China is undergoing an economic slowdown and companies have turned to India as their next best alternative. Individuals are looking for the next big driver of growth and India seems like a suitable destination for manufacturing and trade purposes. It has taken advantage of its good international relations and low labor cost. The trade war further accelerated the growth of the Indian manufacturing sector as many US-based companies broke ties with China and migrated to India. The International Monetary Fund (IMF) estimates that India will be the fastest-growing major economy in the world in 2021.
India enjoys several comparative advantages and hence is a desirable destination for production and procurement. For this reason, companies like Walmart, Amazon, Apple and Tesla are opening their manufacturing hub in India. It is projected to expand by 7.4% putting it ahead of China.
So what’s driving India’s growth?
India has a population of about 1.3 billion. This makes it the second-most populous country in the world. If India’s population continues to grow at its current rate, it will soon surpass China’s population by 2024. Majority of India’s population is young and considered a part of the productive workforce. Whereas, many Asian countries constitute an aging population. India has a median age of only 27 years compared to China’s 37 years and Japan’s 47 years. By 2050 India is expected to have a working population of more than 1 billion.
Since Prime Minister Narendra Modi came into power in 2014 his government has attracted foreign direct investment. Modi has been credited for his strong reform agenda to improve India’s business environment. The World Bank endorsed his efforts improving India’s ranking and its ease of doing business. India grew faster than China between 2014 and 2016 but lost its fastest-growing major economy title in 2019.
In November 2016, the demonetisation act of the Indian government startled the entire nation. The withdrawal of 500 and 1000 rupee notes resulted in 86% of the country’s currency in circulation becoming invalid.
While businesses were trying to recover from the policy the government implemented the goods and services tax (GST) in July 2017. This was considered the nation’s biggest tax reform since its independence. This reform consolidated several taxes into a single structure and was formulated to bring long-term benefits for India.
Former Chief Economic Advisor to the Government of India, Raghuram Rajan said that India needs to grow much faster. About 1 million people enter the labor force every month. This huge supply of workforce needs to be absorbed which means we need significantly more growth to employ more people.
A period of stagnation
The country’s domestic investment has fallen as businesses have been hesitant to invest. India’s exports have also dropped since Modi came into power. Despite his ‘Make in India’ campaign meant to promote the country’s manufacturing industry economists say that domestic developments are to be blamed.
India’s growth in the past couple of years has faced some serious challenges. The top rating agencies cut their growth projections for India. One reason was rising oil prices. This meant higher import costs and higher inflation. India is the world’s third-biggest oil consumer after China and the United States because of low oil prices which fell to about $40 per barrel in 2016. Modi’s government dealt with this by adjusting its taxes on petrol and diesel.
The Indian rupee is also the worst-performing currency in Asia as of 2020. With low earning potential and low wage rates, the standard of living is also compromised. The pandemic further gave rise to tensions in the job market. With the increase in youth unemployment, the government is unable to match the labor supply.
There are reports on unstable jobs as more than 25 million people applied for about 90,000 job vacancies on India’s state-run railways. The workforce has no choice but to work at low wages in a highly competitive market. Many multinational companies are excited about India planning to export goods and outsource their services.
At the moment, India’s middle-class income levels of similar populations in cities like Hong Kong and Singapore are extremely tiny. It is estimated to be just about 1% of India’s population. Unfortunately, it’s a weaker currency and growing oil prices hit India hard.
The rebirth of the manufacturing sector
In the preceding years, the government aggressively promoted its manufacturing sector. It offered several incentives and introduced various schemes to jumpstart its production. Majority of India’s population is employed in the service sector. However, the manufacturing sector needs to be developed to reduce vast unemployment. To turn this vision into reality, the government introduced the ‘Make in India’ initiative.
The purpose of this initiative is to boost manufacturing efficiency and increase employment. India could benefit from its engineering and technological capabilities as these are the prerequisites for a successful manufacturing hub. It has started to outsource the majority of its services to foreign nations. India introduced tax reforms and incentives to encourage local manufacturing. Despite its challenges, it continues to grow at an accelerated rate. India has also shown significant rebound after the pandemic and nationwide shutdown.