By Vesselin Boianov
Just recently, India overtook the U.K. to become the fifth largest economy in the world in nominal terms. The substantial GDP growth over the years, together with the government’s constant social improvement policies and programs, have not just improved the standard of living, but have also made the ordinary Indian feel proud of his / her own nation. So, can the South East Asian giant really replace China and become the next global production and economic hub?
Considering the recent developments, in the longer run, the answer to that would be more yes than no. In order to replace China and to target a global top 3 GDP, however, the federal government in New Delhi will have to face a lot of internal as well as external challenges, as per my experience. We all know about the huge investments the Modhi government has made into modernizing and developing the vast infrastructure across the country. Multibillion dollar projects such as development of Smart Cities and Special Economic Zones have been going on for years now. Reconstruction, extension and new construction of airports, sea-ports, train-stations, highways, flyovers and bridges can be witnessed in literally every city and state.
However, for the physical and digital infrastructure to reach the standards required for India to become the global production hub, it will take some time. How much that time will be exactly is hard to say right now. As I see it, the answer to that question will, to a large extend, depend on the efficiency of the federal and local state administrations and authorities and most importantly, on their joint effort for coordination in the name of the national interest. As we know, various state governments across the country are often ruled by political parties which oppose each other, which still leads to an imbalance in the overall national economic, political and social policy. It is here, however, to mention that the Modhi government was probably the first federal government after Independence, which prioritized the long awaited social and economic unification of India. It is the completion of this very process, that will allow the country to transform itself from the largest global market to the largest global power-house.
As I mentioned above, the other important factor here is India’s external geopolitical and economic relations in a world that becomes more and more complex and divided. So, taking the usual Indian “fiends with everyone” stand becomes harder and harder every other day. However, so far, the BJP government has managed the situation pretty well in that respect.
Here it is important to go back in time and to mention that historically India has never invaded and occupied another country, even though it has always had the means to do so: we should never forget that the India has the 4th most powerful army on the planet and has been the 3rd largest economy in PPP terms for years now.
So, for the first time in modern human history, we have the chance to see the rise of a global superpower, which will grow and exist on the “No War” principle. In economic terms this means that India has always been interested in maintaining a mutually beneficial relationships with most countries across the geopolitical spectrum, which will often require that New Delhi will be maintaining the brave decision policy of India’s interest first. Whether due to historic reasons or for purely economic reasons, these are the policies that every country should adopt for the benefit of its own people and businesses. Hence, no blame can be imposed on India for taking its stand.
Regarding the relationship with China, well, this has always been a very complex issue for both New Delhi and Beijing. The two neighboring and most populated countries are both BRIC members and maintain strong economic and financial relations, so a potential conflict would be devastating to both. This is well understood on both sides of the border and so far, things look under control.
Regarding the economic ties between the two most populous countries, the rapid expansion of the India-China bilateral trade since the beginning of this century has propelled China to emerge as India’s largest goods trading partner by 2008, a position which China continues to hold today. Since the beginning of the last decade, bilateral trade between the two countries recorded exponential growth. This growth was temporarily disturbed during the covid lockdowns, but is now recovering. However, India still experiences a significant trade deficit in this relationship, which can be another stimulus for a more export-oriented future.
So coming back to our main point, to see how and when can India replace China as a global production hub, we should first see the situation inside China itself. It is evident to all, that after nearly 4 decades of super-economic growth, the further progress of the Chinese economy looks rather gloomier today. The main reasons for that are the geo-political and economic conflicts with the USA as well as the disturbances in the production and supply chains, which are very much influenced by China’s zero covid policy. Massive lockdowns continue in China even now in 2022, thus causing major disruptions in the economy, which leads to delays and even cancelations of orders to customers around the world.
These factors really make companies consider other destinations where they can shift their production. Thus, for instance, in line with the foregoing, Apple was looking to move out of China many of its final assembly operations. Here, India has really a chance to become the next destination where your latest iPhone is made at.
Another valuable proposition could be the government’s drive to turn India into the next Taiwan in global semiconductor manufacturing. This dream has been around in India for years, but it recently received a new boost by the Modhi government, which is now ready to invest billions of dollars to realize the dream. However, a few challenges have to be resolved first. A stable and reliable electricity supply as well as experienced chip production engineers are required. Currently, the country can provide just chip designers, but not the foregoing.
When considering tech products assembly or manufacturing, we should also take into account the competition from the other South East Asia tiger economies, who have already managed to “steal” a lot of high-value chain business from China. On top of that we have the domestic issues that India continues to face today, namely: the further development of the national and local infrastructure, the development of a strong domestic consumer market as well as the overall administrative burden, which all together represent a major hurdle to local and foreign investors. And when talking about the administrative burden by local and national authorities, we should also focus on the import and export policy that India maintains. On the one hand we have the Indian local producers’ interests which are correctly protected by high import duties, but those lead to high export duties as well, being reciprocally imposed by other trade partner countries. Thus, exporting to the world, as China still does today, will be very hard in the current conditions unless some kind of trade liberalization is envisaged. Here comes the role of the FTAs which India intends to sign with some of its key trade partners.
Thus, for instance, the India-UK Free Trade Agreement is likely to be sealed any time soon.
India’s Commerce Minister Piyush Goyal recently said that both the UK and India are working toward the Diwali deadline (i.e. October) for the India-UK free trade agreement (FTA). "Two days ago, I received a letter from the UK again reiterating that they want to stick to the Diwali deadline (for the India-UK Free Trade Agreement)," Minister Goyal said at an event on September 20 in New Delhi. According to him, if India doesn't participate with the global economy, it will be "the losers" in terms of its engagements and efforts to achieve self-reliance. In August, the fifth round of FTA negotiations between the two nations came to a close.
Another important relation in this regard is between India and the EU and their potential and long-awaited FTA. The New Delhi government expects that the FTA negotiations with the EU will take about one-and-a-half or two years to fructify, given the complexity of negotiating with a 27-member block and firming up a new-age FTA that goes well beyond the traditional pillars of just goods, services and investment. However, up until last year, the EU was rather reluctant on warming up the trading environment between the two. And although, we have witnessed a small breakthrough this year, this FTA is set to be a difficult one.
In addition to that, India aims at similar negotiations with Bangladesh, Australia as well as the GCC (Gulf Cooperation Council). The GCC comprises six countries–Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.
Now, let’s take a quick look at another interesting relationship: that between India and Russia.
Historically, since Independence, Russia has been India’s closest military ally. This inevitably has brought tremendous benefits to the economies of both countries. We all know the big noise that western media made about the recent oil and gas deal between the two governments. This deal is fully in line with India’s wise international stand and under no circumstances can such a business deal be related to the conflict in Ukraine.
It is important to note here, that in spite of the really good offer which India received, as of today, Saudi Arabia replaced Russia as India's second-largest oil exporter in August, while Iraq continues to hold the top spot. Being the third-largest oil importer and consumer in the world, India imported 863,950 barrels per day (bpd) from Saudi Arabia, up 4.8% from the previous month, while purchases from Russia declined to 855,950 bpd (a decline of 2.4%). Nevertheless, India has become Russia's No 2 oil buyer after China as others have cut purchases following the Ukraine conflict.
In addition to that, India is making an effort to diversify its energy basket by importing crude oil from non-OPEC sources. And its efforts are bearing fruit as it is set to sign long-term contracts to procure at least 2 million tonnes (mt) of crude from Brazil’s Petroleo Brasileiro SA (Petrobras) and 1 mt from Colombia’s state-run Ecopetrol SA.
Here, once again we see India’s multipolar approach in action, where getting the best deal for the country is the priority. That’s why India is also willing to cooperate with the US and will consider backing the US-proposed price cap on Russian crude, but only if supplies from countries such as Venezuela and Iran are assured.
So, despite all the turbulence around them, the India-Russia relationship remains strong as further trade and investment initiatives between the two countries have already begun, although the payment and transaction issues are still there for the private businesses in their attempt to operate in a post-dollar environment. Apart from the general trade, Russia is specifically interested in reinforcing the collaboration with India in the telecom technology, security, and development of 5G use cases. To recall on July 11, the central bank came out with a directive on international trade settlement in Indian rupees.
At the same time, the India-Bulgaria trade relationship continues to remain fairly modest, considering the size of the economies and the opportunities available. Last year the value of the bilateral trade ( exclusive of special equipment ) was around USD 300 million, while this year it is expected to reach USD 500 million, which is, in fact, a very good recovery after the pandemic years.
Mutual investments are also very small and a lot more is to be desired on that front, especially with the bright future India has. As of today, some big Indian tech firm have invested in Bulgaria, while Bulgarian investments into India are just about to begin. Important role here can play the official Indian-Bulgarian business chamber, established a few years ago in Sofia.
As we know, India will also assume presidency of the G20 from December and will host the summit of leaders of the world's 20 largest economies in New Delhi in September next year. The country will hold the presidency from December 1, 2022, to November 30, 2023, so this will be a good chance for the country to fuel the achievement of its macro-economic goals.
And once again, in order to achieve its targets, the country has a lot of work to do in order to provide multimodal connectivity infrastructure to various economic zones as well as a comprehensive logistics ecosystem, which is technologically enabled, integrated, cost-efficient, resilient, sustainable and trusted. Efficiency in all forms needs to improve by the creation of a data-driven support system. And not to forget the export / import duties. At the end, it is a mutual thing…