Is India the next China?
Ray Gordon, studied Economics at Michigan State University
For a refresher, please read these two swers:
Ray Gordon's answer to What is the economic future of Pakistan?
Ray Gordon's answer to Which country will be the next China in terms of economic growth?
I would advise anyone who doesn’t want a sugarcoated and excessively wishful thinking answer to turn away unless you want a pretty biting answer.
The people who claim that India will soon become the next China in terms of growth tend to have a misunderstanding of this figure:
The usual claim is “China had a demographic dividend, so its our turn now”, this is frankly speaking quite naive.
India has a number of embedded structural deficiencies, including a massively underdeveloped industrial basis, high growth rates leading to high NPA’s, an acute lack of the types of capital required for high growth rates and an assortment of go nmental issues means that its unlikely that India will be able to pull it off.
Couple these facts w/ the ongoing issue of automation, AI and less and less willingness by the developed world to absorb massive amounts of exports means that its unlikely that India will be able to experience a China-type growth miracle.
Countries in the developed world don’t want to absorb the same amount of trade deficits (along with the associated job losses) that allowed China, South Korea, Japan and next coming Vietnam to climb the economic ladder, this means India will have to compete with other developing countries in order to gets its exports to the west. As I’ve pointed out, during East Asia’s rise, the words free trade and globalization
India will have to find a way to compete with Vietnam and Indonesia or the Philippines, which is a heck of a lot easier said than done. In fact, both those countries are outperforming India relative to their populations by quite a large margin. So India is not showing much promise as of right now in this field.
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It’s been noted here before, India’s non-price competitiveness is very low, non-price competitiveness essentially means the comparative advantage derived not from an undervalued currency or low wages but other factors.
It’s pretty clear that India frankly is not going to be able to dramatically increase non-price competitiveness anytime soon, which is a bad sign particularly with the new advent of automation.
To see examples of high non-price competitive countries, all we need to do is look at these graphs:
Now, if your country has low non-price competitiveness, that means time is running out as automation comes into play and dramatically reduces the need for low wage labor.
I’m just going to say it, it’s incredibly unlikely India will be able to do this based on past projections and current data. Although Modi is trying to push on this front the said structural deficiencies that India’s economy has is not going to allow much progress in the short-medium term.
The Changing nature of manufacturing
This is from my other answer:
“Manufacturing is changing, it used to be that businesses had to order in bulk now they can order on a case by case business due to the advent of cheaper internet connectivity. This has led to manufacturing being more and more determined not by cheap labor but by the economies of scale and having the required infrastructure to catch onto this new trend.
What it used to be:
A business needs to buy at least 500 shirts for the spring sale, they need to buy in bulk due to the fear of the supply being short, unfortunately the spring sale doesn’t go as well as planned and only 350 shirts are sold. 150 shirts are now being sold at a loss or must be stored for a cost for the next season.
What it now is:
A business can now order in units of 25 using the internet and have them shipped based on demand, now the business estimates with a far higher accuracy the amount of shirts that they sell, as a result the business does not have any excess shirts they need to sell at a loss or store at a cost for the next season.
As long as developing countries (w/ the notable exception of China and Vietnam *again) don’t have the ability to catch onto this trend, there is simply less incentive to migrate manufacturing to them.”
This new trend in manufacturing is making manufacturing less and less determined just by vast amounts of cheap labor but more and more by economies of scale and non-price competitiveness, both of these factors India sorely lacks and is unlikely to be able to build up before automation comes into play.
Although India is much better on Pakistan on this regard, it’s still not something to be proud of. India’s go nment is quite inefficient and has a huge problem with co ption. With this in mind it’s even less likely India will be able to build up the required factors to sustain export-led industrialization.
While India will likely achieve decent growth rates in the short-mid term, it will not be able to sustain the growth rates required for a growth-miracle, largely due to waning export led industrialization, embedded structural deficiencies and the coming advent of automation