IfW economist: Really this time
“India is one of the best alternatives to China”
04/17/2023, 4:09 p.m
India is overtaking China for the world’s largest population. In the ranking of the largest economies, the country wants to overtake Germany soon. Once again, India is being traded as a strong new economic partner for the West – as an alternative to China. In an interview with ntv.de, Dirk Dohse from the Kiel Institute for the World Economy (IfW) explains why it should work this time. The economist heads the research center for innovation and international competition there.
ntv.de: India is replacing China as the most populous country in the world these days. Can India also replicate China’s economic development?
Dirk Dohse: I’m skeptical about repeating it, the gap between the two countries is still very large at the moment. But India’s longer-term prospects are definitely better than China’s. India’s population will continue to grow while China’s is shrinking sharply. According to UN forecasts, by the year 2100 China will only have around 770 million inhabitants, half as many as today. India will then be almost twice as large. India is also looking better than China in terms of the economic growth rates forecast by the International Monetary Fund (IMF) over the next few years. China has dominated for decades with double-digit growth rates, but is currently below five percent. For India and some African countries, the forecasts are higher.
What growth rates is India currently achieving?
Between six and seven percent. The IMF forecasts annual growth of this magnitude up to 2027, but significantly less for China: less than five percent.
Does the economic output also increase simply because of the growing population?
This increases overall economic output. Of course, it is more interesting to see how the per capita gross domestic product is developing. Nobody wants a growing population that remains poor. This is the big problem that could face India. The population growth – the many young people, the large labor force and demand potential – will trigger a strong growth spurt overall.
What are the strongest drivers, the IT sector?
Essentially, these are service sectors. The IT sector is important, Bangalore is a world center for it. Investments in infrastructure have also been a very important factor for economic growth in recent years. The Indian state invests the equivalent of a good 100 billion euros in infrastructure every year. This is also urgently needed because it was one of the greatest obstacles to development in recent decades.
In a few years, India wants to rise from its current fifth place to the third largest economy after the USA and China. When do you think the emerging market can overtake Germany and Japan?
If India continues to grow as it has up until now, and we continue to grow as it has up to now – that is, at significantly lower rates – then it could be as early as the 2030s or even as late as this decade.
Dirk Dohse
(Photo: Kiel Institute)
Do you see problems that could prevent this?
Problems abound in India. So far, the infrastructure has been a huge problem, in many metropolises there have been significant traffic bottlenecks, energy problems and the like. A lot is now being done, but these bottlenecks in critical infrastructure will remain an obstacle for the foreseeable future. Corruption is also a major problem. China is far better off than India on Transparency International’s corruption index. In addition, the bureaucracy in India is considered to be very slow and sluggish. The caste system is certainly not a driver either, but the opposite. There are also religious and political tensions. From my point of view, it is very important whether this growth is accompanied by an increase in employment or whether only a small part of the population benefits and other people are left behind. Then there could also be major political tensions.
India has often been traded as a hopeful market. Why should it work this time?
Conditions are favorable at the moment. On the one hand the infrastructure investments, on the other hand the geopolitical situation is playing into India’s hands. Europe and the USA need new partners and want to become more independent of China. Other countries like Russia are also looking for new partners. The Russians export cheap gas to India. And companies like Foxconn, which are very dependent on China, are moving parts of their production to India.
How great is this potential for India to replace China as an economic partner?
India definitely has great potential and China is facing a lot of problems at the moment. One of the biggest is the consequences of the one-child policy. The fact that the Chinese are on average much older than the Indians is a disadvantage in the long term. And then there is the geopolitical situation: investments in China are becoming increasingly risky. Investments by Western companies are still high, but new investments are rare. The smoldering conflict with the US is likely to hurt China more than the US.
With which partners could the West best make itself more independent from China?
India is one of the best alternatives to China. The other is Africa. It has similar prospects to India but comes from a much lower base. African countries are likely to grow much faster over the next 50 years. Contrary to our own announcements, however, the West’s dependency on China has grown even more, and our trade and investment relations with China are currently at record levels.
How strongly are Germany and India economically intertwined?
Germany’s foreign trade turnover with India is only a tenth of that with China: 30 billion euros is relatively little for two countries of this size. According to Bundesbank figures, the cumulative stock of German direct investments in India is around 18 billion euros. Here, too, there is still a lot of room for improvement.
Who are India’s main trading partners?
These include the USA, China and the United Arab Emirates.
Which goods does India export and which does it import?
India exports chemicals, petrochemicals, food and textiles/clothing. The most important import goods include petroleum, chemical products, gold and other raw materials, as well as machinery and electronics.
Source: IfW
Is India an alternative to China for Germany? Chancellor Scholz and India’s Prime Minister Modi want to significantly expand economic relations and are committed to a free trade agreement between the EU and India.
India is definitely an alternative for Germany, there is still a lot of room for improvement. Germany’s foreign trade turnover with China is around 300 billion euros, with India around 30 billion – although both countries are similar in size. So there is still a lot that can be expanded. German investments in China are also much higher than in India, and there is still a lot that can be done. Individual German companies are already benefiting from the infrastructure expansion: Siemens, Airbus and Deutsche Bahn earn good money in India. But all this is still relatively small compared to the economic relations with China.
Wouldn’t greater dependence on India be just as problematic as dependence on China?
Basically, it’s good to diversify. It makes sense to move away from China and towards India. Trade relations with India are not particularly strong. There are also major political differences. India is considered the largest democracy in the world, albeit now controversial. Modi rules very autocratically, but compared to China, India is still much closer to us politically.
Christina Lohner spoke to Dirk Dohse