The Indian century

The Indian century

The Indian economy is on a roll. India has replaced China as the world’s fastest growing major economy and its economy today is roughly four times as large as it was at the turn of this century. A vast single market is starting to emerge, powered by a national financial system, a shift away from cash and internal migration. The replacement of regional and state levies with an all-India goods and services tax is boosting trade between states and bringing more economic activity into the financial system. India’s stock market is the world’s fourth largest, behind the US, China and Japan. Whereas China’s population is shrinking, India has overtaken China to become the world’s most populous country.  

• The fraying of US-China economic ties creates opportunities for India to strengthen links with the US and other western countries and to benefit from the diversion of foreign investment away from China. Multinationals are increasingly switching to a so-called "China+1" strategy, looking for an additional, lower risk location for investments. With its large workforce and huge home market India is likely to become a significant "+1" country. Next year Apple's biggest supplier, Foxconn, will start production of iPhones in the southern Indian state of Karnataka. US memory chip maker Micron Technology is also diversifying away from China, constructing a new $825m assembly and test facility in Gujarat.

• Patterns of US trade are shifting away from China. Over the last year Chinese goods accounted for 14% of all US imports, down from a peak of 21% in 2018, and the lowest share in 20 years. The US is turning elsewhere - to India, South Korea, Vietnam, other Asian countries as well as Europe and Mexico - for imports. India’s share of total US imports, though far below Chinese levels, has risen from 2% to 3% in under five years.

• The future looks bright for India. At current rates of growth, India is likely to move from the world’s fifth largest economy to third place, overtaking Japan and Germany, by 2027. That would put India behind only the US and China in the world, with India’s superior growth rate set to slowly narrow the gap over time.

• None of this is to suggest that India can replace China’s role in the world economy. India, despite its heft, is a far smaller economy. In dollar terms the Indian economy is about one-fifth the size of the Chinese economy. China’s economic role in the world has been shaped by its vast manufacturing sector, accounting for about 28% of global output, more than the US and Japan combined. Much of China’s manufacturing output is exported, making China the world’s largest trading nation and making Chinese products ubiquitous across the world.

• India is unlikely to rival the scale of Chinese manufacturing. Manufacturing plays a relatively small role in the Indian economy, accounting for 13% of GDP, roughly half the share of other Asian economies including China, Vietnam, Thailand and South Korea. India accounts for 3% of world output of manufactured products, slightly less than one-tenth of China’s share, and less than South Korea or Germany.

• Foreign direct investment (FDI) into India has grown rapidly in recent years and the country has secured some notable new manufacturing projects. The government is hoping to benefit from multinationals diversifying away from China with a programme of $26bn in subsidies over the next five years for target industries including solar and batteries. India is, nonetheless, competing for manufacturing FDI with hubs in Europe, Asia and in Mexico, areas where manufacturing and foreign investment tend to play a larger role than in India. And $26bn of subsidies for investment into the sectors of the future over five years compares to an astonishing $400bn over ten years in the US Inflation Reduction Act. 

• India’s economy has partially skipped the industrialisation phase which most developing economies, starting with the UK in the eighteenth century, go through. This limits the scope for growth in manufacturing and exports, but it also confers advantages, by moving directly to a service-based economy (India has a larger agricultural sector than most other emerging economies). It is in services that India’s comparative advantage is most apparent. India is a key global supplier of technology and related services helping make it the world’s fifth-biggest exporter of services. Morgan Stanley estimates that the number of Indians employed in outsourced roles for overseas firms is likely to at least double over the next 10 years, to more than 11 million people.

• Despite running a surplus in exports of services, India tends to run an overall trade deficit due to a large deficit on trade in goods. Whereas most manufactured products can be exported, only some services, such as IT and financial services, can be sold abroad. As a more service-focussed economy India is therefore unlikely to develop the large trade surpluses that manufacturing behemoths such as Japan, Germany, South Korea or China run.  

• Arguably India’s great challenges relate to domestic policy and governance. India ranks below China in the two main international league tables of competitiveness, from the World Economic Forum and the Swiss business school, IMD. The World Bank’s Doing Business survey rates China as having a more attractive environment for business than India.

• Common themes recur across each of these surveys. Poor transport and utility infrastructure is a key obstacle for businesses operating in India. Logistics costs eat up 16% of India's GDP, according to the Minister of Road Transport and Highways, Nitin Gadkari. For China, the figure is 10% and for the US and Europe 8%. Connectivity to water, electricity and the internet is far below Chinese levels and, despite a formidable IT and outsourcing industry, ICT adoption lags its peers.

• India has a young and fast-growing population, and produces large numbers of graduates, but its school system suffers from often large classes and low per pupil spending. Levels of workforce participation are low, with just over 20% of women working, far below the 50-70% rates seen in China, Brazil, Russia and South Africa. Moreover, female participation has declined, creating a significant drag on growth in the overall labour force. As much as three-quarters of India’s workforce is self-employed or engaged in casual work, with fully employed, salaried work the preserve of a minority.

• Businesses in India face a complex bureaucracy and significant barriers to trade, including tariffs and slow, burdensome customs processes. Delays and costs in registering property and in having contracts enforced are a particular problem.

• The government acknowledges these challenges and change is happening. India is creating a digital welfare system which is sending payments direct to peoples’ bank accounts. This is reducing costs and bureaucracy and bringing more timely help to those in need. As well as the creation of a biometric ID card and a national payments system the government is leading a drive for all Indians to open bank accounts. Infrastructure is improving. Since 2014, the national highway network has expanded by more than 50% and domestic air passenger volumes have doubled. Policymakers are also trying to cut red tape and make it easier for foreign businesses to invest in India.

• The Indian economy has the capacity to grow at over 6% a year for many years, enough to triple its size in just 20 years. Excellence in IT, service exports, a vast domestic market and a growing population are significant strengths. A re-orientation of world trade and supply chains from China is an opportunity for India to take a bigger role in the global economy. India is not the new China. But, with the right policies, it has the capacity to become a far larger, more successful and influential version of its distinctive self.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index closed the week down 2.6% at 7,402. UK equities had their worst week since August as geopolitical tensions increased uncertainty and a global bond sell-off pushed long-term interest rates to the highest levels in decades.

Economics

• Yields on US 10-year treasuries reached 5% for the first time since 2007 on expectations that the Federal Reserve would keep interest rates higher for longer
• High US mortgage rates are likely to slow US home sales this year down to the lowest level since 2011
• The US public sector deficit rose to $1.7 trillion, or 6.3% of GDP, in the 12 months to September, up from 5.4% of GDP a year earlier. A widening deficit fuelled market concern about rising levels of US public debt
• President of the asset manager Blackstone Jonathan Gray said that the higher government yields would hit consumers and slow down the US economy
• Wholesale prices of German goods fell at the fastest rate since 1949 on lower energy prices
• A sharp decline in German exports to the US and China, its two largest trading partners, increases the risks of a material contraction in German third quarter GDP 
• UK consumer confidence fell by nine points in October to -21, the biggest monthly fall in more than three years, unwinding gains that have been seen earlier this year
• UK retail sales fell by 0.9% in September, more than economists expected, as consumers cut back on discretionary spending and unseasonably warm weather hit sales of autumnal clothes 
• The Office for National Statistics delayed the publication of key UK labour market data, including the unemployment rate, due to low response rates affecting the accuracy of the statistics. The data are expected to be released this Wednesday
• UK inflation held steady at 6.7% in September, slightly higher than forecasts, underscoring the persistence of price pressures
• UK average wage growth slowed slightly to 8.1% and vacancies edged lower the three months to August, suggesting a slight easing in a still-tight labour market
• UK public borrowing in the financial year to September was almost $20bn lower than forecast by the OBR, giving the UK chancellor some room to manoeuvre ahead of the Autumn Statement next month 
• UK rents rose by 5.7% in September, the fastest pace on record. New rents are rising at an even faster rate
• The Chinese economy grew by 4.9% in the year to the third quarter, more than economists expected, as fiscal and monetary stimulus helped bolster the recovery. Commenting on the numbers China’s statistics office said that domestic demand remains inadequate
• Argentina borrowed $6.5bn from China in a bid to support its economy as its economic crisis deepens
• The price of gold increased to over $63 per gram as investors increased exposure to safe-haven assets
• Global wheat prices hovered at the lowest level in three years last week, easing global food inflationary pressures as Russian production replaced Ukrainian supply following the end of the Black Sea Grain Initiative

Business

• Credit card provider American Express posted better-than-expected profits in the third quarter as card spending rose 7% but the company warned credit losses may rise
• Weak consumer demand in China hit French beauty company L’Oréal’s revenues as it missed analysts’ expectations in the third quarter
• Streaming service Netflix increased its number of subscribers by 9m in the third quarter, 50% higher than expectations due in part to a clamp-down on password sharing and despite an increase in prices 
• Tight labour markets pushed American Airlines into a loss of over $0.5bn in the third quarter as it made a one-time bonus payment to its pilots in an effort to avert strike action 
• UK’s largest investment platform Hargreaves Lansdown reported a 13% increase in revenues in Q3 2023 as higher interest income offset the drop in share dealing
• Investment bank Goldman Sachs reported a 36% fall in profits in the third quarter due to the retreat from retail banking and real estate investment losses
• Phone manufacturer Nokia announced 14,000 job cuts as macroeconomic uncertainty and higher interest rates pushed the company to restructure and reduce costs
• Chinese property developer Country Garden missed a $15m bond payment in September adding to liquidity concerns in the Chinese property market 
• Tighter US rules on advanced computer chips from China caused shares in semiconductor companies to fall, highlighting the sector’s exposure to rising geopolitical risk 
• Tesla announced it would cut the price of its entry-level model sold in the UK by £3,000 following a 44% fall in annual global net income in September
• Fund manager M&G announced it would close its £565m property fund after it suffered major outflows by UK retail investors, in further signs of the impact of higher interest rates and tighter regulation on the sector
• Chat-GPT owner OpenAI was reported to be selling shares taking the valuation of the company to roughly $86bn, three times what it was worth six months ago as investors have a growing appetite for AI businesses
• Jaguar Land Rover announced plans to offer battery-powered versions of all its models by 2030, despite the UK government scrapping the ban on new fossil fuel-powered cars 
• The Economist reported that Chinese banks may be “loaded up with hidden bad debts” after uncovering that 50% of Jinzhou Bank’s personal-business loans were non-performing

Global and political developments

• US president Joe Biden urged Congress to approve a $100bn military aid package for Israel and Ukraine and said he is still committed to a “two-state solution”
• King Abdullah of Jordan called for humanitarian assistance to Gaza and warned that “the whole region is on the brink of falling into the abyss” following the outbreak of the Israel-Palestine war
• Retired hedge-fund founder Ray Dalio warned that the Israel-Palestine conflict, following the outbreak of the Ukraine war, increases the chances of an “uncontained hot world war”
• The US Federal Reserve warned that geopolitical tensions pose a threat to the global financial system at a time of slower growth and high inflation
• The UK Labour Party won two by-elections in Mid-Bedfordshire and Tamworth, overturning substantial Conservative Party majorities, and pointing to landslide victory at the next UK General election to be held in 2024
• The coalition led by Donald Tusk won 248 out of 260 parliamentary seats in Poland’s election, giving the former European Council president a route to a majority
• Swiss right-wing parties look set to achieve one of their strongest showings in Parliamentary elections on Sunday

And finally… a man in Warsaw was arrested for shoplifting jewellery after hours. CCTV footage showed the thief posing as a mannequin in the shop and waiting until closing time before going for the loot - robber dummy