January, 2023
Poor take but understandable given the difficulty in summarising India’s economic nuance from a desk in Washington DC. First, it’s problematic to look at India’s consumption story with a Western or China lens.
BMW, Starbucks, Netflix will be part of but not the cornerstones of the Indian middle class consumption basket. Indian consumer preferences are understandably different and warrants differing offerings specific to India.
Second, China’s per capita GDP on a PPP basis is ~3x that of India. Any comparison to China on absolute size of consumption of any good is unfair let alone that of goods such as BMW, Starbucks or Netflix that are not appropriately priced to account for the difference in PPP.
But foreign consumer companies are not making investments based on the TAM today. There is at least a 10 - 15 year view which is where Indian growth comes in to play. Conservatively, over the next decade India’s share in world growth will be at least 15%.
Third, why can’t India pursue growth through FDI which promotes consumption and exports at the same time? Simple example, a company invests in a factory that produces a good that is otherwise tariffed if imported. Now the product is cheaper, which increases domestic consumption.
But the promise is that advanced manufacturing will soon be India’s comparative advantage, and hence those same goods can now be exported from India, reducing India’s account deficit but also benefit the manufacturer, win-win. India’s push for self reliance isn’t protectionism.
This is also the exact reason why we didn’t join the RCEP.
If India were to join the RCEP, this could hamper its transition towards industrialization in the face of a surge in imports, which would leave its economy dominated by agriculture and services. Data indeed shows that deeper the trade relation between India and China grew, the more we have seen a shift towards imports of high-skill and technology-intensive manufactures from China, while India’s exports consist of a stable chunk of commodities.
Lastly, for non FDI related indigenous exports such as textiles, leather, furniture, jewellery, and machinery, we have plenty of free trade agreements with large trading partners in store. So rest assured, the Indian consumption and export story is looking as bright as it can.