Weekend Long Read: Can India Become the World’s Next Manufacturing Powerhouse?

### Summary

#### Can India Become a Manufacturing Powerhouse Like China?

In recent years, China's economic recovery post-pandemic has been weak compared to India's strong recovery. India has advantages such as a young and growing labor force, improved infrastructure, increasing foreign investment, and a friendlier external environment. However, India still lags in manufacturing, accounting for only about 3% of global manufacturing compared to China's one-third share [para. 1]. India's per capita GDP in 2023 is comparable to China's in 2000, suggesting potential for manufacturing growth. China's rise as a manufacturing giant was driven by several factors including WTO entry, cheap labor, good infrastructure, and FDI attraction [para. 3]. India, however, is traditionally services-oriented, with only about 13% of its GDP from manufacturing compared to 32% for China in 2000 [para. 4].

Demographics favor India, with a population and median age similar to China’s in 2000. However, India’s total employment is lower at 550 million compared to China's 720 million in 2000, due in part to low female labor participation [para. 11]. Wages in Indian manufacturing are significantly lower than in large ASEAN economies and comparable to China’s wages in 2000 [para. 16].

In terms of infrastructure, India's logistics performance and ease of doing business have improved but still lag behind [para. 21]. Labor regulations in India have been historically rigid, although recent reforms aim to make the business environment more flexible [para. 23]. FDI inflows have been robust, albeit with a recent slowdown, but sectors like clean energy and electronics are attracting new investment [para. 29]. Land acquisition remains a challenge, with reforms needed to expedite industrial projects [para. 36].

Comparatively, India’s economy is less state-owned than China’s, which may help in faster manufacturing growth. While India is unlikely to replace China as the world's factory, its large domestic market offers significant potential for rapid manufacturing development [para. 42][para. 43].

#### How Might India’s Domestic Consumption Grow?

India's household consumption has doubled in the past decade, reaching $2.1 trillion in 2023, with expectations to surpass Japan as the third-largest consumer market by 2026. India’s consumption size is currently similar to China’s in 2006-2007, even though India’s per capita GDP is much lower [para. 47]. If India's consumption share of GDP remains stable, its domestic market could grow faster than its GDP, making it very attractive to foreign investors [para. 48].

A crucial factor behind India's consumption growth will be labor income, driven by both wage growth and employment expansion. Urban wage growth has been robust at around 14% in 2022, akin to China’s 15% around 2006 [para. 58]. India's non-farming employment growth has accelerated, rising to 316 million by 2022, indicating large potential for further employment shifts from agriculture to more productive sectors [para. 60].

Household saving rates in India are higher than in developed markets but similar to China’s in the mid-2000s. However, the potential for consumer credit uptake could support further consumption growth [para. 67][para. 68]. High-quality job creation is essential for sustained consumption growth, especially given the impact of recent economic challenges [para. 72].

As income levels rise, so will consumption patterns, with significant growth potential in sectors like automobiles [para. 75].

#### Will India’s Energy and Commodity Demand Grow Like China’s Over the Past Two Decades?

China’s economic rise led to massive increases in energy and commodity demand, with primary energy consumption growing from 42 exajoules in 2000 to 171 exajoules in 2023 [para. 82]. India’s energy consumption in 2023 was about 39 exajoules, similar to China’s in 1996, but India is less energy-intensive and its economic structure is more service-oriented [para. 90].

India’s growth is unlikely to match China’s capital- and energy-intensive pattern. China’s high investment share in GDP, driven by policies favoring industry, is not as apparent in India [para. 92]. Additionally, India is not anticipated to grow its manufacturing exports as China did, reducing the corresponding energy and commodity demands [para. 95].

India is a large coal and oil importer, but its imports are not expected to grow as rapidly as China’s did due to differences in economic structure and resource endowments [para. 104]. India’s agricultural import and export dynamics are also different, with India being a net exporter in several categories unlike China [para. 108].

In summary, while India has the potential for rapid growth in manufacturing and domestic consumption, its patterns of energy and commodity demand are likely to be different and less intensive than China’s [para. 115].