How Strong Is India's Economy?

This video is brought to you by InVideo There are very few, if any countries in the world today with more economic potential than India. India has a huge growing population, a strong base of industrial knowledge, a great geographic position for global trade, the world's second-largest English-speaking workforce, vast swathes of agricultural land to sustainably feed all of those people, and perhaps above all else, it's becoming a more attractive economic partner as India's logical global rival China doubles down on issues like unpredictable state influence in domestic industries, as well as geopolitical ambitions that could prove to be problematic for industries that rely on them as part of their supply chain. Now, of course, nobody can predict the future, least of all economists, but with all of these advantages, it's perhaps unsurprising that many are predicting that India could become one of the world's most dominant economies within this century.

But national potential and demographic advantages don't always translate into a prosperous reality. And just as India has a very long list of reasons why it could become an economic superpower, there are some major obstacles that have so far prevented it from becoming one. If the economy lags even a little bit, it could be in a really bad place, where its most skilled people look for better jobs in the West, its most physically able look for better-paying jobs in the Gulf states, and everyone who is left behind is made redundant in other ways that are worth seriously considering.

So understanding just what is holding the country back could be the key to unlocking an economic miracle similar to or exceeding China's over the past three decades. It could lift hundreds of millions of people out of poverty, and create immense wealth for the entire global economy. So why has India so far failed to live up to its economic potential?

How could these problems be fixed? And finally, how would another global economic superpower influence the global economy? The acceleration of technological growth is guaranteed to lead to creative disruption.

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India, despite some very real challenges, has clearly been doing at least something right. Over the past decade, its economy has doubled its overall output, as it continues to industrialize and become an easier and often cheaper alternative to China. Now, there is a lot more to India's economic potential than just picking up the scraps falling off the Chinese economy as it stagnates, and we'll get to those more exciting opportunities.

But this process is still very important to understand. China's economic success has meant that its people are now demanding wages that put them basically in the global middle class, which combined with their geopolitical issues means that the benefits of outsourcing manufacturing to China are shrinking every day. Now, some of that manufacturing is moving back to the countries that originally did the outsourcing, but there are certain types of products that just don't make sense to manufacture in a country with high incomes.

Average incomes for Indian workers are for now at least a long way behind China's, which means it's able to pick up a lot of the outsourced manufacturing that used to go to their northern neighbors almost by default. This is not happening in India exclusively either. Vietnam, Thailand, Malaysia and Bangladesh have also been happy to undercut basic Chinese industries that are highly manpower dependent.

Basic factories creating basic consumer goods are much more sensitive to the cost of labor than advanced manufacturing, which is more sensitive to the price of other manufacturing inputs. The production of things like clothing, furniture and other mostly handmade goods is very hard to automate, so they still depend on unskilled workers using their hands. It's the kind of work that is almost always going to go to the lowest bidder.

If the cost of making a t-shirt is 10% in the material, 10% in the shipping and 80% in the labor to manually stitch the t-shirt together, then doubling a worker's salary will effectively double the price of the shirt. Compare that to manufacturing something like a car, a computer or even something really technical like a processor. These all rely far more heavily on incredibly advanced machinery and the role of the person in these factories is far less hands-on and more about making sure the machines making the stuff are working as expected.

These workers' salaries make up far less of the total end cost of the advanced products they're making, so even if they're paid a little bit more for their advanced and specialized skills, it doesn't really matter. The cost of manufacturing something like even a basic CPU might be 50% in the machinery, 40% in the R&D and 10% in the salaries of the few highly paid technicians watching over the ultra-advanced facilities where these chips are made. Even if these workers were also paid double, that would only increase the end cost of the goods they produce by 10%, which with inflation may be barely noticeable.

Now of course this is an extremely oversimplified example and the numbers we're working with here are going to be wildly different for all the thousands of factories across the world, but what it does show is that the real cost of labor is much more important for some goods than others. China itself is trying to move towards manufacturing the latter, more advanced, less handmade goods so it can keep on paying its workers more, and India more so than any other country in the world has the labor force to pick up the products in the former category. What may look like a rivalry could in many ways be a win-win for both countries, as a lot of those labor-intensive products are important components in the high-end goods that China wants to manufacture itself.

China is now a world leader in manufacturing EVs, but making something like the floor mats in those cars could itself be outsourced to a country like India. Now of course that's in a perfect world, but even still the simple global shift away from China and towards alternatives like India isn't really the country's biggest opportunity anyway, nor is it India's biggest threat. India's biggest economic resource is its people.

It's now the most populous country in the world, and beyond just sheer numbers the average person in India is a lot younger than the average person in China, the only other country that really comes close. Young people are important because they're the ones that work and contribute to the economy, and also start families of their own, where now a lot of countries have large populations that are too old to work, and simultaneously too old to make more young workers. India also has a large English-speaking population, which means it can offer global services beyond just manufacturing in the world's most widely spoken second language.

More so than exporting goods, the Indian economy's biggest opportunity is in exporting services. As more work is done remotely, it doesn't really matter if basic jobs get done in advanced economies with their higher salaries, or in places like India, where even if the work isn't done quite as well, it'll be done for one-tenth the cost. Now obviously the reputation for this kind of work is call centres, both genuine and otherwise, but India is starting to provide more and more outsourced services every year in increasingly technical roles.

One of the biggest outsourced roles is coding. Normally this kind of coding isn't the highly technical cutting-edge innovation being done in places like Silicon Valley, but more setting up basic functionalities for businesses that don't need to be the next Google, but do want a website. This is a great source of foreign income that is endlessly renewable because it doesn't involve loading stuff onto ships and sending it across the ocean, but beyond that it also generates something of a positive feedback loop in the economy.

People who can get jobs doing services in English for large multinational corporations outsourcing work to India may not get paid as much by the standards of advanced economies, but they're paid a lot more than basic labourers, farmers, or domestic service workers. As the population sees the monetary opportunity of getting educated in these fields to secure these kinds of jobs, more people are going to seek out an education to get these skills to get these jobs, and for India as a whole this means an even more productive workforce which can attract even more specialised jobs. Now manpower is an amazing resource to have especially in a world where most advanced economies are facing an ageing and outright declining population.

These countries are going to need to find a way to substitute a smaller domestic workforce out of necessity if not just in the interest of cost savings. But the thing with the labour force is that it's a lot more slippery than something like raw materials buried in the ground, or national infrastructure. India has a lot of people who are investing heavily in getting themselves an education, but once they have those skills, they could earn 10 times more than an unskilled labourer or farmer by working a service job in India, or they could earn 100 times more by immigrating and working a service job in an advanced economy.

The fact that a large share of their educated population can speak English has been a great opportunity to provide international services at a scale that no other country can really match, but it also means that these same citizens will find it much easier to get a job and live in another country than say a worker from China would because a much smaller share of their population speaks the language outside of Mandarin. India has brain drain at the top end and muscle drain at the bottom end, where a lot of its unskilled workers are getting jobs in places like the gulf states to do a lot of the grunt work in building out infrastructure and constructing the mega-projects that those countries have become famous for. Now conditions for these workers are often horrendous, they are shipped across the world specifically because they will work for the lowest possible price, but they are still earning much more than they would back in India.

This creates a problem for the Indian economy because while the money that these workers send back home to their families is an okay source of foreign currency, it deprives the country of workers that could be used to build out their own infrastructure. The country is very lucky in the way that it has very arable farmland to support its large population, but to actually do much with that population the country is going to need more roads, bridges, schools, ports and municipal services. A large part of the gap between the current GDP per capita output of China and the output of India is explained simply by the fact that China has far better infrastructure to support their big industries than India does.

Pulling workers from the top and the bottom of the country into more lucrative positions overseas has also created something of an over-dependence on a small group of workers in those middle-skilled jobs to drive a majority of the growth the country has been experiencing. Now these jobs are a great opportunity, but they are also extremely vulnerable to technical automation. Amazon has recently been exposed for hiring a thousand or so workers in India to operate behind the scenes of their supposedly AI-powered convenience stores, where in reality these workers are actually just checking almost every item themselves, effectively working as an outsourced cashier.

Now for those workers in the Indian economy itself, this is exactly the kind of unglamorous but semi-skilled work that has been a great economic opportunity. But even though this particular example was of humans stealing the basic job of an AI, those same basic jobs are overwhelmingly going to be stolen back in the other direction. Work that is repetitive, boring and sensitive to labour costs is the perfect target for automation.

Even if workers in India are making a fraction of the salaries they would be paid in an advanced economy, increasingly capable AI programs will operate for next to nothing. Call centres and technical support work that used to be outsourced to places like India are now using AI chatbots with a small skeleton crew of staff to deal with the queries that slip through the cracks. So the country is in something of a race against time to capitalise on the advantages its huge population gives it before they are no longer competitive.

Beyond just the potential for cost savings, industries outsourcing work to India face something of a negative stigma, as it is generally seen as a purely cost-cutting exercise, often coming at the expense of the quality of the goods and services they are producing. Using AI to do the same sort of work makes companies seem even more impressive as innovators leveraging a new technology to increase productivity. Outsourcing to India, bad, AI good, for some reason.

Now this is normally the part where we say nobody can predict the future, least of all economists, but this is already happening right now. Already millions of jobs have been lost pushing workers back into unskilled labour roles that can't be done by AI, at least not yet. Now beyond that the true scale of what the latest wave of AI is going to be able to achieve is not yet known.

It's possible that all of our jobs are on the chopping block and the service jobs being done in India are just the first victims of this inevitable march of progress, but while this may be India's biggest external threat, it's perhaps far less important than the country's internal weaknesses. Now we've spent a lot of time exploring India's population because it is clearly one of the defining strengths of the Indian economy. However, this is perhaps one of the clearest examples of an economic opportunity not necessarily translating into an economic reality.

India has a slightly larger and far younger population than China, so it would be reasonable to expect that it would have a larger or at least comparable workforce. However, China actually has a workforce roughly 40% larger overall. To understand why, it's important to first understand what a labour force even means, which is simply the total number of people currently employed or currently unemployed but looking for a job.

The people left behind are either too old or too young to work, don't want to work, or don't need to work because they're independently wealthy or supported by their family, or people who can't work because they are disabled. Putting the labour force over the total population gives economists the labour force participation rate. Simply put, India has a real problem with a large share of its population not working.

Now, some of this can be explained by the fact that it has a lot more children as a percent of its total population than most other countries, and well, hopefully, no economists are seriously advocating for putting children to work. But even just looking at participation rates amongst people of working age, India lags well behind most major economies and the reason is simply because most women in the country don't formally work. Now, partially this is because they can't.

Millions of Indian households don't have the amenities to make domestic work faster or easier. A lot of food is still prepared from scratch and cooked over a wood stove, clothes are cleaned by hand, and all of this takes a lot of time and effort, meaning that once this informal work is done there isn't much time left for women to work in a formal job as well. Now, a lot of this is also cultural, and look, it's not the role of an economist to say what's right or wrong here, there are genuine quality of life benefits to not having dual income households be the norm.

But in terms of realistic economic potential, having so much of the population unwilling or unable to contribute to market output is a major challenge. What's particularly puzzling is that a lot of women in the country have received a good education and yet they overwhelmingly don't participate in the labour force. Certain economists have argued, quite convincingly, that the advent of the washing machine did more for the global economy than the internet because it was technologies like that that allowed women to enter the workforce, effectively doubling the amount of people producing stuff.

India is still a poor country, but it also doesn't have the same motivation to invest into these domestic technologies, so women don't have as much opportunity to work, which reinforces the cultural tradition of women just doing domestic work, which means that there is less motivation to invest into these domestic technologies. If India had a labour force participation rate similar to that of China's, it would have a far larger labour force overall, and that by itself, all other things being equal, would make the economy almost twice as productive as it is today, while relieving a lot of the problems of workers moving abroad. Now, India will still likely be one of, if not the largest economies in the world over the next century, just by virtue of its sheer size.

But, top-line output figures won't mean much if most of that wealth has just been created by a small group at the top, while the rest of the country struggles. These issues can be addressed with good policy, but the country is also notoriously hard to govern, even if its politicians had nothing but best intentions. Now, as the country grows and absorbs a lot of the industries of China, it too is going to need a country to outsource its work to, and Bangladesh has appeared to be the logical target for that.

We made an entire video on Bangladesh last month that is also definitely worth watching, because it's yet another country in the same region that should be way more successful than it is, but has fallen behind for slightly different reasons that either way will still influence the future of both of these countries. You should be able to click to that video on your screen now. Thanks for watching mate, bye.