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Author | Mao Keji
Editor's Note | Zhang Qianhe
Editor of this issue | Yang Qian
Reviewer of this issue | Jiang Yi
Editor's Note
The International Monetary Fund's latest "Global Economic Outlook" points out that India is expected to surpass Japan by the end of 2025 and become the fourth largest economy in the world. This is another ranking rise for India's economic volume, following its surpassing of the UK in 2024. However, compared to the total ranking, a more important long-term factor may be the structure. After all, the population of countries such as Japan and Germany is only a fraction of India's, so India does not need particularly high per capita GDP growth to achieve an overall surpassing. Over the past decade under Modi, India's economic growth still heavily relies on services such as finance, insurance, and real estate, while the contribution of manufacturing has not increased but decreased instead. Although the Indian government has tried to take advantage of the global supply chain restructuring opportunity, relying on the domestic market and tariff barriers to attract foreign investment to set up factories, the actual effects of reforms in key areas such as land acquisition, labor system, and business environment have been poor, failing to effectively reduce production costs and leading to a lack of price competitiveness in exports. As foreign capital gradually recognizes the true nature of the Indian economy, capital inflows have significantly declined from their peak, and foreign investment remains biased towards the service sector, further limiting the ability to drive manufacturing. Affected by this, the problem of underdeveloped manufacturing and the structural issue of "moving away from the real economy to the virtual economy" will continue to exist. Moreover, the large-scale infrastructure investments made earlier in India face serious problems of insufficient returns due to "premature investment." The stark contrast between different economic data indicates that objectively assessing India's economic development requires not only paying attention to India's economic potential and achievements but also taking into account long-term potential, medium-term trends, and short-term dynamics, focusing on detailed industry data and typical policy cases to deeply analyze its true nature and quality, providing decision-making basis for formulating systematic and sustainable policies toward India. The South Asian Research Communication specially reprints this article for readers' reference.
Image source: Indian media
Since Modi took office in 2014, India's economic development has been rapid, and it is expected to become the third largest economy in the world by 2027, being praised by Western and Indian media as "the new center of the global industrial and supply chains," and therefore seen as a key swing force in the strategic competition between China and the United States.
However, if we carefully analyze the actual performance of India's economy during this period, it is not difficult to find out:
"The Indian miracle" is not what it seems.
One, what supports the "economic miracle" of Modi's ten years?
According to the CEIC database, based on the average contribution of each industry to GDP growth from the third quarter of 2014 to the fourth quarter of 2023, the top three pillars of the "economic miracle" of Modi's ten years are all service industries: first, finance, insurance, real estate, and business services, which together contributed 25.23%; second, trade, hotels, transportation, and communication, which together contributed 24.39%; third, community, social, and personal services, which together contributed 14.40%. The combined GDP contribution rate has consistently exceeded 50%, followed by manufacturing (13.92%) and construction (9.45%).
In other words, the service industry—not the well-known "Made in India"—is the main driver of India's economic growth over the past decade.
Because the service industry has a weaker industrial chain and cluster effect than the manufacturing industry, this service-led economic growth model has caused long-term issues such as insufficient employment, weak goods exports, and excessive trade deficits, as well as systemic weaknesses such as increasing wealth gaps and lack of industrial linkage. In the critical stage of economic takeoff, the reason why India's annual GDP growth rate has struggled to reach the double-digit "East Asian level" is mainly due to the lack of development in the manufacturing sector.
GDP Growth Contribution by Industry in India. Image source: WeChat official account of "Observer Net"
At the same time, after Modi took power, the contribution of India's manufacturing industry to GDP did not increase but decreased.
From the quarterly average GDP contribution of the manufacturing industry, it was 16.53% before Modi's tenure (second quarter of 2005 to second quarter of 2014), but it dropped to 13.92% during his tenure (third quarter of 2014 to fourth quarter of 2023). In addition, the industry with the highest GDP contribution growth after Modi took power was community, social, and personal services, with a contribution growth of 3.23 percentage points.
GDP Growth Contribution by Quarter in India's Manufacturing Sector. Image source: WeChat official account of "Observer Net"
Looking at the share of manufacturing value added in GDP, the share of manufacturing did not reverse the long-term declining trend after Modi's tenure, and by 2023 it had fallen to 12.84%, the lowest level since 1960. At the same time, the share of service sector value added in GDP continued to hit new highs, reaching 49.8% in 2023. For comparison, the share of manufacturing value added in GDP in Bangladesh and Vietnam increased from 16.61% and 20.37% in 2014 to 22.34% and 23.88% in 2023 respectively.
Share of Manufacturing and Service Sector Value Added in India's GDP. Image source: WeChat official account of "Observer Net"
These data indicate that India has not changed its path dependence on the service industry.
Despite this, against the backdrop of the U.S. and Western implementation of "friend-shoring" strategies, the Modi government continues to try to shape India as the best choice to "replace China". However, looking at actual data, compared to before the Sino-U.S. trade friction in 2017, China's share of U.S. imports fell by 8.8 percentage points in June 2024, but India's share only rose by 0.6 percentage points to 2.7%, far below Vietnam's 2.3 percentage points and Taiwan's 1.9 percentage points.
In other words, the idea of "India replacing China" is hard to stand, and the substitutability of India's industrial chain and supply chain for China is actually greatly exaggerated.
It is worth noting that although India has successfully attracted many foreign companies to invest and set up factories in India by relying on its vast domestic market and tariff barriers, the high manufacturing costs in India have led to a severe lack of price competitiveness in India's manufacturing exports. Therefore, the newly added capacity in India is mostly "in India, for India", rather than "in India, for the world", indicating that the substitutability of India's position in the Chinese industrial chain and supply chain is not significant at present.
Two, see through the color and understand the essence objectively
Under the long-term hype by Western media and India itself, the actual performance of the Indian economy is not commensurate with its reputation; interested parties have recently been enthusiastic about promoting the narrative of "India's rise", especially shaping the rhetoric of "the next global manufacturing center", which is not realistic.
Investigating the fundamental reasons behind this phenomenon, it lies in the fact that India's internal constraints, such as low labor quality, rigid land acquisition systems, strict labor systems, and poor business environment, have not improved, seriously hindering India's release of its industrial development potential.
In recent years, foreign investors have gradually realized the true nature of the Indian economy, and FDI inflows have declined significantly, with no improvement in the structure.
From the total perspective, the scale of India's use of FDI reached a historical high of 4.79 trillion rupees in 2020 and has been declining continuously since then. Its share of the global emerging market countries (excluding China) has also declined significantly, from a high of 18% in 2022 to below 8% currently.
From the structural perspective, the main industries attracting FDI inflows in India in recent years remain the service sector, especially the communication and computer services. The proportion of manufacturing using foreign investment has actually declined after Modi took office, not only failing to change India's traditional growth path but also exacerbating the reliance on foreign investment in the service sector.
Considering that economies such as Vietnam and Indonesia in the same ecosystem have been actively utilizing foreign investment in specialized fields during the same period, the current FDI dilemma faced by India reflects more the serious constraints of India's internal problems, rather than external factors such as the Federal Reserve's interest rate hikes or the deterioration of global geopolitical situations.
Although India's economy appears to be booming, it is actually accumulating internal risks such as "moving away from the real economy to the virtual economy" and "high deficits."
On one hand, India's economic growth is overly dependent on the service sector, leading to low resilience. Departments such as IT and finance in the service sector have limited capacity to absorb employment and create export capabilities, and they are highly dependent on overseas demand. Therefore, changes in the global market situation can easily be amplified in India, causing drastic fluctuations in economic operations.
On the other hand, departments driving India's economic growth, such as infrastructure, rely heavily on debt-driven development, making it prone to risk accumulation. The Modi government mainly uses government bonds to finance infrastructure funding, and in recent years, the general government deficit in India has accounted for about 10% of GDP, which is more than twice the average of emerging market countries. Among them, interest payments alone already account for 20% of India's government spending, and in the future, it may also affect the sustainability of fiscal investment and the stability of economic growth.
Certainly, the breakthrough progress in India's infrastructure and other fields is worth noting, especially the long-term effects.
The Modi government invested 43.5 trillion rupees in infrastructure from 2014 to 2023, initially reversing the trend of declining investment as a percentage of GDP, marking that India's economy may shift from "single-pull by domestic consumption" to "multiple-pull by consumption, investment, etc." Looking at sectors such as transportation, communications, and electricity, India's infrastructure level has improved rapidly, playing a positive external effect, effectively reducing the cost of economic operations, and better attracting manufacturing investment.
However, the effectiveness of India's borrowing to make up for infrastructure shortcomings is still worth observing. The premise for India to make up for infrastructure shortcomings through borrowing is that the long-term return rate of infrastructure is higher than the government's borrowing financing rate. However, the current yield on India's 10-year government bond has reached as high as 7%. If India's economic development is sluggish and the infrastructure return is not as expected, it will be difficult to maintain the current level of infrastructure, and it may even fall into the trap of "premature infrastructure."
Three, do not underestimate India, nor should we overestimate it
Against the backdrop of the strategic competition between China and the United States, facing India, the only super-large country with a population of over 1 billion outside of China, we should neither be bound by old prejudices and preconceptions to underestimate India, thinking that India is worthless and has no hope for development, thus being careless in major matters involving India, committing irreversible strategic miscalculations; nor should we blindly follow other interested parties in fabricating the rhetoric bubble of "the Indian miracle" and overestimate India, giving it "over-standard treatment" beyond its actual strength and level, which in fact helps India enhance its ability to respond to and align with the U.S. implementation of "friend-shoring" and "China + 1".
In summary, for China, the most ideal approach should be to pay attention to India, conduct targeted research on India's long-term potential, medium-term trends, and short-term dynamics, especially through detailed industry data mining and policy case studies, further understanding and grasping the essence and quality of India's economy, and based on this, formulate policies for India that are beneficial both now and in the long run.
Author's Introduction:
Mao Keji, Assistant Researcher at the Center for International Cooperation of the National Development and Reform Commission.
This article is reprinted from the WeChat official account of "Observer Net" on November 7, 2024, titled "The 'Indian Miracle' Is Not What It Seems."
Original article: https://www.toutiao.com/article/7562234405742281266/
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