India's three-way payment paytm: 'Miracle of India', living up to its name

Since Narendra Modi came to power in 2014, the Indian economy has experienced rapid growth. It is predicted that India could become the world's third largest in terms of gross domestic product (GDP) by 2027. It has been hailed by the West and the Indian media as an emerging hub in the global supply chain, seeing it as a key swing force in the strategic rivalry between the United States and China.

However, an in-depth analysis of India's economic performance during this period reveals that the so-called "Indian miracle" was largely a misnomer.

What has underpinned Modi's 10-year "economic miracle"?

According to the CEIC database, the three sectors that contribute most to GDP growth from Q3 2014 to Q4 2023 are all service-orientated: finance, insurance, real estate and business services (25.231 TP3T); trade, hotels, transport and communications (24.391 TP3T); and community, social and personal services (14.401 TP3T). . Together, these sectors contribute more than 50% of GDP, followed by manufacturing (13.92%) and construction (9.45%).

In other words, it is the services sector, not the much vaunted "Make in India", that has been the main driver of India's economic growth over the past decade.

This service-led growth model, with its weaker supply chain and agglomeration effects compared to manufacturing, has led to long-term problems such as insufficient job creation, weak merchandise exports and excessive trade deficits. It has also fuelled income inequality and systemic weaknesses such as insufficient industrial synergies. The lagging development of the manufacturing sector is at the centre of India's difficulty in achieving double-digit "East Asian levels" of annual GDP growth during the critical economic take-off phase.

Meanwhile, the contribution of manufacturing has actually declined under Modi.

In terms of the average quarterly contribution of manufacturing to GDP, it was 16.531 TP3T before Modi came to power (Q2 2005 to Q2 2014), whereas during his tenure (Q3 2014 to Q4 2023) it fell to 13.921 TP3T.In addition, the fastest-growing sector in terms of its contribution to GDP since Modi came to power has been community, social and personal services, with a It grew by 3.23 percentage points.

In terms of the share of manufacturing value added in GDP, the ratio has not reversed its long-term decline since Modi came to power, falling to 12.841 TP3T by 2023, the lowest level since 1960. In contrast, the share of manufacturing value added in GDP in Bangladesh and Vietnam increased from 16.611 TP3T and 20.371 TP3T in 2014 to 22.341 TP3T and 23.881 TP3T in 2023, respectively.

These data suggest that India has not changed its path dependence on services.

Nonetheless, the Modi government continues to promote India as the best alternative to China in the backdrop of the US and the West's 'friendly-shoring' strategy. However, looking at the actual data, while China's share in US imports has declined by 8.8 percentage points compared to 2017 before the US-China trade friction, India's share has only increased to 2.71 TP3T from 2.21 TP3T, which is much lower than Vietnam's 2.31 TP3T and Taiwan's 1.91 TP3T.

In other words, the notion of "India replacing China" is difficult to substantiate and India's role in replacing China in the supply chain has been greatly exaggerated.

It is worth noting that, despite India's success in attracting many foreign companies to invest and set up factories in the country, taking advantage of its large domestic market and tariff barriers, India's high manufacturing costs continue to make its manufacturing exports uncompetitively priced. As a result, much of India's capacity additions are "in India, for India" rather than "in India, for the world", suggesting that, at least for the time being, India is not a significant alternative to China in the supply chain.

Objective understanding of the true nature of the Indian economy and dispassionate insight into potential problems

The actual performance of the Indian economy has not lived up to expectations in the face of the hype created by the Western media and by India itself. In recent years, there has been an unrealistic push for the "rise of India", especially the rhetoric of it being portrayed as the "next global manufacturing centre".

The root cause behind this phenomenon lies in India's endogenous constraints such as low quality of labour force, rigid land acquisition system, stringent labour laws and poor business environment, which are yet to be improved and which are seriously hampering India's potential to unleash its industrial momentum.

In recent years, overseas investors have come to realise the true nature of the Indian economy, leading to a significant decline in foreign direct investment (FDI) inflows, with no structural improvement.

On the aggregate front, India's FDI utilisation reached an all-time high of Rs 4.79 trillion in 2020 but has been declining since then, and its share among global emerging market countries (ex-China) has declined significantly, from 181 TP3T in 2022 to below 81 TP3T at present.

On the structural front, the main sectors that have attracted FDI inflows in recent years continue to be services, particularly in communications and computer services. Since Modi came to power, the share of foreign investment in manufacturing has actually declined, not only failing to change India's traditional growth path, but instead increasing the services sector's dependence on foreign investment.

Considering that during the same period, countries such as Vietnam and Indonesia have been extremely aggressive in attracting foreign investment in specific sectors, India's current FDI woes are actually more a reflection of the severe constraints of its endogenous problems than of external factors such as Fed rate hikes and a deteriorating global geopolitical situation.

The Indian economy appears robust on the surface, but is accumulating endogenous risks such as a "drift from reality to the virtual" and "high deficits".

On the one hand, India's over-reliance on the services sector for economic growth has led to its low resilience. the limited capacity of the services sector, such as IT and finance, to absorb employment and generate exports, and their high dependence on overseas demand have made it easy for changes in the global market to be magnified in India, leading to severe fluctuations in the performance of the economy.

On the other hand, sectors that drive India's economic growth, such as infrastructure, are overly reliant on debt, which can easily lead to risk accumulation. The Modi government has financed infrastructure investment mainly through the issuance of government bonds, and in recent years India's total government deficit as a percentage of GDP has been around 10%, more than twice the average of emerging market countries. In addition, interest payments alone account for 20% of India's government spending, which could affect future fiscal inputs and economic growth stability.

Certainly, India's breakthroughs in areas such as infrastructure are noteworthy, especially for their long-term effects.

The Modi government's cumulative investment in infrastructure from 2014 to 2023 totalled Rs 43.5 trillion, initially reversing the trend of declining investment as a percentage of GDP, suggesting that India's economy may be shifting from a model driven by domestic consumption alone to one driven by a combination of consumption, investment and other factors. In sectors such as transport, communications and power, India's rapidly improving infrastructure has effectively reduced the cost of operating the economy and attracted investment in manufacturing.

However, the effectiveness of India's strategy of addressing the infrastructure gap through debt remains to be seen. India's debt financing strategy is premised on "long-term returns on infrastructure being higher than the government's cost of borrowing", but India's 10-year government bonds are currently yielding as much as 7%. If its economy weakens and infrastructure returns fall short of expectations, it may struggle to maintain its current infrastructure intensity, and may even fall into the trap of "infrastructure too soon". "premature infrastructure" trap.

With regard to India, we should neither underestimate it nor overestimate its capabilities.

Against the backdrop of strategic competition between the United States and China, we should not be bound by old prejudices and stereotypes to underestimate India as the only country other than China, with a population of more than 1 billion, and consider it useless and hopeless, and thus make a strategic miscalculation on major issues related to India. Nor should we blindly follow other parties in creating a bubble of public opinion around the "Indian miracle" and overestimate India by giving it "super-standard treatment" beyond its actual strength and level, which may objectively help India enhance its ability to cope with the "friendly-shore outsourcing" of the United States. This may objectively help India enhance its ability to cope with the US strategy of "friendly outsourcing" and "China+1".

Overall, the best policy for China should be to take India seriously and conduct targeted research on India's long-term potential, medium-term trends and short-term dynamics, especially through detailed sectoral data mining and policy case studies. This would provide further clarity on the true nature and quality of the Indian economy and help formulate a strategy that is beneficial for both the present and the future.