The Indian economy has come under greater scrutiny as the debate over whether the country will be the “next China” intensifies.

China was a key driver of global growth for almost three decades, contributing more than a quarter to global gross domestic product expansion between 1990 and 2020. In the period from 2013 to 2021, China contributed almost 39% of global GDP growth — 13% more than the G7 countries combined.

Emulating China would thus require India to sustain a near double-digit growth rate for nearly three decades, integrate with the global manufacturing supply chain, transition into an export powerhouse and attract enormous foreign investment. While this is a daunting task, India does find itself at a unique juncture where China stood over 40 years ago.

China’s ascent was a result of key political and economic factors shaping the world in the 1970s. The geopolitics of the period, characterized by the deepening U.S.-Soviet rivalry and the Sino-Soviet split, prompted the U.S.-led West to open up to China in 1971. This provided a favorable circumstance as China launched reforms in the late 1970s.

A similar inclination exists within the West vis-a-vis India today, owing to the deepening strategic competition with China. Beijing’s expanding diplomatic and economic clout, manifested in its belligerent foreign policy and economic coercion, has sparked concerns of overdependence and strategic vulnerability in the West. This, in turn, has forced the U.S. and its allies to reevaluate their partnership with China and explore options for de-risking and diversification, with India emerging as a preferred partner.

Another factor that worked in China’s favor in the past was that the above geopolitical shift coincided with a time when global businesses, in pursuit of greater competitiveness, were actively looking for offshore destinations in Asia to drive down their increasing operational costs. Incidentally, following the Sino-U.S. rapprochement in the 1970s, China’s market, endowed with a vast pool of cheap labor, became a lucrative option.

Yet again, a similar reorganization is underway. The deepening Sino-American rivalry has impelled Washington to impose unilateral and multilateral export restrictions on Chinese companies to restrict their access to key technological goods. China too has brought in strict regulatory compliance requirements for foreign companies as a tit-for-tat measure. Compelled by the double whammy of regulatory challenges enforced by Washington and Beijing, foreign firms operating in China are looking to redirect their new investments away from China. India has hence emerged as a credible alternative.

The Indian government too seems inclined to make the most of the gains arising from the de-risking strategy, evident in its keen interest in supporting high-profile projects involving the manufacturing of iPhones and the assembly of semiconductors.

Finally, China had the advantage of a burgeoning consumer base that none of its Asian competitors had, offering it an unparalleled edge. Accordingly, its consumer market became increasingly significant in influencing business decisions in the following decades. Over time, the downsides of increasing labor wages in China were offset by the skill competitiveness of its labor and an expanding consumer base.

India is endowed with a similar advantage today. It currently boasts the second-largest consumer base — defined as people spending above $12 a day — of over 500 million, second only to China’s 900 million. Estimates show that by 2030, India’s consumer base will expand to 773 million, trailing only China’s 1.062 billion. The gap between China and India will only shrink from here on.

A shopping mall in New Delhi. India has a large consumer base.    © Reuters

Nevertheless, multiple complications confront India’s journey. The most significant among them is the rise of protectionism worldwide and the reintroduction of industrial policies even within the heart of liberal capitalist economies.

The Chinese miracle rode on the wave of globalization that began around 1980 and lasted until the 2008 global financial market crisis. However, the economic logic underlying globalization has come under severe stress lately. The inclination toward weaponizing trade has left nations increasingly wary of economic coercion.

Domestic political compulsions have encouraged states to pursue self-sufficiency in some form or other. Even the foremost champions of free trade have resorted to floating subsidies at home to encourage the repatriation of investments. The impeded globalization, thus, is the biggest countervailing force against India’s ambition. This is further compounded by India’s reluctance to leverage whatever is left of globalization, evident in its recourse to higher import tariffs and skepticism of multilateral trade agreements.

Yet, there are gains to be derived from the ongoing de-risking and “China plus one” strategies, albeit not of the magnitude that existed in the 1980s and 1990s. While India has emerged as a strong contender in this ensuing contest, it faces tough competition from countries such as Vietnam, Thailand and Malaysia, which threaten to diminish its gains in both absolute and relative terms.

The EU Chamber of Commerce in China pointed out that while India has performed better than any Southeast Asian country and has attracted 15% of European investment diversifying away from China, it fell behind ASEAN as a whole, which attracted 21% of the rerouted investments.

Lastly, while a large consumer market can give India an unparalleled advantage vis-a-vis its competitors, experience suggests that it is a third-order factor in influencing inbound investments. This is evident in the fact that Singapore, Vietnam, Malaysia and Thailand — all with much smaller domestic markets — have attracted significantly higher foreign direct investment (FDI) as a percentage of their GDP.

Openness to foreign investment and the ease of doing business are key factors for creating growth. On openness, the OECD’s FDI Regulatory Restrictiveness Index places India on a par with or even better than its competitors. But when it comes to the ease of doing business, India falls far behind, thereby preventing its consumer market from catalyzing the inbound investment.

India currently contributes 16% of the global economic growth, as opposed to China’s 34%. The IMF predicts India’s share to rise to 18% in the next five years. As China witnesses a decline in its share going ahead owing to its economic slowdown, India is strategically placed to emerge as the leading engine of growth, provided it navigates the above challenges deftly.