Here, we’ll examine China’s path to becoming a major contributor to global growth over the past two decades and make the case that India has the potential to follow suit.
There have been two major catalysts driving China’s economic acceleration: reforms passed by Deng Xiaoping and China’s accession to the World Trade Organization in 2001. The set of reforms permitted privatization and the opening of foreign investment within the country. The entrance to the World Trade Organization allowed China to leverage its strengths to rapidly scale its industrialization, global exports, and investments into the country. Both of these factors have helped China achieve high-single-digit GDP growth since 1978. Many of you may have seen evidence of that growth firsthand, as the favorite gadget from your youth was likely not produced in China but, today, the phone you may be reading this on likely is.
Further, despite Deng Xiaoping’s implementation of a one-child policy, the country has seen its population grow from 1 billion in 1982 to just under 1.41 billion in 2023. GDP product per capita (i.e., the size of the economic output per person) grew by more than 45 times over the same time frame.
But China’s economic growth has come with a cost. The country’s total debt-to-GDP ratio has risen from roughly 150 percent in 2008 to more than 286 percent today. Additionally, as debt and concerns over housing have picked up in recent years, consumer confidence has remained under pressure. And as confidence in the economy has faded, so has population growth. The country’s population declined by 2 million people in 2023.
Following COVID-19 and rising geopolitical tensions between the U.S. and China, U.S. and Western companies have looked to move production away from China and into areas such as Vietnam and Mexico. In addition, as China’s middle class and incomes have grown, it has become harder for the manufacturing segment of its economy to carry the burden. To maintain its growth trajectory, the country now must look to pivot to a more service-based economy.
As China has struggled, India’s star seems to be on the rise. It passed China’s population in 2023 and, per the IMF, is expected to grow by 6.04 percent over the next five years (outpacing China’s growth by 2.61 percent).
India’s economic reforms lagged those of Deng Xiaoping’s by 13 years, as the country did not make moves toward reform until a balance of payments crisis in 1991. These reforms led the way to an approach closer to that of a free market, allowing for greater privatization, limiting tariffs, removing licensing requirements, incentivizing foreign investment, and freeing up liquidity within the banking sector.
India is in the midst of implementing another wave of economic reforms similar to those seen in China. Since Prime Minister of India Narendra Modi took office in 2014, we’ve seen a focus on privatization, a “Make in India” manufacturing initiative, and the demonetization of the 500 and 1,000 rupee banknotes in 2016 as the country made a pivot toward its Unified Payments Interface digital payment platform. The platform processed more than $1.7 trillion in payments in 2023 alone. The goal of switching to a digital payment platform was to reduce the cost of using cash and to promote transparency, accountability, and efficiency.
One distinct difference between the economies of India and China is the size of their service sectors. In China, industrialization propelled its growth after it joined the World Trade Organization in 2001. In India, the service sector already makes up more than 50 percent of the economy. Not surprisingly given the leadership in global digital currency adoption, India has been a leader in financial services and IT within its service sector. More recently, we have seen India’s growth within the healthcare sector.
While the near and intermediate terms appear to be in India’s favor, the country represents just 8.7 percent of the global economy on a purchasing power basis. This compares with the U.S. and China, which make up 14.6 percent and 19.8 percent, respectively. India now represents just under 17 percent of the MSCI Emerging Markets Index, and China represents roughly 26.5 percent (as of the end of December). At its height in 2020, we saw China approach nearly 40 percent of this same index, while India came in just above 8 percent at the same time.
The big picture here is there are changing investment opportunity sets outside the U.S., and these developments will play into where individuals choose to invest in the future. The world is changing—and it may change the way we think about constructing our portfolios.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada.