India’s Path to Becoming the Next Global Economic Power: Challenges and Opportunities

The Indian economy is under increasing scrutiny as discussions intensify over whether the country could become the “next China.” China played a crucial role in driving global growth for nearly three decades, contributing more than a quarter to global GDP expansion between 1990 and 2020. Specifically, from 2013 to 2021, China accounted for almost 39% of global GDP growth—13% more than the combined contribution of G7 countries.

For India to emulate China, it would need to sustain a near double-digit growth rate for close to three decades, integrate into the global manufacturing supply chain, become an export powerhouse, and attract substantial foreign investment. Although this is a formidable challenge, India finds itself at a critical juncture, similar to where China stood over 40 years ago.

China’s rise was shaped by key political and economic factors of the 1970s. During this period, the intensifying U.S.-Soviet rivalry and the Sino-Soviet split led the U.S.-led West to open up to China in 1971, creating favorable conditions for China as it launched economic reforms in the late 1970s.

Today, a similar inclination exists within the West toward India, driven by deepening strategic competition with China. Beijing’s growing diplomatic and economic influence, evident in its aggressive foreign policy and economic coercion, has raised concerns about overdependence and strategic vulnerabilities in the West. Consequently, the U.S. and its allies are reassessing their partnerships with China and exploring options for de-risking and diversification, with India emerging as a preferred partner.

Another factor that worked in China’s favor was the simultaneous emergence of global businesses seeking to increase competitiveness by offshoring operations to Asia. Following the Sino-U.S. rapprochement in the 1970s, China, with its vast pool of cheap labor, became an attractive destination for these businesses.

A similar shift is happening today. The deepening rivalry between the U.S. and China has prompted Washington to impose unilateral and multilateral export restrictions on Chinese companies, limiting their access to key technological goods. In response, China has introduced strict regulatory compliance requirements for foreign companies. Faced with regulatory challenges from both Washington and Beijing, foreign firms operating in China are looking to redirect their investments elsewhere. India, in turn, has emerged as a credible alternative.

The Indian government appears eager to capitalize on the opportunities arising from the global de-risking strategy. This is evident in its strong support for high-profile projects involving the manufacturing of iPhones and the assembly of semiconductors.

China also had the advantage of a rapidly growing consumer base, which none of its Asian competitors could match. Over time, this expanding consumer market became increasingly influential in shaping business decisions. The downsides of rising labor costs in China were offset by the skill competitiveness of its labor force and the growth of its consumer base.

India today has a similar advantage. The country currently boasts the second-largest consumer base—defined as people spending above $12 a day—of over 500 million, second only to China’s 900 million. Projections indicate that by 2030, India’s consumer base will grow to 773 million, trailing only China’s 1.062 billion. The gap between China and India will continue to narrow in the coming years.

Despite these advantages, India faces several significant challenges. One of the most pressing is the rise of protectionism globally and the resurgence of industrial policies even within the heart of liberal capitalist economies.

China’s economic success was largely driven by the wave of globalization that began around 1980 and continued until the 2008 global financial crisis. However, the economic rationale underlying globalization has come under severe stress in recent years. The trend of weaponizing trade has made nations increasingly wary of economic coercion.

Domestic political pressures have led countries to pursue some form of self-sufficiency. Even the strongest advocates of free trade have started offering subsidies to encourage the repatriation of investments. The slowdown in globalization is thus the biggest obstacle to India’s ambitions. This challenge is further exacerbated by India’s reluctance to fully embrace the remaining aspects of globalization, as seen in its higher import tariffs and skepticism toward multilateral trade agreements.

Nonetheless, India stands to gain from the ongoing de-risking and “China plus one” strategies, although not to the extent seen in the 1980s and 1990s. While India has emerged as a strong contender in this contest, it faces stiff competition from countries like Vietnam, Thailand, and Malaysia, which could limit its gains both in absolute and relative terms.

The EU Chamber of Commerce in China has noted that while India has performed better than any Southeast Asian country and has attracted 15% of European investment diversifying away from China, it still trails ASEAN as a whole, which has attracted 21% of these redirected investments.

Lastly, while a large consumer market can give India a significant advantage over its competitors, experience shows that this is a third-order factor in attracting inbound investments. This is evident from the fact that Singapore, Vietnam, Malaysia, and Thailand—all with much smaller domestic markets—have attracted significantly higher foreign direct investment (FDI) as a percentage of their GDP.

Openness to foreign investment and ease of doing business are crucial for driving growth. According to the OECD’s FDI Regulatory Restrictiveness Index, India is on par with or even better than its competitors in terms of openness to foreign investment. However, when it comes to ease of doing business, India lags far behind, preventing its consumer market from driving inbound investment.

Currently, India contributes 16% of global economic growth, compared to China’s 34%. The International Monetary Fund (IMF) predicts that India’s share will rise to 18% over the next five years. As China’s share declines due to its economic slowdown, India is strategically positioned to emerge as the leading engine of growth—provided it navigates the aforementioned challenges effectively.