Post-Covid Globalization: Can India Replace China?

India could benefit more than China from the next phase of globalization. That’s according to Arvind Subramanian, a senior fellow at Brown University’s Watson Institute for International and Public Affairs.

But that may not be enough to replace China.

David Dollar, a senior fellow at the Brookings Institution, has argued that globalization is shifting in favor of India, not China.

“China has done so well for so long that it is closer to the border than India,” Dollar said.

“Let’s say China is about a third of the GDP per capita of the US. India is probably, you know, 11 or 12% of that. So it’s just the fact that China has done much better for a long time. more time by definition means it’s going to go down because, you know, as you get closer to the border, your wages go up, capital isn’t as productive, and unless you make certain changes, there’s a natural tendency for the economy to not stop converging, but certainly to converge at a slower rate.”

In a nutshell, India has a lot of idle resources and thus can grow its economy by deploying these resources efficiently rather than developing new technologies.

But Udayan Roy, an economics professor at Long Island University, does not subscribe to this thesis.

“We’ve heard this thesis many times before,” said Roy. “The inefficiencies of the Indian market run very deep in the commodity and resource markets, and I don’t see any improvement in the near future. For example, let’s take the labor market, where companies with more than ten people cannot lay off workers. That is a disincentive for companies that grow and achieve economies of scale.”

In addition, there are cozy relationships between the government and big business (crony capitalism) in various sectors of the economy such as utilities, telecommunications, transportation, energy, and banking, which limits competition and wastes resources.

“For example, banks allocate resources to companies according to political rather than economic criteria,” Roy said.

Dr. Guo Yu, Senior Analyst for Asia-Pacific at Sibylline, takes a middle ground, seeing both countries as playing a vital role in the next stage of globalization.

“As major economies, both China and India are major obstacles in the globalization of trade and supply chains,” he said. “And both economies have reaped significant benefits from globalization. India and China are at different stages of their development, so it’s not conducive (or helpful) to entertain the notion of one replacing the other.”

Still, Dr. Yu sees India capitalizing on its young workforce and democratic institutions, while China faces an increasingly hostile geopolitical environment.

“India enjoys increasing advantages in massive and labor-intensive manufacturing with its large young population, and its democratic political system often makes it the preferred partner of many Western economies,” Yu said. “By contrast, Beijing has faced a challenging, if not hostile, geopolitical climate in recent years, underpinned by intensifying strategic rivalry between China and the US for trade and investment.”

But that does not mean that India will be the winner of the next phase of globalization.

“China’s insistence on maintaining the zero covid strategy has caused significant disruption to business operations and supply chains and is seen as the antithesis of globalization,” said Dr. Yu. “While India may take some advantage of lost production in China, it does not have the capacity to replace China. In fact, China’s relatively well-developed infrastructure, highly-skilled workforce and vast market with a middle class in rapid expansion continue to make it an attractive economy for international business, despite political and geopolitical challenges.

Meanwhile, Dr. Yu sees the two countries playing a leading role in the next phase of globalization, at least in the Asian region.

“It is not surprising then to see new trade agreements such as RCEP and CPTPP to foster greater regional economic integration,” he said. “In addition to manufacturing and trade, the digital economy will also help shape future globalization.”

All this may depend on whether globalization survives the consequences of the war between Russia and Ukraine.

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