Making Waves: The Indian giant has arrived

•  MA EL-ERIAN, M SPENCE

India’s recent economic success, solid momentum, and promising prospects are making the country ever more influential both regionally and internationally. But the experience of other countries – most notably China over the last three decades – suggests that such rapid influence and robust progress can be tricky to manage. After all, an action that makes sense domestically may conflict with what other countries expect from a systemically important economy. By the same token, actions that make sense internationally could complicate domestic economic progress.

Like China, India’s systemic importance has become apparent earlier in its growth and development process than was the case with other emerging economies, primarily because it boasts the world’s largest population (over 1.4 billion). Its growing presence is easy to detect. It is the world’s fifth-largest economy, and with an annual growth rate 5-6 percentage points above that of Germany and Japan, it could well move into third place in about four years.

Relative per capita incomes paint a different picture, however. India’s per capita GDP, at $2,389, is still far below the level of high-income economies, and remains considerably lower than that of China. In terms of overall economic size and income levels, India is roughly where China was in 2007, nearly a generation ago. Adjusting for differential price levels – the so-called purchasing-power-parity adjustment – lower and lower-middle-income countries tend to move up in relative size. With the PPP adjustment, India is already in third place, at about half the size of the US economy.

Carbon dioxide emissions, another dimension of global impact, paint a similar picture. India ranks behind only China and the United States in terms of overall CO2 emissions. But this, again, is a function of its large population; its per capita emissions are still quite low, at 1.89 metric tons, well below the global average of 4.66 metric tons.

Moreover, India already has plans to reduce its emissions. The chart below, from a 2022 McKinsey Sustainability report, depicts alternate decarbonisation pathways that it could take. The “line of sight” (LoS) scenario (the royal blue line) reflects the anticipated adoption of existing technologies, policies, and commitments that have already been implemented or announced, whereas the accelerated scenario captures further-reaching measures such as carbon pricing and carbon capture, utilisation, and storage (CCUS).

But even the LoS scenario seems very aggressive to us. With overall CO2 emissions peaking in the mid-2030’s, and with 7% annual growth in the interim, it will be achieved only if the carbon intensity of the economy declines at an equally rapid pace. But over the past decade, McKinsey notes, India’s carbon intensity declined at a rate of 1.3% per year. If India manages to stay on the LoS path, its per capita CO2 emissions would peak at 2.71 metric tons – something that has never been done before. It will be difficult to stay on this path, and India will most likely face growing sustainability-related global pressure, as has been the case for China.

In the meantime, India’s urbanisation, which is already moving at a steady, moderate pace, will likely pick up as more people pursue employment in industrial sectors.

China plays an important role in India’s recent growth story. Its high middle-income levels imply that it was destined eventually to shed labour-intensive manufacturing and assembly jobs. But that process has been accelerated by the rapid diversification of global supply chains, owing to various economic shocks and geopolitical developments. Most likely, there will be demand-side inducements for India to expand its tradable sector, with manufacturing for export providing employment opportunities for lower-income people in rural sectors.

Apple, for example, is expanding iPhone assembly in India, in collaboration with partners like the Taiwanese manufacturer Foxconn. India already accounts for 7% of iPhone production, and much of that is for export. That said, net foreign-direct-investment (FDI) flows into India declined sharply in the current fiscal year, and it remains to be seen whether there will be a wave of export-driven investment in manufacturing sectors. Finally, India also already has a thriving digital and financial sector. With a large and growing domestic economy, it has a natural advantage in large-scale digital innovation, owing to the fact that such technologies tend to have relatively high fixed costs, but low variable costs.

As with manufacturing, recent developments in China bear on this issue. Owing to changes in China’s economic and governance model, along with its deteriorating relations with some advanced economies (most notably the US), external capital has been leaving, leading to an influx of capital into India. If not managed carefully, these inflows could complicate economic policymaking by impacting the currency and competitiveness. With India expected to remain the world’s fastest-growing major economy, policymakers face the increasingly complex challenge of balancing external and internal interests, while still maintaining the country’s growth and development trajectory. Multinational corporations have also faced this dilemma when considering whether and how to change where they operate. Judging from the recent experience of Big Tech companies like Google and Meta, such changes can create many operational and reputational challenges.

Whether the lesson comes from China or Big Tech, India should heed it. Recent history shows that the necessary internal course corrections, as well as the ability to shape international perceptions, can come late or be insufficient. As a result, a country’s (or a company’s) secular transformation can end up being more complicated than it needs to be. This is not just about India playing defense to manage the growing international expectations that come with increased regional and global influence. It is also about playing offense. The Indian economy is reaching the point where maintaining reliable access to international markets is not just valuable but also important as a development priority.

One of India’s major challenges is to avoid the error that both China and Big Tech made when they failed to recognise their newly acquired global influence and adapt accordingly. In China’s case, policymakers remained too narrowly focused on their domestic development agenda as the country was becoming more systemically important. By the time China woke up to the external realities associated with a growing global footprint, it was already getting serious pushback from other countries. These responses piled up and ultimately created major complications – including by exacerbating domestic challenges – which could now derail, or at least hamper, China’s impressive development journey.