How India’s Economic Rise Could Bolster America’s Economy

Taking the Long View of the Global Economy
July 2 2014 11:25 AM

How India’s Economic Rise Could Bolster America’s Economy

Narendra Modi’s pro-reform government could do for the next decade what China did at the turn of the millennium.

Narendra Modi
India's Prime Minister Narendra Modi emerges from a meeting room to receive his Bhutanese counterpart Tshering Tobgay before the start of their bilateral meeting in New Delhi on May 27, 2014.

Photo by Adnan Abidi/Reuters

In the coming weeks, the new government of Indian Prime Minister Narendra Modi—elected with a huge mandate and parliamentary majority in May—will release its first budget. Modi campaigned on a program of radically reforming the Indian economy, and this budget—and indeed his entire economic program—is hotly anticipated.

Zachary Karabell Zachary Karabell

Zachary Karabell is an author, money manager, and commentator. His most recent book is The Leading Indicators: A Short History of the Numbers That Rule Our World.

Modi has been a controversial figure in India. His party, the BJP, emerged as a Hindu nationalist institution, and Modi will have to show that he means to govern as a secular leader.* That said, if he succeeds in restructuring the Indian economy and integrating India more deeply into the global economic system, India might well do for the next decade what China did for the global system in the years after 2000.

Like China then, India has an immense population (1.2 billion, just about where China was in 2000) and has an economy that’s been touted as the next new thing, only to halt and sputter. China before 2000 was the place where Western dreams of avarice went to die. For much of the 20th century, Western investors venturing to China found only grief.

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After joining the World Trade Organization in 2001, China’s growth averaged over 10 percent a year for the next decade. The nation became the dominant importer of raw material and high-end equipment, one of the biggest manufacturing nations globally, and the largest consumer market in the world. If India can pull off in the next decade even a fraction of what China did in the 2000s, the global economy—and specifically the American economy—will start looking substantially more robust than the current consensus would have it.

For many years, there have been serious concerns about long-term growth in India. Led by a rickety Congress Party coalition, the previous government couldn’t break the cycle of subpar economic performance and part the thickets of bureaucracy and corruption precluding reform. These failures were prime reasons for Modi’s victory. Even with Modi’s win, expectations for India haven’t been radically adjusted: India’s economy is still expected to grow 5.5 percent this year and a bit over 6 percent next year, according to the World Bank.

India currently has a per capita gross domestic product of about $1,500 a year in nominal dollars and about $5,400 in purchasing power; by comparison, China today is $6,800 in nominal terms and $11,900 in terms of purchasing power. But in 2000, the gap was much narrower; in purchasing power terms, China was at about $2,800 while India was at $2,000.  In those days, neither China nor India was seen as a major contributor to global economic growth. In its annual publication in 2000, the International Monetary Fund didn’t even discuss China until well into the report, and then only in a few brief paragraphs.

As we now know, China became the economic story of the decade. Rather than becoming primarily an importing nation, as the IMF predicted, China built a massive pile of foreign reserves, became a significant lender to the U.S., and created the fastest-growing consumer market in the world. In the process, it provided markets for U.S. companies ranging from GE to Nike to Ralph Lauren to Procter & Gamble.  It was the primary growth engine for hundreds of foreign companies, many of them American, that either gained business helping China’s industrial build-out or became a market for Chinese consumers. The rise of China was one reason why the economic crises of 2001–02 and 2008–09, painful though they were, were not substantially worse.

One of the first things the Chinese government did to accelerate its growth path was to open itself to foreign investment and competition—a process that accelerated after China joined the WTO. China also embarked on a massive urbanization program, crafting the world’s most modern infrastructure and then encouraging the move of hundreds of millions of people into cities. That process is not nearly complete.

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