UBS Economics-APAC Economic Perspectives _Can India be the next China_ Wa...-109915757

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APAC Economic Perspectives

Can India be the next China?

In the past couple of years, the economic fortunes and outlookfor China and India was

divergent. China’s economic recovery has been weak after the pandemic while India’s

has been strong. China is also facing many structural challenges including a rapidly

aging population while India has a relatively young and rising labour force and a far

friendlier external environment. Many investors ask: Can India be the next China?

We think this question is not simply about whether India can grow rapidly over a long

period of time and become as large and as rich as China today. That is not difficult to

answer – with a population already larger than China’s, India’s economy will become as

large as China’s is today sooner or later. This report provide a framework for the

following implied questions: 1) can India become a manufacturing powerhouse like

China and, potentially, export like China; 2) can India’s domestic market grow like

China's did in the past two decades, with the rising middle class absorbing an increasing

amount of global consumer goods and services; and 3) will India’s growth have similar

implications for the global commodities and energy markets as China's has had?

With a relatively small  base, India is unlikely to seriously challenge

China’s overall manufacturing position soon. However, India has some potentially

favourable conditions for rapid growth in manufacturing including abundant cheap

labour, improving infrastructure, policies to attract foreign investment and a mostly

favourable international image. More importantly, India has a large domestic market

that is now equivalent to China’s around 2006-2007, which will be the key to rapid

manufacturing growth in the years ahead. In this process, India stands a good chance of

closing the gap with China and taking some market share. For details on specific sectors

that could grow faster, see Asia's supply chain shifts.

India’s doubled in the past decade and UBS expects India to

overtake Japan in 2026 to be the 3rd largest consumer market. If India’s consumption

grows at a similar pace as its GDP, the country’s domestic market size could reach

China’s current level many years before its GDP does. India’s household saving rate is

relatively high (though lower than China’s) and household leverage is moderate, but we

think the most important driver for sustained consumption growth is high-quality job

creation. As India grows, demand for modern durable goods and automobiles will likely

grow even faster.

China has had an enormous impact on  over

the past two decades. India is already a large oil and coal importer but we think it’s

unlikely to see a similar demand growth from India in the coming years. India’s economy

is less focused on industry than China’s has been and its growth is unlikely to be as

capital- and energy-intensive. India’s own resource availability and different

urbanization pattern also means the country is unlikely to follow China’s past path in

imports of base metals such as Iron ore.

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China

$E

Economist

wang.tao@ubs.com

+852-2971 7525

$F

Economist

tanvee.guptajain@ubs.com

+91-22-6155 6070

FG

Economist

S1460516050002

jennifer-a.zhong@ubs.com

+86-105-832 8324

E

Economist

S1460524050003

grace-zc.wang@ubs.com

+86-105-832 8335

!H

Associate Economist

nihal.kumar@ubs.com

+91-22-6155 6059

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 %K

In the past couple of years, for China and India

was divergent.After the pandemic, China’s economic recovery has been weak while

India’s has been strong. China is also facing many structural challenges: the country’s

labour costs have risen sharply while its working age population and total population are

declining; recently, foreign direct investment (FDI) has shrunk to low levels, national

security concerns are hurting China’s trade and investment links; and local governments

are facing fiscal difficulties in sustaining infrastructure investment. In contrast, India has

a relatively young and rising labour force, the government has been improving

infrastructure and the business environment, foreign investors are interested in coming

to India, and it faces a far friendlier external environment than China.

Many investors ask J&JLM

JD To be clear, when we discuss India potentially becoming a manufacturing

powerhouse, we are not talking about it replacing China as the world’s factory now or

soon. That is not feasible as China currently accounts for roughly one-third of global

manufacturing while India is only about 3%. The real question is whether India has the

fundamentals to set forth rapid manufacturing development going forward and

increase its share in global exports along the lines of what China has done since the start

of this century.

Since 2000, China’s GDP per capita almost quadrupled as the country became the

factory of the world. Such economic performance was led by both exports and property-

heavy urbanisation. China’s rise as a manufacturing powerhouse was driven by its

competitiveness in global markets after the country’s World Trade Organisation (WTO)

entry in 2001 and domestic demand for consumption and investment goods. In this

process, China’s abundant cheap labour sufficiently educated for manufacturing,

relatively good infrastructure, opening up to international markets, and ability to attract

FDI have been cited as the key factors behind its success. In addition, rapid growth of

private enterprises also helped to reduce the relative importance of state-owned

enterprises in manufacturing, helping to improve efficiencies and competitiveness.

India’s per capita GDP in 2023 was about the same as China’s was in 2000 measured in

constant USD terms (around US$2300 in 2015 USD, versus US$12,000 for China in

2023), according to the World Bank. To explore whether and how India’s future

economic development, specifically manufacturing growth, might resemble China’s

path, we think it is useful to compare India’s economic features now with those of

China’s at the turn of the century.



A notable difference between India and China is their economic structure, in particular

the importance of manufacturing. China’s economy was already more manufacturing

based at the turn of the century (Figure 1). Manufacturing was about 32% of China’s

GDP in 2000, while services accounted for only 40%. India traditionally has been a much

more services-based economy, and its manufacturing is about 13% of GDP today, while

services account for over 50%. China’s manufacturing employment was about 110-115

million back in 2000, according to our estimate, and India’s is now about half of that,

55-60 million, while the two countries are roughly the same size in population.

As such, the  of China and India in the global landscape are

also different. We estimate China accounted for 6% of global manufacturing value-

added in the year 2000, which then rose to 9% in 2004, three years after it joined the

WTO, to now almost 30% (latest data). India accounts for 3% of global manufacturing

value-added now, half of where China was in 2000. India, on the other hand, is doing

well in services exports and accounted for 4.4% of global services exports in 2022,

compared to China’s 4.6% in 2000.

I%I 19 August 2024 ab 3

'NO

India 2022/23 China 2000 China 2022/23

% of own GDP 12.9* 31.6 26.2

% of global manufacturing VA 2.8 6.2 28.8

Manufacturing VA (Tiva) % of global manufacturing VA 2.8** 6.1 28.9**

Manufacturing employment % of non-farming employment 18.5*** 31.4 25.0

Manufacturing VA (GDP)

Source: CEIC, Haver, WDI, RBI KLEMS database, ILO, UBS. Note: India follows financial year, 2023 = FY24 (April - March), 2022 = FY23. *FY24; **For both countries, share in

global manufacturing VA (Tiva) is as of 2020; ***manufacturing employment data is as of 2022 for China and FY22 for India

Notwithstanding the difference in manufacturing’s starting position, how does India

compare to China in some key factors commonly recognized as having driven the latter’s

manufacturing sector growth?



' has often been cited as an important reason for India’s

future growth, just as the abundance of young and cheap labour boosted China’s

manufacturing competitiveness two decades ago.

In 2000, China had a population of 1.26 billion, with a median age of 29 years, while

India today has 1.4 billion people and a median age of 28.2 years old, making its

population bigger and slightly younger than China’s back then (Figure 2). Measured by

overall population dependency ratio – ratio of non-working age people vs working age

(15-64 years old) population, China started at 43% in 2000 (declined to 34% in 2010

before rising to 47% now), while India today is about 47%, also similar. However,

China’s total employment was 720 million in 2000, while India’s is only about 550

million today, due to the low participation of women in India's labour force. This, plus

the lower share of manufacturing in the overall economy, means India’s manufacturing

employment, at 55-60 million, is only half of what China’s was back in 2000, although it

is still by far the second-largest manufacturing labour pool globally. This also means that

India’s potential manufacturing employment could expand notably should female labor

market participation rise significantly.

'N&%

India 2022 China 2000 China 2022/23

Total population mn 1,429 1,243 1,410

Working age population (15-64) mn 972 870 961

Working age population (15-64) % of population 68 70 68

Total dependency ratio (15-64) % 47% 43% 47%

Child dependency ratio % 37% 33% 25%

Old age dependency ratio % 10% 10% 22%

Total employment mn 553 721 740

Median age of population Years 28.2 29.0 39.1

Education attainment Years of schooling 7.8 8.4 10.7

Source: UNPD, CEIC, Barro and Lee (2015); Lee and Lee (2016), Haver; UBS. Note: Working age in the above table is 15-64. Data for China is based on national census and

NBS, data for India comes from the UNPD. India and China’s years of schooling are both as of 2020.

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abAPACEconomicPerspectivesCanIndiabethenextChina?Inthepastcoupleofyears,theeconomicfortunesandoutlookforChinaandIndiawasdivergent.China’seconomicrecoveryhasbeenweakafterthepandemicwhileIndia’shasbeenstrong.Chinaisalsofacingmanystructuralchallengesinclud...

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