analysis
India’s economy and population are growing. Politicians around the world are courting this important partner for specialists and political alliances. India – new superpower or pseudo-giant?
In India, high-ranking politicians from all over the world are currently shaking hands. After Chancellor Olaf Scholz, Finance Minister Christian Lindner and Defense Minister Boris Pistorius, as well as Labor Minister Hubertus Heil and Economics Minister Robert Habeck, leading figures from other economies are also vying for the emerging economic power – such as Giorgia Meloni from Italy and Anthony Albanese from Australia.
US Treasury Secretary Janet Yellen has just been to New Delhi for the third time this year. In June, her boss, US President Joe Biden, rolled out the red carpet for Indian Prime Minister Narendra Modi in Washington. The parade was opened last year by China’s President Xi Jinping, India’s economic partner and political opponent with a long, troubled border. But what do they all want in India?
Germany wants more energy and trade
In order to become less dependent on China, Germany wants to cooperate more closely with India. The vision: more green energy from and more trade with India. Trade had increased recently, but 30 billion euros in volume is a tenth of what trade between Germany and China accounts for.
And so Economics Minister Habeck is hoping for a free trade agreement between India and the European Union. Partners are needed so that the EU and Germany can assert themselves against China and the USA, he said before his trip to India. According to the ministerial explanation, Germany is India’s most important trading partner within the EU and India is Germany’s most important trading partner in South and Southeast Asia.
According to a survey by the Indo-German Chamber of Commerce, local German companies appreciate the political stability, but also the excellent skilled workers and the relatively low wage costs.
USA help shape India’s energy transition
Energy and climate policy are also on the Habeck agenda. And that’s where the US broke new ground this week: Treasury Secretary Yellen offered India a partnership to help the country’s energy transition.
India, the US and China emit the most greenhouse gas emissions in the world. However, India consumes much less energy per capita – not least because many Indians do not yet have access to electricity. It changes. The US offers capital for the energy transition. India wants to be climate neutral by 2070.
Getting India on (its own) line?
The hopes of many countries are also based on the fact that India’s economic recovery will continue – and that they will benefit from it. The International Monetary Fund (IMF) expects India’s economy to grow by 6.1 percent this year and even by 6.8 percent in 2024. The IMF predicts that the country could replace Germany as the fourth largest economy in the world in 2025/26 at this rate.
So when politicians from all over the world come to India, there’s a lot at stake: India has just replaced China as the world’s most populous country. In addition, the country should also play at the top of the political and economic stage if Prime Minister Narendra Modi has his way.
In addition, many heads of state hope to win India over to a common line against Russia in the Ukraine war. So far in vain: India abstained from the UN resolution on the withdrawal of Russian troops. Russia is an important partner for the country. For example, India obtains Russian oil and gas as well as weapons. Besides China, India is the main buyer of Russian oil – at attractive prices.
confident India
India is well aware of its role in the world: “Europe must grow out of the paradigm that Europe’s problems are the world’s problems, but the world’s problems are not Europe’s problems,” Foreign Minister Subrahmanyam Jaishankar said in March.
Efforts to pull India to one side or the other have always existed. But India aligns its foreign policy efforts with economic interests. “India is a democratically governed country, but under the current government it seems to be moving dangerously close to the edge of autocracy,” says Holger Görg, Professor of Foreign Trade at the Christian Albrecht University in Kiel and head of the International Trade and Investments research department Kiel Institute for the World Economy.
Politically, the country seems to want to keep all options open – with success. “Of course, tensions with China could continue to escalate over the next few years as economic rivalry grows.
China and India very different
According to Görg, however, China and India are very different. China is the “workbench of the world” because many consumer products like Electronics, toys and clothing contain parts from the People’s Republic or are produced locally. India does not play a major role in manufacturing and consumer goods.
However, the country is strong in the service sector (finance, IT, software, medicine) and also internationally intertwined here. “With the growing importance of services and especially trade in services, which according to many experts will grow strongly in the coming decades, India’s importance will of course also increase significantly,” says Görg.
In addition, the knowledge of English of the relatively young, growing population, the growing middle class, is a great advantage when it comes to integration into international value chains, especially in services. “India has relied heavily on special economic zones, which also show positive effects in terms of the settlement of companies, especially in the IT sector,” explains Görg.
Education is the key
According to the research institute Pew Research, the population is incredibly large at 1.4 billion and will probably be 1.7 billion by 2064 – significantly more than the Chinese. Most Indians are young: More than 40 percent of the people in India are younger than 25. The average age is 28. For comparison: Americans are 38 years old on average, Chinese 39.
But what does it take to take advantage of the high population and especially the many young people? “Education is the most important thing here,” says Görg. There is a very well trained workforce in India, as can be seen in the strong economic sectors of the national economy (IT, financial services, health). “But that still needs to be expanded, because at the moment it only affects a relatively small part of the population.”
China is far ahead economically
Economically, China is still far ahead. India generates goods and services worth 3.4 trillion US dollars per year, China with 18.1 trillion US dollars a good five times as much. However, India has achieved steady economic growth in recent years, in 2022 it was almost 7 percent. According to forecasts by the International Monetary Fund, India will continue to grow – at rates of six percent in the next few years. In contrast, falling growth rates of between three and five percent are forecast for China.
So India’s economy is growing faster – but the bureaucracy is only slowly declining. Negotiations about a chip factory by Apple supplier FoxConn in India recently failed. Bureaucracy still seems to be a barrier for foreign investors. And not only that.
Disastrous infrastructure
Anyone who has ever been to India knows how far behind the infrastructure is. An avalanche of bicycles, mopeds, cars, rickshaws and tuktuks bounces over pitted streets – always careful to avoid the sacred cows. Only half of the roads are paved at all – in bad condition. Trains are packed to the roof. India has the highest number of road fatalities in the world.
The infrastructure is being expanded; 10,000 kilometers of expressways are to be built every year. That is almost as much as Germany’s entire motorway network. Around 100 airports are being built. But that costs: India will invest 1.2 trillion dollars in its infrastructure by 2025. The aim is to reduce the high logistics costs. According to the Ministry of Transport, transport and logistics costs account for 16 percent of GDP. For comparison: In China it is ten percent.
spirit of optimism, but…
But where does the attitude of the new superpower India come from, which can also be heard and read everywhere here? Economic expert Holger Görg describes it like this: “India is the most populous country in the world and one of the fastest growing. It also has an expanding middle class of the population – which means a reduction in poverty in the population – with growing consumption.”
In addition, one of the national languages is English, which simplifies the international integration of the economy, according to Görg. “Therefore: Yes, it definitely has what it takes to become an economic superpower in the medium to long term.”
second strongest National economy 2075?
Investment bank Goldman Sachs expects India to overtake the US and become the world’s second-biggest economy by 2075. India has made more strides in innovation and technology than some might think. “India’s large population clearly represents an opportunity, but the challenge is to harness the workforce productively by increasing participation and skilling that workforce,” said Santanu Sengupta, economics researcher India at Goldman Sachs Research.
On the way – but overestimated?
But despite all the progress, India has been on the verge of economic strength several times. But corruption, bureaucracy and infrastructure kept investors back. India experts such as economic historian Ashoka Mody have long warned against overestimating India: the state has not yet managed to create enough jobs for the rapidly growing population. A good twelve million applications were received for 35,000 vacancies at Deutsche Bahn.
Frustrated, many Indians therefore return to their families in the countryside. There is work there. Corona also exacerbated the emigration. And it’s not just their own compatriots who are frustrated: companies that leave China don’t necessarily go to India either. Thailand, Vietnam and Indonesia are tough competitors.
Although India’s focus on services is quite unique, Görg explains, “but the other countries are fishing in the same pool of consumer goods production.” India is relatively little embedded in these global value chains for consumer goods production, but is an important exporter of services.
India is currently on a stable path. Whether this is sustainable or whether India will remain the much-cited pseudo-giant will probably only become clear in a few years.