India's Economy: Why can't India Become the Next China?

[Music] india is the second largest nation by population on earth and is currently predicted to overtake china in population size as early as 2024. in the last decade there has been a lot of talk about china's rising incomes and its potential to switch away from low cost and cheap labor manufacturing it's often argued then that india would be the natural replacement to china as the next lowest point of cost for manufacturing businesses and for foreign direct investment however as china transitions to a middle-income economy it is not clear at all that india is taking its place as the world's manufacturing powerhouse and many firms are instead switching to countries like vietnam malaysia or thailand to access cheaper labor as chinese workers demand higher wages what then is holding india back from becoming the world's factory as china currently is today as there are no doubt huge benefits from a country becoming a manufacturing powerhouse and having a large positive trade balance india's growth in gdp has been averaging around six to seven percent per year almost half of what china showed in the 1990s at the height of its growth in this video i will attempt to go through a number of reasons why india consistently fails to match china and its position as a manufacturing and economic giant one of the first and most persistent issues for india is that of inequality hangovers from the caste system is still very much prevalent in indian society and this impacts a huge number of people from achieving social and financial mobility the oecd undertook research in 2014 showing that rising inequality does impact on overall economic growth and progress the basic premise is this if you imagine all manufacturing jobs were suddenly automated overnight this would lead to huge increases in profit for businesses as their labour costs would suddenly drop to zero making some business owners incredibly wealthy however with the increased unemployment there would also be a huge drop in domestic demand for the businesses products as the majority of the population would not be able to afford them even if businesses reduce their prices substantially a poor middle and working class therefore dampens domestic demand considerably and this is largely what is seen in india today in support of this a united nations survey found that intergenerational mobility is slow and that inequalities across different population groups are also very high meaning there is large inequality between groups at the top and bottom of society this problem is just not historically as much of an issue in china india's caste system and entrenched social hierarchy stems from deep religious and philosophical routes stretching back millennia whereas china has always had a relatively homogeneous population with most members of its society facing similar economic conditions going back thousands of years india on the other hand currently has 80 of its wealth held by 10 percent of its population and in recent years has attracted negative attention as the second most unequal country in the world after russia its inequality problem is also largely divided by region in particular between rural and urban areas this inequality problem is persistent and it is unclear whether there is a real desire amongst indian politicians to really grapple with this problem leading us on to our second issue governance india is incredibly diverse with an official 22 languages registered for the country and reportedly over 2 000 different ethnic groups varying by region to region with its democratic system then implemented after the end of colonial rule in the 20th century it has proved incredibly hard to govern and hard to agree on decisions when there are so many different vested interests many indians even say that one of the biggest problems in the country is that there is too much democracy so much that nothing ever seems to get done this is in contrast to china where state investment and public projects are hardly ever opposed due to the nature of the chinese one-party system this has often resulted then in huge inertia to new infrastructure projects in india like new railways power grids government buildings and more all of this holds back india's economy from reaching its full potential and leaves the population with old and slowly deteriorating infrastructure which will impact on growth in the long term many business sectors also remain under state control as democratic leaders have continually resisted reducing state employment in favor of the private sector due to the short-term economic disruption and pain that would resolve whereas china has managed to achieve a sort of free market communism india is in many ways the opposite being stuck with a sort of state-dependent democracy this contradicts then india's recent 2014 make in india campaign launched by prime minister narendra modi which tried to encourage both foreign and domestic companies to invest and manufacture within the country many companies that saw china is no longer cost effective opted to manufacture in countries like vietnam which has seen a four-fold increase in exports since 2008 instead india's export growth in contrast remained in the single digits for that entire time period this is caused not only by poor infrastructure and resistance to change by many groups in india but also for other reasons notably the complicated tax rules and red tape that many companies have to deal with when investing in india nokia in 2014 opted to close a plant in india after being hit by an astonishingly high 702 million dollar fine and this is just one of many well-publicized historical tax disputes with foreign companies it is no wonder then that foreign firms opt for countries with simpler legislation and tax rules the problem of governance also stretches to international trade and investment policies further limiting india's potential growth as a manufacturing power in 1990 a severe recession within india's largely state-run economy at the time resulted in the indian government having to request a bailout from the imf the bailout was granted on conditions relating to trade liberalization and free market reforms including the privatization of many state industries however many industries such as banking and power still operate under a state monopoly and as a result india's economy remains very mixed on top of this india's tariff levels remain unusually high at an average rate of 17.1 in 2018 in comparison to the us and the eu at around just four percent this again makes manufacturing in india for foreign firms very unattractive as any natural resources that would need to be imported for manufacturing would likely attract huge tariff bills and exports to other countries from india are also likely to face high tariffs due to the tit-for-tat nature of protectionism protectionism until only very recently was not an issue for china as the chinese government largely embraced free trade since their entry to the world trade organization in 2001 as they realized the potential it had for their growing economy and the consumer markets that they could cheaply gain access to in the west perhaps the most interesting development of india's economy however and what may be one of the main factors in explaining its low manufacturing output is the emergence of a thriving service sector arguably built upon a significant portion of the population that are highly educated but also english speaking what is most interesting about this is it defies the usual logic of economic development the general consensus is that poor rural economies will first transition to middle incomes through manufacturing in the industry and then transition to a service-based economy when high incomes are reached this is the case for most countries but india appears to buck this trend india maintains a highly rural and agricultural economy but at the same time shows urban areas with highly skilled workers and a majority of service-based employment and this accounts for a growing proportion of india's gdp in a similar way then to how many african countries skipped out traditional landline phones and went straight to mobile perhaps india doesn't even need to have a growing manufacturing sector to compete with china and to become an economic giant a large factor causing this is the growth in digital technologies and globalization which allows skilled workers in india to service many foreign firms online without them having to have a physical presence in the country bypassing many of the previously discussed legislative and regulatory issues having said that india's economy still lags behind the turbocharged growth that china showed through manufacturing in the 1990s and early 2000s if it can reach the same growth levels through a service-based economy and can deal with the outstanding issues of inequality governance and protectionism it may well become an economic giant however it will no doubt look very different to the china that we see today and low-skilled manufacturing will almost certainly not be a central component of india's long-term success thank you for watching if you like this video please remember to hit the like button comment and subscribe to the channel

Channel: Time Flies

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Keywords: India, China, economy, can india become the next china, economic growth, economics, manufacturing, agriculture, protectionism, trade, governance, services economy, services, middle income, cheap labour, low cost, manufacturing jump, infrastructure, taxation, inequality, economic mobility, exports, globalisation, Vietnam, Malaysia, Thailand, digital technologies, legislation, regulation, population, investment, tariffs, world trade, business, industry, caste system, developed nation, developing nation, money

Id: q9SFdmbiDPM

Length: 10min 16sec (616 seconds)

Published: Mon Feb 01 2021