Sanjeev Ahluwalia | Securing India’s future: Can we ‘replace’ China?

Assume the world continues to grow, like it has since 1960, on average at three per cent per year (real terms). By 2060 a growth of 3.5 per cent per year gives ageing China a share in global GDP of 22 per cent, marginally behind the immigrant-boosted US economy, growing at a resilient three per cent per year to a share of 23 per cent. India growing at a relatively high 6.5 per cent could have a share in global GDP of 10 per cent, marginally behind the share of 11 per cent for the EU, growing at a sedate two per cent. Together the four economies could add 67 per cent to global GDP in 2060, a larger share than 62 per cent in 2024. This aligns with the trend, since 1989, of concentration of economic power in these four economies. Their combined share in global GDP increases from 57 per cent in 1989 to a projected 67 per cent in 2060.

If economies were rational entities and inherently collaborative, rather than competitive, these four would club their resources to leverage growth within themselves. But political economy factors -- leaders jostling for global dominance, pandering to domestic political dictates, posturing to appear more in control of global events than is possible for any one individual -- all make geopolitics volatile beyond the capacity of any one country to derisk, think flashpoints like the Russo-Ukraine and the Israeli-Gaza wars, driven primarily by the obduracy of the concerned leaderships.

Sadly, of the four economies considered here, India is the most sensitive to geopolitical risks for two reasons. First, historically, India has invested insufficiently in consolidating support within its near neighbourhood. To be sure, we made grand conciliatory gestures like supporting China’s entry into the UN Security Council in 1949, and the People’s Republic replacing Taiwan as a UN member in October 1971.

With the US solidly behind China’s inclusion, there was little choice. But why did we not extract a price from China for that favour, like settlement of our border disputes, in exchange for abandoning institutional privilege in the United Nations?

Second, India ignored building a common regional strategy for global alliances, aiming instead for global leadership of the developing world at Bandung 1955.

Privileging global media attention over quiet, transactional settlement of bilateral or regional interests and disputes was an Achilles heel, which persists. India has chosen to remain excluded from the two major trade agreements in Asia – RCEP and CPTTP -- illustrating a delusion that India is big enough to work things to its advantage from the outside. It also overlooks the fact that India lacks the institutional capacity to shape decisions to its advantage, from inside such plurilateral agreements.

Nevertheless, with India clocking the highest growth rates in the post-Covid years, despite the handicap of a higher bureaucracy, permanently in flux and distracted by the demands of engineered social fragmentation for political gain (a misguided foreign template), new opportunities for integrating better into global and regional partnerships shall present themselves, if we hang onto our key asset today: high economic growth.

Does India’s programmatic architecture reflect sufficient attention to promoting high growth, the key ingredient for global attention? The answer is a qualified yes. India displayed skill and courage in using fiscal expansion to overcome the economic ravages of the global financial crisis in 2008, unforced policy errors (demonetisation in 2016) and the Covid-19 pandemic in 2021 and skill in protecting tax revenue. But actions to implement deep reform remain prisoner to the feared, negative political economy consequences from impacted vested interests.

The middle class enjoy low property tax rates relative to land prices, free or cheap electricity and water, free bus rides for women and cheap rail travel. Privileged, large private corporates benefit from import protection and access to deliberative government fora. Many in the sizable public sector (banks, manufacturing, and utilities) are zombies -- unviable enterprises. Low productivity government servants enjoy inflation indexed salaries, time-bound promotions, untaxed perquisites and housing. Rich farmers access free electricity, irrigation water, cheap fertilisers and pay zero income tax, while hiding behind the deprivations of small and marginal farmers (average land holding 1.4 to 0.4 hectares) who account for 80 per cent of the farming community.

Despite the long list of pending structural reforms to weed out low productivity, it is possible to coast along at an annual real growth rate of about 6.5 per cent per year by fiddling at the edges to extract more efficiency from fiscal outlays and enhance revenues through better tax assessments and savvy tax levies. But this is insufficient to push growth to eight per cent per year over the next 36 years to 2060. Why is this necessary?

India must acquire a critical mass in fiscal resources, infrastructure, and skills to compete in a tough neighbourhood like Asia, where China poses an existential economic and security threat. The travails of Taiwan are an early warning. GDP is a reasonable proxy for economic heft, political muscle, and military capability. China’s GDP at $18 trillion (2015 dollars) is about six times of India at $3.4 trillion (2024). Catching up with China requires maintaining a growth differential of four percentage points per year (real terms). After the Covid-19 downturn, the growth differential is about two percentage points in India’s favour. Future near parity in GDP is possible but only under optimistic assumptions. First, that China’s growth will remain lukewarm at four per cent (real terms) slowing to 3.5 per cent per year, and second, India shall grow at seven to eight per cent per year over the next 36 years till 2060.

It is not inconceivable that democratic India, with the largest young population and locational advantages in fast growing Asia, could pick up the baton from a faltering China and drive future global GDP growth. By choosing an ill-timed, acrimonious, in-your-face path to perceived global dominance, China has gifted to India an opportunity to become the “other”, more reliable, big economy, offering the world a market with the fastest growing purchasing power, globally compliant institutional processes and standards and competitive suppliers. If we fail, we can only blame ourselves.