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Can India Overtake the US and China as the Strongest Economy?

25 November 2019

Let’s Find Out if India Can Overtake the US and China as the Strongest Economy

 

The Us and China tend to dominate conversations when it comes to the strongest economies in the world, but India is starting to change up the focus based on their incredible economic growth over the past decade and their limitless potential for the future. But is it realistic to think India, which some still consider a developing nation, could overtake the most dominant and strongest economy in the world and the world’s top producer anytime in the near future? Today we will consider this possibility and look at several factors that will either push India in that direction or cause it to fall back, but first a little background.

 

If you are one of those Aluxers who perefers to watch visiuals over dull text, here’s the whole article “Can India Overtake the US and China as the Strongest Economy” in the form of a video:

with that out of the way, let’s discuss whether or not India can overtake US and China as the strongest economy:

1

Introduction

Since 1871, the United States has held the position of the largest economy in the world. In 2018, America crossed a new threshold with a GDP that totaled over 20.5 trillion dollars. China, on the other hand, is a newer player in the field of large economies, having only claimed the second highest spot in 2010. Their economy significantly trails that of the United States with a GDP in 2018 of 13.4 trillion dollars. If you travel further down the list past Japan, Germany, the United Kingdom, and France, you’ll find India in 7th place with their GDP of 2 trillion dollars.

Just looking at these numbers on the surface, it seems ridiculous to ask whether India could overtake both the US and China—not to mention the other four countries in between—to become the strongest economy in the world. But the real story here is found in the economic growth rates. While the economy of the U.S. grew only 2.9 percent in 2018, China’s grew by 6.5 percent, and India had the fastest growing economy in the world with a 7.4 percent growth rate in 2018.

These numbers gain even more significance when you realize that America’s 2.9 percent growth rate is their highest in a decade. India, on the other hand, has led the world in economic growth rate for several years and is expected to continue to do so. Just one glance at this chart shows you how consistently India’s economy has been growing. Let’s take a look now at how the Indian economy got in this position.

Resource: How China Became the Factory of the World

2

How India Became One of the World’s Top Economies

India gained its independence from the United Kingdom in 1947 and quickly implemented a closed economy where they focused on providing for the country’s needs without relying on imports. Many of the major industries, including mining, banking, insurance, and telecommunications, were nationalized by the mid-50’s. When corruption became a problem, the government over-corrected by implementing strict regulations that stifled economic growth.

After decades of this stagnant economic growth and widespread poverty, India found itself at a crossroads. 1991 brought the collapse of the Soviet Union, one of India’s primary trade partners. And the Gulf War raised oil prices and cut off funds from Indians who had been sending back money while working in the Middle East. These were the main factors that brought India to the brink of a financial crisis. The country was in serious danger of defaulting on its loans. They were bailed out by the International Monetary Fund with a 1.8 billion dollar loan under the condition that they implement major economic reforms.

This led to the liberalization of India’s economy. Their markets were opened up to foreign competition, and restrictions on foreign investment were eliminated. This opened up opportunities for Indian entrepreneurs, who could now get funding from investors around the world.

A number of other regulations and restrictions were also eased in order to stimulate economic growth. Tariffs were reduced and monopolies were eliminated. By 2003, India had established a free-market economy, and its GDP began to grow significantly year after year.

Indian entrepreneurs embracing the IT sector was a big part of this growth. By 2007, revenues from the IT sector totaled 23.5 billion US dollars. In 2018, revenues topped 167 billion from the IT sector alone. The increase in technology-based businesses will continue to play a vital part in India’s economic growth. Now let’s see what else is working in India’s favor.

3

Reasons Why India Might Become the Largest Economy

India’s primary asset is its people, and the country has plenty of them. With a population of over 1.3 billion people, India comes behind only China on the list on the world’s most populated countries. But there is one important difference between the two countries’ populations—India’s people are generally much younger than China’s aging population. In fact, about 65 percent of India’s total population are younger than 35.

The United Nations expects India’s population to surpass China’s by 2024. India’s current population dynamics contribute to what is referred to as a demographic dividend, which is the economic growth potential coming from shifts in the working-age population. The potential of India’s workforce is unrivaled throughout the world due to their sheer numbers and the current economic landscape.

Another indicator that India’s economy is strengthening is the decrease in poverty rates. Poverty is still a widespread problem in India with 12.4 percent of the country living below the international poverty level, which means they live on less than one dollar and ninety cents per day. However, between 2005 and 2016, a total of 271 million Indians moved out of poverty.

This means the poverty rate was cut in half in this period of about 10 years. Although India still has a long way to go in addressing poverty, this trajectory is a positive sign for the strength of India’s future economy.

Another piece of the puzzle for India’s potential economic growth is increased urbanization. Today 50 percent of India’s workforce is employed in the agriculture sector, but low wages and a decline in land fertility have begun to gradually drive people from rural areas to seek better opportunities in the cities. By 2050, it’s expected that over 830 million people will live in India’s city centers. According to the World Bank, urbanization spurs economic growth by increasing demand for both urban businesses and agricultural products, which helps reduce poverty overall.

However, urbanization could have a negative effect if the proper infrastructure is not put in place and if there are not enough jobs available for the growing workforce, which brings us to the challenges India is facing in growing their economy.

Resource: Richest People In India 2014

4

Reasons Why India May Not Become the Largest Economy

Despite some promising statistics and economic trajectories, India will need to overcome a number of challenges before it will be able to surpass both the United States and China to become the world’s largest economy. The primary challenge is job growth. The flip side to India’s massive, young workforce is the hurdle of providing enough sufficiently paying jobs to sustain the population. In 2018, unemployment in India reached a 45 year high as a result of the number of jobs not growing at the same rate as the economy.

This means that India’s newest generation of workers in particular may struggle to find their place to contribute to the ever-growing economy. There is also not enough of an effort to reskill workers whose jobs are becoming obsolete or automated.

Another issue is that 81 percent of India’s workforce is engaged in informal work. This includes household help, street vendors, rickshaw drivers, and others. The economy is not benefitting as much as it could from these types of businesses, even though they make up about half of the GDP, because they are largely cash based, and their informal nature limits their capacity to grow.

If India takes the steps necessary to formalize their largely informal economy, wages would increase, more companies would become digitized, and a higher amount of taxes would be paid. Workers would also have more access to business loans and other government resources geared towards registered businesses. To put it very simply, India must make three significant transitions in order to sustain their current state of economic growth: farm to factory, rural to urban, and informal to formal.

5

Conclusion

Economists predict that China will become the largest economy in the world by 2032, and India has the potential to surpass both the US and China by 2050. But economies are dynamic and complex; they are affected by numerous factors like population, regulations, world events, politics, and industry trends. But if the question is whether this is possible for India, the answer is yes. Will they do everything required to sustain their growth and make it happen? We’ll have to wait and see.   

For an inspirational and informative look at India’s potential for the future, you should check out The Path Ahead: Transformative Ideas for India. This book brings together informed perspectives from government officials, thought leaders, and industry executives in India to explore the challenges the country is facing for future growth as well as possible solutions to these issues. This book is available exclusively on Audible for 25 dollars, but we’ve got this one covered for you. Just go to alux.com/freebook and sign up so that you can get the audiobook version for free thanks to our partnership with Audible!

6

Question

Now that we’re wrapping up this topic, we’d like to know: Which do you think will happen first: China surpasses the US or India surpasses China as the strongest economy? Let us know what you think in the comments.