Narendra Modi, India’s Prime Minister, is nothing if not ambitious.
The Hindu nationalist leader, elected in a landslide earlier this year, is planning to increase the country’s manufacturing share of GDP from 15% to 25%.
It’s an enormous task.
This week Modi has already celebrated India’s successful and astonishingly cheap mission to Mars, but the coming task will be harder.
Modi’s basic goal is a Chinese-style expansion, led by the manufacturing sector. There are a lot of factors in India’s favour, and some major challenges.
Here’s eight charts showing how he plans to do it and what’s standing in his way:
There’s a lot of room for improvement already. India’s development over the last decade and a half has been predominated by growth in services, as the agricultural proportion of the economy shrank. Industry, which includes manufacturing, actually makes up a smaller proportion of the economy now than it did at the turn of the century. A breakdown here from Sanjeev Sanyal at and his team at Deutsche Bank.
The country has extremely favourable demographics. India has a very young population – just shy of 30% are under 14. Since today’s kids are tomorrow’s employers and taxpayers, that’s a big positive for the country. In comparison, China hasn’t had such a high proportion since the early 1990s. Beijing’s one-child policy and the country’s rapid development mean China now actually has worse young-age demographics than the US.
India’s got a lot of room to catch up with other Asian economies. A combination of rising population and less impressive growth means Indian GDP per capita is now significantly lower than Indonesia’s, and even further below China’s. That’s bad for India now, but it does mean that there’s significant room to catch up, and potential for rapid growth.
The rupee is weak by historical standards. That’s a positive thing for manufactured exports, because it makes Indian products relatively cheap for foreigners to buy. Deutsche Bank’s India economists offered an explanation in a major report earlier this month: “in the East Asian model, the currency can be an important tool rather than a passive exchange rate that drifts towards ‘fair value’. Recall how both Japan and China accumulated very large reserves and held down their currencies over long periods of time.” Here’s the rupee vs. the US dollar:
Low labour costs add to India’s massive export potential. Of the top 25 exporter economies, India is the second least expensive after Indonesia, according to Deutsche Bank. That’s also going to give companies a serious advantage in selling manufactured goods round the world.
A lot of stalled projects means a lot of room to improve. Modi is extremely preoccupied with reforming India’s energy sector, and with good reason. Electricity and manufacturing make up more than half of the country’s stalled projects. When industrial projects seize up, it’s often due to the country’s unreliable energy supply. That’s a weakness, but Societe Generale research from Patrick Legland and Suman Guliani suggests an improvement “create a cascade effect leading to high growth and boosting investor confidence.”
Indonesia isn’t going to grow as quickly. That’s according to a note from Morgan Stanley’s Singapore office: “India is likely to show cyclical recovery in economic growth and margins before it begins to accelerate its pace of reform momentum, whereas Indonesia will have to increase the pace of reform momentum to lift its growth potential from the current levels.” The economists add that Indonesia is most exposed to rising US rates. If competitor nations are held back, that’s probably to India’s benefit.
The only way is up for investment. India’s transport and energy infrastructure systems are in particular need of investment – that’s partly what’s stalling so much economic activity. The government is planning to more than double the capacity of India’s major ports by 2020, and is now allowing foreign direct investment in the country’s stretched railways network.
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