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India Becomes World’s Fastest Growing Economy: What Investors Need to Know

India Becomes World’s Fastest Growing Economy: What Investors Need to Know

Key Points
  • India has taken the title of the world’s fastest growing economy from China.

  • Five important differences between India and China include: growth outlook, demographics, economic composition, politics, and risk profile.

  • Despite obvious similarities, the differences between these two economies mean India’s leadership holds unique impacts for the global economy and markets helping to buffer global weakness, but also introducing new risks.

It is widely known that China’s growth rate has been slowing. But less discussed is how India has taken the title of the world’s fastest growing economy from China and what it means for investors. Will India take over where China left off?

India’s similarity to its Asian neighbor China suggests they are almost interchangeable and that India becoming the global growth leader would make little difference to the world. Both China and India:

  • are the two most rapidly growing economies in the world,
  • rank among the top 10 largest economies in the world,
  • each are home to about 20% of the world’s population,
  • are major global trading partners with the sum of exports and imports accounting for 40-50% of GDP.

It is easy to get caught up in the similarities, but it is the differences that are the key to understanding what India’s growth leadership means for the global economy and investors. The five differences include: growth trajectory, demographics, economic composition, government, and risks.

1. Growth outlook

The two economies have different growth trajectories. Growth is accelerating in India as China’s growth is slowing. Growth in India is set to outpace China for years to come.

Economic growth in India surpassed China this year

Historical GDP growth and forecast by country

 

Economic growth in India surpassed China this year

Source: Charles Schwab, International Monetary Fund data as of 11/20/2015.

China’s growth rate is widely expected to decline. The IMF forecasts GDP will slow from around 6.8% in 2015 to 6.3% in 2016. However, the IMF forecasts India’s growth rate of about 7.3% in 2015 is expected to reach 7.5% in 2016 and continue to rise to 7.7% by 2020.

2. Demographics

While both China and India are home to about 20% of the world’s population, in India the population is young and growing—unlike in China.

  • India’s birthrate of 2.5 children per woman is way above China’s 1.5.
  • India’s median age is 27 while China’s is 37.
  • India’s working-age population, aged 15-64, is projected by the World Bank to continue to grow and to surpass the size of China’s shrinking workforce in about 10 years.
  • That means it is likely India will need to create 100 million new jobs over the next 10 years. For perspective, that is two-thirds of the size of the entire civilian labor force in the United States.

India’s workforce is set to surpass China’s in ten years

Working age population forecast by country

 

Indias workforce is set to surpass China’s in ten years

Source: Charles Schwab, World Bank data as of 11/20/2015.

3. Economic sectors

The differences between China and India may be most pronounced in the composition of their economies. China's growth has slowed down as it has evolved from an economy focused on export-driven manufacturing and infrastructure spending to a more services and consumer-driven economy. Just the opposite, India is a services and consumer-driven economy looking to step up spending on infrastructure and boost manufacturing output.

China’s economic transition has resulted in a near balance between sectors, with services at 48% and manufacturing at 43% of GDP (with the rest in agriculture).  In contrast, India’s services sector makes up 23% more of its economy than the manufacturing sector (at 53% and 30% respectively), per World Bank data.

This has left India well insulated from the manufacturing slowdown affecting the globe and China, in particular. It also illustrates the different path India is taking from the one taken by China and positions India well for higher value-added growth than China’s former low-cost export model.

4. Politics

India is a democracy, unlike China's one-party system, which can mean quicker policy actions to enable growth. Prime Minister Modi is focused on reforms intended to simplify regulatory red tape, make the business environment friendlier to foreign firms, develop the nation’s infrastructure, and build an educated workforce.

While India’s government can be a strength compared with China, it also bears risks. India’s multi-party elections mean that proposed reforms may be at risk if Modi’s party is voted out of power.

5. Risk Profile

China’s biggest risk in our view comes mainly from outside the country given the dependence on global demand for Chinese made goods. China’s efforts to prop up growth as demand weakened in the post-Great Recession environment led to a large buildup of debt that overhangs the economy.

In contrast, India’s biggest risk may come from inside the country. India’s economy is much more dependent on consumer spending than on demand for exports. The drop in oil prices has helped narrow India’s consumer-driven trade gap. This means that India’s biggest threat now may be the weather. The World Bank estimates that 47% of jobs in India are in agriculture. India has seen two back-to-back years of drought, further bad weather could mean job and income losses that could weaken consumer spending growth.

What it means for investors

There are several key takeaways from India’s emergence as the global growth leader for global investors to consider.

  • Better global growth in 2016 – We expect global GDP to accelerate in 2016, powered by better growth in many of the world’s biggest economies, including India.
  • Buffer global weakness - India’s service sector strength can help to offset some of the global weakness in manufacturing. Also, India’s rising demand for construction is helping to offset some of the weakness in global commodity demand.
  • A smaller engine - It is important to recognize that while India is the 9th largest economy in the world, it is only one-fifth the size China is today. That means China’s slowdown will still have more of a global impact than India’s acceleration.
  • New risks - Weather may become an increasingly significant factor contributing to global economic growth.

India’s rising growth helps to paint a brighter global economic outlook, despite a slowing China. In the near-term, interest rate cuts by the central bank combined with government infrastructure spending is helping to boost growth in India. Over the longer-term, investors should take note that India’s unique strengths require inflation to remain contained, structural economic reform efforts to take root, and drought conditions to improve in order to support the strongest growth among the world’s economies.

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