By Rhod Mackenzie
China's economic growth is slowing, and economists around the world are now taking a closer look at the most successful of the largest emerging markets - India and Indonesia. Back in 2009, India overtook Japan, displacing it from third place in the ranking of countries in terms of GDP (purchasing power parity, PPP), and has firmly held this position so far. And Indonesia is gradually approaching Russia, which is located in sixth place, and in the future threatens to get ahead of us.
Of course, in nominal terms (in current prices), the United States still remains in first place in the world in terms of GDP. However, the measurement of GDP at PPP more accurately reflects the level of the state's economy, since it eliminates the influence of speculative exchange rates and the difference in prices for goods and services within countries.
According to the OECD forecast, India's GDP growth in 2023 will be 6%, and in 2024 - 7%, Indonesia - 4.7 and 5.1%, respectively. IMF forecasts are slightly more modest for India (5.9 and 6.3%), but better for Indonesia (5 and 5.1%). For comparison: world GDP, according to the OECD, will grow by only 2.7 and 2.9%, respectively, Chinese - by 5.4 and 5.1%. The IMF forecast for the world is 0.1 percentage points higher in both cases, and slightly lower for China - 5.2 and 4.5%. So Indonesia and especially India are clear favorites in the global race to higher GDP.
This is confirmed by more and more local examples. Thus, the Indian credit institution will soon become one of the most expensive banks in the world. The combination of HDFC Bank and Housing Development Finance will result in a lender ranked fourth by market cap behind JPMorgan Chase, ICBC and Bank of America. The new bank is valued at about $172 billion, according to Bloomberg. The HDFC Bank division will have about 120 million customers - more than the entire population of Germany.
The Global South has built up its muscles
At first glance, India and Indonesia do indeed have a lot in common with China during its rapid growth: a large and, most importantly, rapidly increasing population (and therefore a cheap labor force), an export orientation, ambitious programs for developing infrastructure and the economy as a whole, as a result - high GDP growth rates. Indian Prime Minister Narendra Modi, in his 75th Independence Address last August, said the next twenty-five years would be crucial and called on the youth to turn India into a developed country by the centenary.
Curiously, Narendra Modi took over as Prime Minister of India in 2014, the same time that Joko Widodo became President of Indonesia. 2024 will be a pivotal year for both leaders, with Indian national elections and Indonesian general elections due next year.
Separately, it should be noted that bilateral relations between India and Indonesia are quite good. This is largely due to similar foreign policy doctrines: in international relations, both countries prefer to remain neutral, ready to join any organization in which they can lobby their interests without fighting for leadership positions. In addition, both states are wary of China's claims to dominance in Asia and the Asia-Pacific region as a whole.
In February 2023, Indonesian Finance Minister Shri Mulyani Indrawati, in an interview with Nikkei Asia, said that the country wants to strengthen ties with India in order to increase the role of the global South in world affairs. “India and Indonesia are among the few large developing countries whose economies are in very good shape. This is what gives us authority, influence and respect at the global level,” she explained. And in March, Indonesian Commerce Minister Zulkifli Hasan called for speeding up the conclusion of a bilateral Preferential Trade Agreement (PTA) between the countries. The target is $50 billion in non-oil and gas trade by 2025. And its volume really grew by 55% annually, reaching $32.7 billion by 2022.
But back to dynamics. According to the World Bank, over the past twenty years, from 2002 to 2022, India's GDP (at PPP, in international dollars, in constant 2017 prices) increased by 3.4 times, Indonesia - by 2.6 times. As a result, India moved in the ranking of countries by GDP from fifth to third place, and Indonesia - from fifteenth to seventh. But China's results were much more impressive: China's GDP grew five times during this time, and in the ranking the country rose from second place to first (see table).
On the other hand, the difference in the pace of development between India, Indonesia and China has narrowed over the past ten years. From 2012 to 2022, India's GDP increased by 73.4%, Indonesia - by 51.6%, China - by 82.9%. According to the IMF, in 2013-2022, the average annual GDP growth rates of India (5.7%) and Indonesia (4.3%) approached China's (6.2%), and in some years India even surpassed China (see chart). 1).
Wrong workers
But the economies of India, Indonesia and China look similar only at first glance.
Let's take India. Yes, its GDP growth rate has already surpassed that of China, but this only applies to the total volume. If we take GDP per capita, again at PPP and at constant prices (2017 dollars), the picture is different. According to the IMF, in 2022 China's per capita GDP was 2.6 times that of India's. For comparison: in 2002 the difference was only 1.6 times, in 2012 - 2.3 times (see Chart 2). There can be two reasons for the increase in the gap: either the fall in labor productivity in India, or the uncontrolled growth of the country's population.
According to the IMF, India's population increased by 29.6% from 2002 to 2022, while China's population increased by only 10%. The UN predicts that India's population will reach 1.428 billion by the middle of this year, surpassing China. However, it should be noted that in relation to India, all data are given only estimates. The last full census of the population there took place in 2011. The next one was supposed to take place in 2021, but it was postponed due to the pandemic, then postponed again, and now it has been postponed again - now to January 1, 2024. But the national and international statistical offices have continued to work all this time, so their approximate estimates should correspond to reality.
How is the Indian population different from the Chinese? Let's start with the positive: it's younger. In 2023, the median age in China will be 39 years, in India - 28.2. This means that there are more able-bodied men and women in India, and less social pressure on the economy. The poverty rate ($2.15 a day, PPP, in constant 2017 prices) in India, according to the World Bank, reached 10% in 2019, and 0.1% in China. On the one hand, there are much more workers in India and they are cheaper, on the other hand, their quality is much lower: people who ate poorly in childhood simply cannot work with the same endurance and efficiency as healthy citizens.
Another important point is literacy. In China, in 2020, the literacy rate of adults and adolescents over 15 years of age was 97%, in India in 2018 - 74%. According to more recent 2019-2020 surveys, 25% of Indians over the age of 15 were illiterate, and only 38.5% of workers had an education of grade 10 and above. The situation is better for young people: in 2020-2021, among 15-29-year-olds, only 5.85% could not read (in 2011-2012 - 13.17%), and 58.29% already had grades 10 and above (in 2011-2012 - 44.72%).
As for productivity, for orientation we will give an assessment of the International Labor Organization. In China, this figure increased from 3.7 dollars of GDP per working hour (PPP, constant 2017 prices) in 2005 to 13.5 in 2021. In India, over the same period, labor productivity rose from a similar 3.6 to just $8.5 of GDP per hour worked. We remind you that these data should be taken with caution, as they are the result of modeling and not direct observations of statistical agencies; nevertheless, a trend can be seen.
Non-industrial paradise
There are quite a few factors that have led to such low overall labor productivity in India. We have already spoken about the quality of human capital above; in addition, investment and the structure of the country's economy play a significant role. For the past twenty years, after peaking at 31.1% of GDP in 2008–2009, the share of industry in India has been declining. In 2022, it amounted to 25.6% of GDP (China has 39.9%). The share of production that enters the industry fell even faster: from a local peak of 17% in 2006 to 13% in 2022 (China has 28%). Instead of enterprises, the service sector in India is growing: from 44.75% in 2002-2003 to 50.1% in 2019. In recent years, agriculture has been steadily fluctuating around 16-18% (in China in 2022, its contribution reached only 7.3%).
As you can see, India cannot yet replace China as a world factory. Although Narendra Modi is making great efforts to develop the country's technological potential, including for electrification. In 2018, the Prime Minister announced that electricity had finally arrived in every Indian village. The percentage of the population with access to the Internet is also constantly increasing: by 2021, according to the World Bank, it has reached 46% (in 2011 it was only 10%). However, China with its 73% (in 2011 - 38%) is very far away.
Another important point for industrial development is foreign direct investment (Foreign Direct Investments, FDI). This is not only money, but also - in the case of the right government policy - technology and the possible development of a network of local suppliers of simple components. India has not been doing very well with FDI lately either. In 2008, investments reached 3.6% of GDP, after which by 2012 they fell to 1.3%. And despite the excellent prospects for the country's economy, in 2022 they amounted to only 1.5% of GDP. However, in China, against the backdrop of growing tensions with the United States, FDI fell even more noticeably: from 1.9% in 2021 to 1% in 2022.
There are also problems with the orientation of foreign trade. Unlike Indonesia and China, the balance of Indian exports and imports of goods and services is in a chronic negative. So, in 2022, it amounted to -4.5% of GDP, while China went into plus by 3.2%, and Indonesia - by 3.6%. India's main trading partners are the US, China and the UAE. In general, the country has long focused on the development of the IT sector and the export of services. However, IT does not require a large number of workers, and it is not clear where to put the rest of the growing population. Of course, you can do nothing with the social sphere, and suppress infrequent food riots, but globally, this approach does not solve the problem of poverty.
As for the export of services, there is another difficulty: quite a lot of people can be employed in the field of outsourcing, but they will have to pay very little, otherwise they will not be able to withstand competition in the world market. There is only a chance to earn serious money in the financial sector or in the field of engineering and advanced technologies.
India and Indonesia are the favorites in the run to high GDP. According to the OECD forecast, India's GDP growth in 2023 will be 6%, and in 2024 - 7%, Indonesia - 4.7 and 5.1%
Export smartly
The outlook for Indonesia is clearer. GDP per capita here grew faster than India's, but the country is still far from China's indicators. The IMF estimates that in 2022, China's GDP per capita (PPP, constant prices, in 2017 dollars) was 45.7% higher than that of Indonesia, although ten years ago the difference was only 12%, and in In 2002, Indonesia's index surpassed China's by 51.1%.
As for the population, in 2002-2022 it grew by 29.5%, that is, it increased at almost the same rate as in India. The literacy rate is roughly in line with Chinese: in 2020, 96% of citizens over the age of 15 could read. 62% of Indonesians had access to the Internet in 2021 (versus 12% in 2011). Domestic productivity, according to International Labor Organization models, increased from $7.9 GDP per hour worked (PPP, constant 2017 prices) in 2005 to $12.96 in 2021, almost catching up with China.
The share of Indonesian industry in GDP, according to the World Bank, peaked at 48.1% in 2008, after which it began to fall, reaching 38.2% by 2020, but by 2022 it increased again to 41.4%. But the share of production (included in the industry) continues to gradually decline: from 32% in 2002 to 18% in 2022.
Indonesia's foreign trade balance almost always leans in favor of exports and even rose to 3.6% of GDP last year. This is an important point. Since January 2020, the country's government has banned the export of nickel ore, later followed by a ban on the export of bauxite (effective from June 2023). In June, it was planned to stop the sale of copper concentrate abroad, but the restrictions were postponed until next year. According to the President of Indonesia, such measures should contribute to the development of the processing industry within the country. Joko Widodo said that the ban on the export of copper concentrate will come into force when the new copper production facilities of the American Freeport-McMoRan and the Indonesian Amman Mineral Nusa Tenggara (AMNT) start operating. Their commissioning is scheduled for May 2024.
Many analysts have argued that as a result of Joko Widodo's policies, Indonesia will lose foreign investment. In the case of nickel, companies have little choice: Indonesia has a very large share of the world market, but for other natural resources, the country does not have such an advantage. However, the government's calculation turned out to be correct. Indonesia received roughly $43 billion in 2022, up 44% from a year earlier, ASEAN reports show. The funds were invested, among other things, in the mining of metals, especially nickel. The top donors to FDI were Singapore ($13.3 billion), China ($8.2 billion), Hong Kong ($5.5 billion), Japan ($3.6 billion) and Malaysia ($3.3 billion). But since Hong Kong is a popular offshore for Chinese companies, the main investor, obviously, turned out to be China.
We must not forget that Indonesia is one of the countries that border the Strait of Malacca, through which, according to various sources, passes from 40 to 60% of international maritime trade. If we talk about hydrocarbons, the share will be even higher. Accordingly, the development of port infrastructure and the provision of related services provides Indonesia with ample opportunities. Joko Widodo's strategy to restrict exports seems to have worked.
So far, the size of the Indonesian economy is clearly insufficient to become a global powerhouse. In the case of India, the situation is more ambiguous. The potential of the country is huge, but for its implementation, the labor force must be qualified, and the purchasing power of the population must be sufficient to meet domestic demand. India has problems with both the first point and the second. Nevertheless, the growth rates of both countries remain high, and together they are quite capable of smoothing over the shock that is predicted to the global economy due to the slowdown in China.
This article orginally appeared in Russian at expert.ru