“India is shaping up to be a beneficiary of geopolitics, that's definitely as it looks right now.”

The discussion turns to India on the latest Macro Bytes – the economics and politics podcast from abrdn – as Paul and Luke are joined by Emerging Markets Analyst Michael Langham. The three cover the near and medium-term prospects for the Indian economy, as well as India's …

  • Demographic tailwinds
  • Infrastructure needs
  • Ability to be a friendshoring winner
  • Prime minister Narendra Modi and what could be in store in his third term


Paul Diggle: Hello, and welcome to Macro Bytes the economics and politics podcast from abrdn. My name is Paul Diggle, Chief Economist at abrdn.

Luke Bartholomew: And I'm Luke Bartholomew, Senior Economist at abrdn.

Paul Diggle: Today we are going to be talking about the Indian economy. India had a remarkably strong year in terms of its economic performance in 2023. It was in fact, the fastest-growing major economy in the world last year - a title that many had originally expected initially to go to China. The Indian economy in the end grew perhaps around 7%. And moreover, 2023 was also the year in which India overhauled China in population terms, and its 1.4 billion people making it the most populous country on earth. But the Indian economy also faces challenges. From poor infrastructure, a widespread need for legal reform, overhaul of the land ownership system, labor laws - the list goes on. So, joining us to discuss the near and medium-term prospects for the Indian economy is Michael Langham, Emerging Market Analyst here at abrdn. Welcome, Michael.

Michael Langham: Thanks for having me, Paul.

Paul Diggle: So, let's start by discussing the current economic performance in India and near-term prospects. What drove the Indian economy to be so strong in 2023? And I know you're expecting something of a slowdown in 2024 – so perhaps you can explain why you're expecting that.

Michael Langham: Sure. Yeah. So, as you mentioned, India's economy was really strong last year, a global outperformer. And I think you can point to a few things behind that. Two points on the support side from in terms of fiscal support. I think we saw a lot of that last year, in the investments drive in terms of infrastructure was very supportive of growth. And then on the monetary policy side, the RBI has hiked, but when you look at monetary conditions, it's not clear they're particularly tight as it were. So credit growth has held up quite a bit. And that's been quite supportive of the economy. And then the dynamism of the service sector as well, has been something of note. But I think looking into 2024, and, you know, at the start of this year, you've seen some signs of economic activity beginning to weaken. It's not clear that India's economy can shrug off what is a global growth slowdown. So PMIs are falling from their highs, industrial production started to show some signs of weakness, and then you had private consumption actually contract in the last quarter of GDP. So, we think fiscal policy can't keep the economy sort of chugging along as it has been. And then on the monetary policy side, you know, credit conditions may tighten a bit more. So overall, we are expecting somewhat of a slowdown this year. But you know, India will remain an outperformer and we expect it to rebound quite quickly in 2025.

Paul Diggle: Let's talk about the inflation picture as well, then, because Indian inflation has been very volatile over the past few years. It's bounced around the top end of the Reserve Bank of India's 2–6% inflation target, sometimes it's moved above the upper limit of that band. Why are you expecting inflation to moderate this year? And what does that mean for RBI monetary policy?

Michael Langham: Yeah, so inflation currently is at 5.6%. So, near the top, top of that upper bound, in terms of the target range. I think, one positive has been that core inflation has been continuing to moderate. And, you know, that's a bit of a puzzling aspect when you pair that with how strong the economy's been. So, expecting growth to slow this year, and with core inflation already, moderating is pretty likely that that's at least going to remain around target where it is or not accelerate again. So, we're seeing underlying inflation remained fairly contained. I think some of that volatility you've mentioned, is around the food price. Volatility and India is very exposed to that. Its CPI basket, its basket of consumer goods prices, is very heavily weighted to food at 46%. So, when you get some swings in food prices that really does cause headline inflation to really spike. And that that remains an uncertainty risk to the inflation outlook. And you know, with El Niño weather conditions and patterns affecting food production globally, that is somewhat of a challenge. But I think you should expect some of that volatility to ease off as the year goes on. And with core inflation sort of anchored around 4%, then overall inflation should come down and continue to moderate and give the RBI scope to think about easing by next year.

Luke Bartholomew: So, shifting gears away from the cyclical questions of growth, inflation, and policy towards some of the longer-term structural drivers of India's economic outlook. And perhaps, starting with demographics. I mean, Paul's already talked about the sheer size of India's population. But another remarkable demographic feature is the continued improvement in the so-called dependency ratio in India, which is likely to improve further for several more decades. So, can you talk about why that is such a tailwind for India's growth and how it compares with other emerging market economies?

Michael Langham: Yes, so, as you mentioned, India's become the most populous country in the world, a title once held by China, and the UN's projecting India's population to grow by another 250 million people or so by 2050. So, it's a large population, and it's growing. So, in terms of the labor boosts to potential growth, that's pretty significant. And when you compare it to other emerging markets, like China, Thailand, Russia, they're all facing, you know, demographic challenges in those terms. I think, when we talk about the dependency ratio, i.e., in more simple terms, the ratio of workers to non-workers in the economy, India's not facing maybe some of the constraints that other economies are facing. It's got a higher and growing percentage of workers relative to dependents. And that's positive in the sense that workers are generating savings for your economy, that can be channeled into investments, helps to push down domestic interest rates, and ultimately reduces the need for external borrowing to some extent, but also creates fiscal capacity. If you think of Japan or in the Eurozone, where populations are ageing, fiscal spending, has to be channeled more towards that ageing population. Whereas with India, it can go to things like infrastructure, education, things that potentially boost long-term growth. So, there's some positives there. And you know, that would be one of the big tailwinds for India's economy over the coming decades.

Luke Bartholomew: So, one sensible source of low hanging fruit when it comes to boosting growth would be to improve the female labor force participation, because compared to a number of other economies, India's female labor force participation does seem extremely low. But of course, there are very deep-seated cultural social issues that explain that. So, it's not necessarily the kind of thing where there's an easy economic policy lever to pull in terms of improving that. So, can that be thought of as a potential tailwind as well? Or will it be too difficult to significantly increase these female participation rates?

Michael Langham: No, I think that's something where we have seen steps in terms of social policy and economic policy to improve that. Education is key in India. And India has made big strides in terms of educating its population. When you look at the share of students entering tertiary education, it's already double that of China at the same stage of development, and the government has flagged that it wants to boost education and skills. But I think one of the challenges around why female participation is quite low is just the sheer lack of jobs and need for employment in the Indian economy. But by educating its workforce and expanding education across from urban centers to rural areas as well, you're getting a workforce that's more innovative, can create their own jobs, adapt to new technologies. And ultimately, if they can't find a job in India, well-educated Indians are heading abroad. You've seen it in places like Singapore, the US, the UK as well. Remittances from Indians working abroad is a growing contributor to the Indian economy. So, I think the World Bank reported last year that 125 billion in remittances flowed back to India. So around 3% of GDP. So, a really large contributor to the economy. So going back to your question, I think education is always key in terms of getting women into the labor force, but it's also the job creation issue.

Paul Diggle: So, we've been talking Michael about the labor force, both the quantity and also the quality of education of labor, but of course, another crucial input into the production process, then alongside labor is, of course, capital and India's infrastructure needs are notoriously high. Its growing population needs, housing, transport, utilities. How is India going to undertake this mammoth task of improving its infrastructure over time?

Michael Langham: Yeah. It is a huge task that the government's making steps on and that is one of the ways it's doing it - via public investment on a large scale. The Modi government has really pushed for infrastructure investment as part of its post-pandemic recovery plan, is tackling things like logistical costs, which have always been flagged by businesses as a reason why operating in India so expensive. And you've seen it in recent government budgets, capital, expenditure as a share of central government spending has risen from around 13% of spending pre-pandemic to now around 18%. So, some uptick and even in imports data you're seeing imports of things like cranes and construction machinery really booming. So, India is getting its capital investment underway. But I guess one constraint on the public investment side is that government debt to GDP ratio is very high for India. It's at 81%. So, while you know investment into needed infrastructure does boost long term growth, that could be a constraint. So, getting the private sector and foreign investors involved is really the key here. And, you know, we talked about the opportunities with India's large and growing workforce, that should be an attractive trait for foreign companies and private investors. But as it stands, you know, foreign direct investment is still relatively low as a share of GDP. It's around one and a half percent of GDP. So more needs to be done to really convince foreign firms to set up in India. There's, you know, we'll get on to it, but reforms around things like land acquisition, international trade, and as I mentioned, the government targeting these logistical costs are all important. Things like the inclusion into the global bond indices recently, you know, that's a positive step as well to getting funding into the economy to drive that capital spending.

Paul Diggle: And then another reason for these large infrastructure investment requirements is rising urbanization. I mean, India is still relatively un-urbanized reflecting, but it's still by and large of agricultural economy. So, how quickly is it urbanizing? What might India's urbanization rate be over coming decades? And how much does that feed into the long-term growth picture?

Michael Langham: Yeah. So, I think relative to its level of development, urbanization rates at around 36% is where you'd expect it to be. But that does mean there's considerable scope for an expansion in terms of the urban population. And, you know, that's a big upside to the economy. As workers move into urban areas, you get capital deepening, you know, this expenditure on infrastructure we were talking about. But I think, for workers to move from rural areas into urban areas, we've got to see sectoral reallocation in the economy, (i.e., people leaving agricultural jobs and moving into things like manufacturing and services). India still has a high share of workers in relatively low productivity, agricultural employment, around 43% of workers in that. So, there is scope for India to increase its urban population. But just because a population is urbanized doesn't mean, you know, the economy's richer because of that. I mean, you know, Brazil has a higher urbanization rate than Italy, but it's considerably poorer. But I think it's about getting workers into higher productivity employment when they move to urban areas. So that's all part of the challenges and reforms that India has to undertake but there's no reason why as India moves up the sort of income levels and up the value chain in terms of production, that urbanization rates can't match what we see in other places in Asia over time. And, you know, this could be a factor that really turbocharges, India's growth over the coming decades.

Luke Bartholomew: So, what we've been talking about so far, sort of the inputs into a standard production function, the quality and quantity of labor, and then the capital side, but of course, the other crucial aspect is how well those inputs are combined to produce output, if you will, productivity. That is often thought of as turning on some of the things that you've already mentioned, Michael, like regulation laws, market depth, legal context, competition, and trade policy and, and Prime Minister Modi has long been talked about as a reformer in that context. So, what are the reforms that investors want or hope that India will make in that respect?

Michael Langham: Yes, so I think Modi has made progress in terms of reforms. We've seen things like the GST (Goods and Services Tax) system, being simplified, which has boosted fiscal revenues. You've seen a lot of progress in terms of digital payments and lower corporate tax rates as well. And then at state level, you know, states have been flexible and innovative. They're changing labor laws and working with foreign companies to attract foreign investment. So, we've seen some progress on that side. But I think when you talk about whether India can become the next Asian Tiger, you'd have to think about what was behind the success of other Asian tigers. And a lot of that comes up to how you boost domestic savings, how you get that channeled into manufacturing and importantly focusing on the export sector as well. And that's going to require not just sort of land and labor market reforms, but you know, speeding up and improving the legal system. India has a low cost of labor, but really addressing these other business costs is what is still a hurdle to investors coming into India. I mentioned education as an area that the government's looking to improve but really expanding that to rural areas and female workforce is another thing, but I think overall, we're looking at measures that can generate employment and get this expanding workforce into higher productivity sectors because ultimately, if workers are just flowing into low productivity jobs, then it really weighs on India's ability to boost income levels over time and escape that sort of middle-income trap that is often the case in emerging markets.

Paul Diggle: And Michael one can't really talk about reform in Indian and how much that might be a boost to growth without referring back to the de-monetization experience. That was this out of the blue announcement in 2016, that large denomination banknotes would no longer be legal currency. It was partly as a way to address black market trading and tax evasion, but it was a reform that actually is now widely thought of as a failure. So, there are clearly kind of delivery risks around all these other reforms as well. And I suppose that's an important caveat when one talks about India's reform potential and Modi's ability to kind of really radically reform the economy.

Michael Langham: Yeah, I think we've seen some failed policies on that front - with de-monetization as you mentioned, but more recently, we had an attempt to push sort of agricultural reforms through but those were sort of protested heavily by farmers and eventually didn't go through. So, it remains to be seen whether that's revisited. We've also seen, you mentioned out-of-the-blue policies, well, you know, thinking back to the sudden announcement that there were going to be restrictions on imports of laptops and tablets that came out of the blue. And again, you know, businesses were shocked, they pushed back, and the measure's been postponed. So, the government has to work with the private sector, to achieve its economic goals, and this kind of out-of-the-blue policymaking doesn't work so well, if you're trying to attract foreign investments. So that's certainly something that, you know, going forward, it's not just looking for reforms, but how they are implemented and how they're announced. And that collaboration between the public and private sector will be quite key to really attracting foreign investment and getting the private sector involved in what has been a good growth story post-pandemic.

Paul Diggle: And we've spoken quite a few times on this podcast about the changing nature of globalization - trends towards re-shoring, and friend-shoring. As a US ally, not uncomplicatedly so but certainly more in the US than the China bloc, as of course an English-speaking economy, do you think India has the potential to be a re-shoring winner? 

Michael Langham: Yeah, I would frame it as so. India is shaping up to be a beneficiary of geopolitics, that's definitely as it looks right now. And, you know, with the tensions between the US and China and even some tensions between the Eurozone and China, there's definitely an opportunity there for India to attract foreign investment as countries look to reduce their China exposure. And I mean, India is a growing consumer market in its own right. So, in terms of supply chains and reallocation of investment, India looks well placed to take that opportunity. I think the government's making steps to reap these benefits. You've seen initiatives to attract manufacturers such as the production-linked incentive scheme, while you know, relatively small scale it is a step in the right direction. And then as I mentioned, these moves around logistical infrastructure, a lot of investment into reducing those costs should help boost foreign direct investment. And, you know, we're starting to see some of that to bear fruit. India's electronic exports are booming, through the pandemic and post-pandemic. Service exports, India's strong point, have also been really booming. So those are positives. And I think when you look at recent FDI data, Foreign Direct Investment data, the flows have been relatively strong in recent months. Q3 data showed that there was a big uptick in terms of foreign direct investment. Last October as well 5.9 billion in inflows. So that's all positive. I think the concerns with India are always around sort of protectionist measures in the economy and the ease of doing trade. And I think that's where, when you talk of India becoming a re-shoring winner, there are some, you know, potential challenges. So, I wouldn't necessarily overplay it as a theme for India's economy going forward. But it's certainly an opportunity for India to take hold of.

Luke Bartholomew: And finally, Michael, there is, of course, the general election in India, later this year, taking place over two months in April in May. It is, as the cliche goes, the world's largest democracy and Modi is widely expected to win at the moment. So, what would a third Modi term mean, both in terms of the geopolitics that we've been talking about just then, but more generally, reforms and other aspects of his political agenda and priorities?

Michael Langham: Yeah, I think we can expect more of the same in terms of economic and social policy. Modi's had two terms now and he's still very popular, which I think is a rarity when looking at politicians around the world. So, he's on a winning formula and it doesn't really seem likely that he'll change from that. As we've talked about, you know, reforms are definitely on the agenda. And you know, Modi's got this 'Made in India' plan, which is around boosting manufacturing and attracting foreign investment. And as we talked about the implementation of reforms hasn't always been a smooth process. So, managing to push through more of these reforms, given this popularity, is key to this third term. And it does pose the question, if Modi can't push through certain reforms, who will be able to in terms of India's politics? But I think, you know, where we're maybe a bit more hesitant around some of the import substitution type policies we've seen in recent years. If they can shift away from that, and more towards kind of the positive infrastructure investment that we've been seeing, push for trade deals, and I think steps around land reforms and reforms to the legal system, those are all possible in this third term. And those could be really positive for the outlook. So, I remain very positive on India's long-term outlook. It's just whether they can really grasp the opportunities that are available to it, given its growing share of the global economy and rising consumer market.

Luke Bartholomew: All right, well, I think that is all we have time for this week. So as ever, please do like and subscribe to us on your preferred podcast platform. And then all that remains is for me to thank Michael for joining us today. And thank you all for listening. So, thanks very much, and speak again soon. This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment, recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provides no guarantee of future results.

This Macro Bytes podcast episode is a follow up from a recent Global Macro Research insight, Will India become the next Asian Tiger?.