India’s potential is huge – and we should cash in
Is India’s star still shining? Or is this express-train economy heading for the buffers? When it comes to writing about India, it’s hard not to wallow in superlatives and resort to clichés. The scale of the recent economic change is so enormous, the transformation so fast. Back in 1770, as the Western world’s industrial revolution began, India accounted for no less than 15pc of global output. Pretty soon, the sub-continent, with its burgeoning population, tech-savvy business elite and ubiquitous shopping malls will be an economic superpower once more.
Already the world’s tenth-largest economy, India is on course to rank second by 2040 – behind China, with America by then coming in third. On a purchasing power parity basis, in fact, adjusting for the cost of living, India is already the third-largest economy on earth.
With its 1.2bn people, India’s population is second only to China. These two Asian giants boast 2.6bn citizens between them, over a third of the entire global population. What’s really striking is that half of India’s citizens are below the age of 28 – providing a fast-expanding workforce over the coming decades, a major source of growth. Many of these new workers will be English-speaking and educated, part of a labour explosion likely to drag down blue- and white-collar wages across the Western world.
While poverty remains endemic, India’s middle-class is growing like topsy, as tens of millions of workers annually move from subsistence agriculture into urban-based manufacturing and service jobs. In 1991, India had 23 cities with a million people or more. Now it’s more than 50. It took from 1971 to 2003 – 32 years – for the country’s income per head to rise from $100 to $500 in constant prices. Yet, just five years later it had doubled again, reaching $1000 by 2008. That upward per capita income trend is set to continue, despite on-going population growth.
The OECD think-tank defines “middle-class” as living in a household earning at least $3650 a year. On that basis, India’s middle-class will surge from just 10pc of its population today to 90pc by 2040, the OECD predicts. Just as the West’s industrial revolution transformed Britain, the US and Germany, as we shifted from agrarian to industrial societies, a similar global mega-trend is happening in Asia, with India at its heart.
Over the next 5 years, Asia’s middle class will more than double to 1.7bn people, according to the United Nations. By 2030, India, China and the rest of this vast continent will be home to 3bn middle-class people – 5-times more than Western Europe and 10-times more than America. That represents an awful lot of demand for cars, washing machines, processed food and services. That’s why Western leaders, keen to drum up trade links, have lately been liberally glad-handing the emerging giants of the east, not least by currying favour with India.
Chancellor George Osborne and Foreign Secretary William Hague made the trip last week, doing their best to secure commercial links between the UK and its former colony. Top of the agenda were efforts to position British defence manufacturers – given that India’s preliminary agreement to buy 126 French Rafale fighter jets may fail, resulting in a new arrangement involving Eurofighter, which is partly built in Britain. UK infrastructure and civil engineering companies are similarly hoping to land some juicy Indian contracts, as the government develops new cities and districts along the 600-mile corridor between Mumbai and Bangalore.
Keen to stress the existing UK-India relationship, Osborne announced new investments in Britain by India car Mahindra and pharmaceutical company Cipla of £20m and £100m respectively. Hague pledged, meanwhile, that the UK will raise available funding for student scholarships. There are already 40,000 Indian students studying in Britain and that number could yet go higher – if Hague can convince the Home Office to issue the necessary visas.
Tories strategists are mindful, also, that being seen in India is good for the party’s image ahead of next year’s general election. The UK’s 1.5-m strong Indian diaspora wields formidable voting (and financial) clout. While his colleagues were on their foreign jolly, David Cameron reminded us that his first overseas trip as Prime Minister was to Delhi and that he has since “visited India more times than any other country apart from Brussels, where I have to go more often than frankly I would like”.
The catalyst for last week’s Osborne-Hague visit, of course, was the recent election of Prime Minister Narendra Modi. In May, Modi’s BJP broke the rule of India’s Congress party for the first time since the country won independence in 1947. His election, and stated determination to clean up India’s rampant corruption, while reforming its stultifying civil service, has launched a wave of hope regarding India’s economic prospects.
Such optimism is needed. Having typically grown by 9-10pc during the years leading up to the credit crunch, India has lately stalled. GDP has increased by just 5.2pc per annum since 2011, with growth of just 4.4pc in 2013 – good by Western standards, but dangerously in the context of a fast-expanding population, grinding inequality and widespread religious tension. Inflation is also stubbornly high, with prices up 9.3pc in 2013 and by an average of 9.9pc annually over the last 4 years.
Even after last week’s budget maintained a fiscal deficit target of 4.1pc of GDP, India’s fragile public finances still pose a risk to its credit rating. Having said all that, the country’s rapid development continues and its potential remains mind-blowing – not least given the presence of a commercial class which, if not too fussed about social justice, undoubtedly has the means, drive and investment acumen to take India to the pinnacle of the economic premier league.
So, will we see much of the action? Well, Britain and India already have quite close economic ties – which seems pretty inevitable, seeing as one country ruled the other less than 70 years ago. British firms have over $80bn invested in India – spread among a range of long-established and newer firms, from HSBC and British American Tobacco to BP, Vodaphone and Diageo. Indian firms, meanwhile, have sunk around $40bn into the UK, amounting to almost a third of the country’s outbound investment – with the mighty Tata group, which owns Corus and Jaguar Land Rover, accounting for a sizeable chunk.
While the bilateral investment picture is bright, though, Britain has failed badly when it comes to cross-border trade, not only with India but with all the fast-growing markets of the East. Our exports to India last year were just £12bn – a paltry 2pc of what we sell abroad. In 1999, the UK was among the top five countries with which India traded. Now we’re the country’s eighth-biggest export market and not even among its top-20 source of imports.
Back in 1980, the UK accounted for 6.2pc of all global exports. Now our share is just 3.4pc. Over the same period, Germany’s global export share has remained steady, at 8.1pc – not least as Europe’s biggest economy, with its manufacturing expertise, now sells a lot of goods to the world’s fast-growing economies.
Just 5pc of our exports are currently destined for the biggest emerging markets combined – Brazil, Russia, India and China. That’s less than we sell to Ireland. Germany manages to sell 10pc of its exports to the Brics, the major markets of tomorrow, the US 12pc and Japan no less than 25pc. That’s why, for all the hype about the British boom, these rival economies are far more “future-proofed” than ours. Again, I apologize for the clichés but not for delivering the message.