take India’s GDP. It is true—as enthusiastic commentators never cease to point out—that growth over the past two years has been exceptionally rapid, higher than any other major country. But this is largely a statistical illusion. Left out is that during the first year of the pandemic, India suffered the worst contraction in output of any large developing country. Measured relative to 2019, GDP today is just 7.6 percent larger, compared with 13.1 percent in China and 4.6 percent in the slow-growing United States. In effect, India’s annual growth rate over the past three years has been just two and a half percent, far short of the seven percent annual rate that the country considers to be its growth potential. The performance of the industrial sector has been weaker still.
Arvind Subramanian & Josh Felman
The article presents a range of valid points, from the uneven playing field, where the government may change existing policies or enforce them selectively to favor “national champions”, to large income inequality, dampening domestic demand. But I would argue there’s a more straightforward reason for the reluctance to replace China with India: having been reliant on Chinese manufacturing for decades – and now being caught in the crossfire between rising Chinese ambitions and American sanctions – companies are not keen to repeat the experience in India. While the country may be a democracy on paper, its institutions are increasingly leaning autocratic, internal religious tensions are rising, and its foreign policy strives for a kind of vocal non-alignment that won’t win India any long-term friends.
In a sense, instead of being its strength, India’s size is developing into a weakness for attracting foreign investors. During its rise, the Chinese leadership at least attempted to play quiet and pliant with the West to secure its rapid economic growth. India’s overt policy seems to be ‘India first’ – which on some level is a legitimate position to take for internal politics, but won’t work that well for attracting external capital.
Why are global firms reluctant to shift their China operations to India? For the same reason that domestic firms are reluctant to invest: because the risks remain far too high.
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