Is India the new China?

In the latest edition of Shifting Asia, we explore India's future, the economy and its challenges. Dive deeper into the report to discover the most relevant takeaways for investors.

15 Jul 2020
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At a glance

India is a diverse country and it's emerging as a key player in the world's fastest growing economies. India’s growing e-commerce market is a particularly promising area. As one of the world's biggest consumer markets, international and local players are racing to gain market share. We forecast a 17.3% average annual expansion rate for the sector over the next 10 years, driven by the youthful population’s embrace of the internet age. In our view, we see growth in India across online retailing, travel booking and food delivery.

For investors, the challenge with investing in India isn’t a lack of opportunities—on the contrary, we see lots of them. It’s the obstacles hindering foreign investors from tapping the local markets. Progress has been made on this front and we expect further financial market reforms, but more needs to be done. Still, as a vast and under-owned market, the potential investment rewards can be substantial. Keep reading to discover our key highlights and suggestions for investors interested in investing in India.

Key takeaways

India's future is bright

  • Enviable GDP growth: India could achieve 9.5% nominal GDP growth in the decade ahead. (1)
  • Youthful demographics: India will add 110mn workers by 2030; one-fifth of the world’s working-age population will be Indian. (2)
  • A mature tech sector: India’s IT industry is one of the biggest globally by revenue.

Challenges to overcome

  • Investment needed: To reach full potential, we estimate infrastructure investment needs to rise from around 5% of GDP today to 7%–8%. (3)
  • Small manufacturing sector: At 1.7%, India’s export share of the global market (4) is a tiny fraction of China’s (approx. 13%).
  • More reform heavy lifting needed to entice investment, upskill the labor force, and build a more robust manufacturing base.

Asset class implications

  • Equities: Earnings to grow 11.5% on average each year from 2021 to 2030, according to our forecasts, with financials (14.5%) and infrastructure (16.7%) leading the pack. (5) 
  • Bonds: We think India’s BBB rating looks secure, IG space has room to grow, and HY defaults should remain relatively low. (6)
  • Currency: The rupee should deliver attractive long-term returns thanks to its high yield, in our view. (7)

India economic growth and development

Expectations for India have always been sky high, especially after elections. For years, many projected the economy would grow (in real terms) by a world-leading 9% clip. But while actual growth rates have been enviably high, they have yet to meet expectations. So what is a realistic target? The long-term rate at which an economy can grow without overheating is largely determined by:

  1. The supply of labor such as working-age population growth, the participation of women and retirement ages.
  2. Investment.
  3. Total factor productivity, which measures the efficient use of labor and investment.


Labor supply

Only India can match China in terms of abundance of labor, with the country set to overtake China as the world’s most populous by 2027. By 2030, close to one-fifth of the world’s working-age population (aged 15–64 years) will be Indian. At a youthful median age of 28, which is 10 years below the median age in China, the supply of labor is India’s key advantage. An average of 10 million people will enter the working-age population each year until 2030 (a cumulative of 110mn, which is close to the population of the Philippines), translating to around 1.0% annual growth for India’s current working age population of about 920mn, a feat very few countries can claim. China’s working-age population, in comparison, peaked in 2015 and is on track to decline by 27mn by 2030. The large pool of labor should keep a lid on India’s labor costs. (8)

This, alongside the government’s focus on skills improvement and labor reforms, can boost the employability of India’s youth.


At around 30%, India’s investment-to-GDP ratio is high by global standards. But to consistently realize a potential growth rate of 6% in real terms—our forecast for the years ahead—we estimate it needs to climb to 33%. The private corporate sector is likely to remain the main source of investment, followed by households and the public sector. The latter will be focused primarily on boosting infrastructure investment, which currently accounts for about 5% of GDP. For India to reach its full potential, we estimate investment needs to be at 7%–8% of GDP. Projects worth USD 1.4tr are being drawn up under the national infrastructure pipeline (NIP). Investment, overall, is mostly being financed by domestic savings. The current savings ratio stands at 29% and will rise as India’s dependency ratio falls, but it will still sit below the investment ratio. Hence, the country will likely run an external (or current account) deficit. More money from abroad will therefore be needed to fill the nation’s coffers; this would also keep the currency from unduly losing value.

TFP – the wild card in the growth mix

India’s total factor productivity (TFP) growth has been well below the 3% threshold achieved by a number of economies that have experienced GDP growth rates of greater than 8%. But the country’s growth drivers are deeply structural and hence, we think, sustainable. They include urbanization, with Delhi aiming to bring the portion of the population residing in rural areas and villages from 66% to 60% over time; the gradual movement of the informal economy, which currently comprises 90% of India’s workers, into the formal economy; and the ongoing upskilling of the local workforce.

In our view, India’s nominal GDP growth could touch 9.5% (in local currency terms) if the right measures are taken (see Fig. 3 for a breakdown of how we came to this number). So where would such a rate put India on the global map of economies? When looking at the top 10 economies globally (in nominal GDP terms, i.e., not adjusted for purchasing power) since the 1980s, India first entered this list a decade ago and has been climbing up ever since. The key question is whether it will stay in seventh place or float even higher. To figure this out, we adjusted nominal growth rates for potential currency depreciation and for India used 7.5% growth in USD terms. Using these assumptions, by 2030, the US and China remain the two largest economies by far. India, however, emerges as the third largest economy with some distance between the other contenders.

Is the Indian rupee stable?

When it comes to currency stability, the Indian rupee (INR) has had a lackluster track record since 1999. It has lost around 44% of its value against the greenback, with the USDINR exchange rate rising from around 42 to around 76 currently. However, this does not mean that the INR has been an unattractive currency to own. On the contrary, it has delivered positive total returns for a USD-based investor once interest is taken into account. Over the past two decades, Indian 10-year government bonds have commanded a 4% p.a. yield advantage on average versus comparable US bonds which have more than compensated US-based investors for the 2%–3% p.a. depreciation of the INR against the greenback. For this reason, the Indian rupee has stood out within the APAC region as a magnet for investors seeking yield in a low interest rate environment.

Why has the rupee fallen?

Two factors can explain the bulk of the rupee’s persistent depreciation: high inflation and negative current account dynamics. Inflation in India, which was stable at mid-single-digit levels from 1999 to 2004, accelerated between 2005 and 2013 to high single digit/double digits. This period of high inflation weighed on the Indian rupee, as reflected by the INR nominal effective exchange rate (or NEER, a measure of how the INR performs relative to its trading partners’ currencies). It was only during 2013 to 2016 when the Reserve Bank of India formalized an inflation-targeting regime under then- Governor Raghuram Rajan that inflation was brought back under control and the rupee stabilized. Current account dynamics have also played a role. You can find out more about this in the full version of the report.

India's improved current account dynamics bode well for INR stability

Source: Bloomberg, June 2020

Growth of E-commerce in India

India’s e-commerce sector may not be the focus for most stock investors (for now), but American and Chinese internet platform giants, as well as venture capital players, have been doubling down on the sector. Just six months into the year, 2020 has already seen the largest amount of foreign tech investment ever in India. Facebook acquired 9.99% of Jio Platforms, the telco and tech arm of India’s most valuable listed company, Reliance Industries. And Intel’s investment arm is among the latest to seek exposure to India’s e-commerce landscape via Jio Platfroms. Jio became India’s biggest mobile operator, taking onethird of the market, in just five years. It saved money by skipping the second and third telephony generations and went straight to 4G and 5G, but it amassed up to USD 40bn of debt in the process (even though it is owned by Mukesh Ambani, Asia’s wealthiest business man). After many years of fierce price competition, the other two main telcos, Bharti and Vodafone Idea, have also become strapped for cash. The joining of foreign financial muscle with popular content and domestic access to the planet’s second largest population could catalyze advertising and e-commerce revenues.

India offers an underpenetrated yet enormous consumer market. Hence, its potential growth rate is among the highest in Asia and worldwide. For more information, download the full version of the report.

Projections for B2C e-commerce market size

Almost 20% growth can be reached early in the decade

Source: IBEF, UBS

We answer: Is India the new China?

India needs to be understood on its own terms. It is the only country with the scale to match China, but it will not be the next China.

India’s economy will continue to grow in the years ahead, but it will take a long time for it match China’s size today (China is currently five times bigger). China’s economy would have to crash and India’s grow at over 10% a year for several decades for India to catch up. Neither is likely.

Investing in India: Investor takeaways

For investors, India is one of the last large population markets that is waiting to be truly discovered. Restrictions, especially for non-institutional investors, make it difficult, but not impossible, to access the market. Indeed, it will take more effort for investors to capture opportunities in India than it would in other, more developed markets. But as the bond and stock markets, as well as certain sectors, open up, waiting for this convenience could mean high opportunity costs.

Anyone who has visited India will tend to agree that the passage to the country is not always smooth, but rich historical and cultural bounties await those who embark on the journey. For investors, the experience could well be similar for those open to it.

Shifting Asia series: Is India the new china?

The aim of this report is to familiarize investors with the country’s long-term growth outlook and the underlying structure of its economy and financial markets.

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