Economics Update March 2024 - Despite good prospects: India is not a second China

India is often regarded as the "second China" due to its considerable economic strength, which is based on a young population, increasing urbanization and a rapidly growing middle class. The hope that India could replace its large neighbor as the engine of the global economy has led to considerable capital movements out of China and into India in recent years. However, despite current high growth rates of more than 6 percent a year, it is anything but certain that the Indian economy will be able to achieve a similarly steep rise to that of China. There are serious differences between the two economies. 

India's growth is based on domestic consumption

India is pursuing a consumption-oriented growth model, whereas China has focused on export-oriented growth in recent decades, particularly in the industrial sector. China's imports have therefore provided considerable impetus for growth in the global economy. India cannot replace China in this respect because Indian industry plays a much smaller role in the overall economy.

Education system and weak infrastructure as obstacles 

The growth potential resulting from India's younger population structure has so far been underutilized: India's education system performs poorly in international comparison, with the result that a large number of young Indians have inadequate qualifications and there is a shortage of skilled workers in some sectors of the economy despite the general oversupply of labor. The low participation of women in the labor market, which is caused by restrictions on women's access to education and conservative family images, is also an obstacle.

The partially underdeveloped infrastructure in India is also an obstacle to growth: poorly developed roads, a lack of railroad lines and inefficient airports lead to delays in the supply chain and deter foreign companies from investing. Inefficient bureaucracy, corruption and complicated labor laws continue to hamper entrepreneurial activity.

Numerous reform approaches for a modern India

The Indian government under Prime Minister Modi can certainly be credited with the will to reform: A number of projects have already been initiated: "Make in India" promotes the industrial sector in particular - alongside other sectors - by facilitating investment, encouraging innovation and protecting property rights more strongly. The "Atmanirbhar Bharat" ("Independent India") initiative is also designed to support the economy, infrastructure and technological systems. A reform of the supply chains for agriculture is also part of the program, as is the simplification of laws and the tax system. The education system is to be reformed through the National Education Policy 2020 campaign, which aims to remove restrictions on access to educational institutions and significantly improve the overall quality of education for young Indians.

However, 10 years of the Modi government show that even in the "world's largest democracy", structural obstacles cannot be removed quickly and easily. Investors will therefore have to take a close look in the future as well to see in which areas the progress made actually makes investment worthwhile and in which areas this is not the case.