Growing Pains: What’s Stopping India from Overtaking China?

As China’s growth rate slows, India’s economy is picking up speed and manufacturers are taking note. But can the country’s lackluster infrastructure keep up with its booming industry?

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Update 8/11/2015, 12:30 PST: China devalues the Yuan by 2 percent

This morning, China allowed a 2 percent devaluation of the Yuan, spurring more concern about the country's sluggish economic growth. That devaluation hit U.S. stocks and threatens to severely impact India's export market. As Chinese exports get cheaper, India will face more competition and may be pushed into a "currency war" with neighboring countries. While manufacturers are optimistic about India's future, China's surprise devaluation will put pressure on the country and threaten its newly accelerated growth rate.

Things are looking up for India’s manufacturing sector.

India’s growth rate surpassed China’s this year, with a 7.5% GDP increase compared to the economic giant’s 7% from January to March. The IMF said that India’s GDP will surpass Russia’s this year and nearly equal Brazil’s by 2016. That’s big news for a country that, for so long, has trailed behind its neighbors in economic development.

A lot of this growth comes down to Prime Minister Modi’s “Make in India” campaign, which opened 25 sectors of the economy to outside investments. Firms such as GE, Bosch, Tejas, and Panasonic recently decided to invest heavily in their respective industries in India. Fifty-seven proposals worth U.S. $3.05B were received by the government in 2014, 30 of which, amounting to US $1.04B, have already been approved. Investment proposals from the electronics industry are expected to double from U.S. $2.89B to almost $6B over 2015-2016. Major investments in the manufacturing sector came from First Solar Inc and China’s Trina Solar, Samsung Electronics, Ikea, Sanofi SA, BMW and Mercedes-Benz, and Suzuki Motors. According to the Reserve Bank of India (RBI), the government attracted Foreign Direct Investments  worth U.S. $34.9b between April 2014 to March 2015, 61.7% higher than in 2013.

Rising wage costs and labor disputes in China have also been a boon for India’s economy as companies continue to shift their production to the country. On Monday, Chinese smartphone producer Xiaomi announced that it will start producing its new phone, the Redmi 2 Prime, in India. Manufacturing giant Foxconn pledged to invest U.S. $5B on factories in the Maharashtra state over the next five years. That announcement is a huge step forward for India’s manufacturing base, as it signals the potential for India to develop as a manufacturing hub.

But there are a few road bumps to tackle before India can truly follow in China’s footsteps.

Literally: India’s poor infrastructure is preventing it from achieving its manufacturing goals. The country was ranked 54th by the World Bank in its Logistics Performance Index (LPI) survey in 2014. Roads, railways, and waterways were not designed to meet today’s freight traffic, which is expected to increase significantly. The congestion and delays from inefficiencies have also cost India’s economy around US $45B every year. Foxconn has stressed the untapped potential that India will not see if it continues to ignore its infrastructure issues. India’s decentralized government presents a roadblock to fixing infrastructure: The lack of a standardized system for investing in and maintaining infrastructure will cause delays and may turn away prospective investors.

India’s energy sector is also facing problems. The lack of reliable electric supply in India will cost the country around U.S. $27B by 2017, according to a World Bank study. India is in desperate need of committed private investment in energy, as too many firms see power cuts adding to delays and costs from running personal generators. Analysts laud the country’s great potential to produce renewable energy, but due to high initial costs, many are reluctant to make the switch.

On (Deteriorating) Track to Success?

Experts are torn over India’s economic prospects. Some analysts believe that economic prospects for India are now brighter than China’s, which has shifted to a private enterprise and domestic consumption-driven economy. But clogged roads and ports, power shortages, and a highly decentralized government will be detrimental to progress. China spends 9% of its GDP on infrastructure development, namely on a transcontinental rail system, and that effort to improve infrastructure is part of what attracted so many manufacturers in the past.

Modi has lofty goals for India’s manufacturing sector, and with China’s recent market troubles he may see his country take a step closer. But no one is calling India the new China just yet—until the country can seriously invest in infrastructure and consistent energy supplies, manufacturers will be reluctant to move their entire operations from China. Foxconn and others will serve as trial runs for India’s manufacturing potential. For Modi’s sake, let’s hope they don’t hit any potholes.

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