India’s rampaging rise threatens to tip world’s fragile balance of power

Deciding the agenda for the recent G20 meeting of finance chiefs was always going to be a little tricky. The US and its allies wanted to discuss new sanctions against Russia and security guarantees for Ukraine. 

Moscow and Beijing preferred to criticise Western “blackmail and threats”.

Indian officials hosting the meeting of the world’s largest economies in Bengaluru were busily working behind the scenes to try and avoid using the word “war” in any joint statement. Ajay Seth of India’s finance ministry had even suggested Russia’s attack on Ukraine was beyond the mandate of finance ministers and central bank governors.

Other attendees pointed out it was quite hard to argue Vladimir Putin’s illegal invasion of a neighbouring country almost exactly a year ago hadn’t had an impact on the global economy. It was probably, therefore, worth at least a passing mention. 

In the end, they agreed to disagree: no joint communique was issued.

The world will probably find a way to survive without the usual bland diplomatic tropes and empty verbiage. But India’s discomfit is emblematic of how the war in Ukraine is driving a wedge between the world’s most powerful economies. 

In a motion at the United Nations General Assembly earlier this month calling for an end to the fighting and Moscow’s immediate withdrawal from Ukraine, Russia voted against, while China, India and South Africa abstained. Everyone else was in favour.

But, whereas Beijing has repeatedly been called out for its tacit support of Moscow, New Delhi, which has increased its imports of Russian crude oil by 33 times since the war started, has avoided censure. 

That’s because, in the increasingly complicated three-dimensional chess of global geopolitics, India is seen by Western governments as an important potential bulwark to Chinese aggression in the Indo-Pacific region.

As an increasingly muscular China prompts businesses to rethink their reliance on the country’s factories, and as defence policies are redrawn around the world in the face of a bellicose Russia, India is becoming increasingly important politically, economically and militarily on the world stage.

It probably helps that the country boasted the second fastest growing large economy behind only Saudi Arabia last year. For years, countries around the world were more or less forced to hitch their wagons to the Chinese engine of global growth or risk being left behind. 

But Covid, an increasingly authoritarian regime in Beijing and retreating globalisation have all led to a recalibration of the political and economic calculus.

There are two other reasons that leaders are rethinking their approach to China to the benefit of India, though they are less likely to be mentioned out loud by Western diplomats: ongoing efforts to ensure that Beijing continues to struggle in its attempts to achieve technological parity with the US; and the fact that China’s own economic growth appears to be plateauing.

These trends are all fast reshaping the world’s approach to relations with Beijing. 

Hawks in the West have long argued that China policy should be shaped by the character of the regime rather than economic self-interest. It is much easier to make their case when growth is in the low single digits.

But this presents another problem: where should the world now turn for fresh economic impetus?

At first glance, India is a good candidate. Its population has just overtaken (or, depending on how you calculate it, is just about to overtake) that of China. Crucially, its working age population is still growing unlike China, which continues to be hobbled by the disastrous one-child policy.

The median age in India is a full 11 years younger than in China. According to Shilan Shah at Capital Economics, India’s working-age population will exceed China’s by an astounding 235m by 2040, roughly the population of Pakistan today.

Internal reforms mean that the Indian economy is on a tear. Morgan Stanley has predicted that India will be the world’s third largest economy by as soon as 2027 and that the country’s gross domestic product will more than double from $3.4 trillion to $8.5 trillion over the next decade.

The UK, with its long history of cultural ties and a shared language, should be in prime position to benefit from the shifting geopolitical axis.

Yet an attempt to agree a bilateral trade deal by Diwali in October last year was torpedoed when Suella Braverman, the home secretary, expressed concern about a potential increase in Indian migration to the UK.

A reciprocal migration deal was finalised a month later ahead of Rishi Sunak's first face-to-face meeting with Modi in November. Sunak, a practising Hindu with strong family links to India, has said a trade deal is “just one part of a broader relationship” with New Delhi and stated he doesn’t want to “sacrifice quality for speed” in trade negotiations.

However, while talks progress, concerns about Prime Minister Narendra Modi’s efforts to undermine democracy and marginalise Muslims are raising red flags. 

Gauging the best approach to managing relations with India, the rising superpower, will be a delicate balancing act.

Economic awakening

Much of India’s post-colonial history has been a pretty eloquent counter to Auguste Comte’s suggestion that demography is destiny.

Despite the country’s population exploding from around 340m at the time it gained independence from Britain to 1.4bn today, its economic story has been far from straightforward.

As Ruchir Sharma, the chair of Rockefeller International, points out, at independence in 1947, India was the sixth largest economy in the world and average incomes were 18pc of the global average; 75 years later, it was the sixth largest economy in the world and average incomes were 18pc of the global average.

This apparent stagnation actually hides a huge dip and rebound. At one point the economy had sunk to 12th in the world rankings, before recovering.

India has long held the promise of becoming the next China but repeatedly failed to deliver. 

Its own domestic market was too fragmented, with different rules and tax regimes in all the separate states. It could not nurture enough home-grown large companies or seed a long-expected manufacturing boom, a tried and tested method for developing nations to turbocharge their growth.

The country only began to make up lost ground when the government started to release the private sector from the iron grip of socialist controls in the 1990s.

This unleashed a torrent of pent-up entrepreneurialism. Shares listed on the Indian stock market have risen by 12pc a year, in dollar terms, since 1990 – twice the global average.

The number of Indian billionaires has almost tripled from 55 to 140 in just the last decade – a fact that simultaneously highlights both the country’s struggles with inequality and its dynamism. 

Encouragingly, many made their money in areas like technology and manufacturing, where India has traditionally punched below its weight.

When Modi first took power in 2014, India was the 10th largest economy in the world. In the subsequent seven years, it grew by a full 40pc. Only China performed better over the same period. But now the rampaging elephant is catching up with the limping dragon.

Last year, India overtook the UK to take fifth spot on the global economic league table. Its stock market is already the fourth largest in the world – behind just the US, China and Japan – and it is home to the third largest number of unicorns (start-ups worth more than $1bn) – behind only the US and China.

The progress has been staccato. Modi’s ill-considered decision to ban bank notes in 2016, a crisis in the shadow banking system in 2018 and Covid lockdowns in 2020 all resulted in disruption. 

But overall, progress has been made.

Many of the reforms that have helped forge a single national market predate Modi’s tenure but he deserves credit for expediting them. 

There are no longer huge queues of lorries waiting to have their paperwork checked as they cross between states, thanks to the adoption of a nationwide goods-and-services tax that replaces a bewildering array of local levies.

The higher revenues the new tax has raised have been ploughed into big infrastructure projects. 

The country’s highway network has increased by 50pc since 2014. Modi has promised to “connect every corner of the country” with 75 Vande Bharat Express semi-high-speed trains.

More recently, the country has rolled out a set of state-sponsored digital services that furnishes all Indians with electronic identities, bank accounts and tax systems. 

A once highly inefficient, cash-based economy is being dragged into the 21st century at lightning speed. And there's room for further acceleration.

“Crucial to India making the most of its demographic potential will be the development of a globally competitive, labour-intensive manufacturing sector,” says Shah at Capital Economics. 

He points out that every economy in Asia that successfully moved beyond low or lower-middle income status (including Korea in the 1960s, Taiwan in the 1980s and China in the 2000s) did so by establishing a thriving manufacturing sector. 

But at the moment this only accounts for a relatively small share of India’s economy.

Shah adds: “The well-worn argument goes that it is relatively easy to increase the productivity of low-skilled workers by taking them out of other sectors (typically agriculture, but also relevant in India’s case, low-end services) and putting them to work in factories using machines that require only basic training to operate.”

Here, too, recent developments have been positive. 

Last year, Apple, which makes most of its iPhones in China, began producing its iPhone 14 in southern India. It was a small step (and initial reports suggest the smartphone maker is having some issues with quality control) but it was nevertheless a big moment: where Apple goes, others tend to follow. 

Shah says Apple’s decision could “prove pivotal”, especially if “it helps to form an ecosystem of suppliers or encourages other multinationals to follow suit”.

Companies around the world are looking at “friend-shoring” their supply chains after finding out the hard way that they were over reliant on China. 

Beijing’s harsh Covid policies and sweeping lock down rules have repeatedly hit production in recent years. Now, rising geopolitical tensions between the US and China are dragging companies, especially those in the technology sector, into conversations they’d far rather swerve – can they still afford to be in China?

Modi’s government has been looking to boost domestic manufacturing and exports through its “Made in India” campaign. Costs are low. The country is English-speaking. There’s a huge and growing local market – India already has, for example, the second-largest number of smartphone users in the world after China. 

Where better to set up shop and diversify your supply chains?

The Modi problem

In reality, however, moving supply chains to India is not as obvious a decision as it may at first seem. 

Modi has signed trade deals with the European Union, the US and Australia. However, most of these are quite narrow in scope. Worryingly, India has a long history of protectionism and import substitution (advocating for locally produced goods rather than those bought from overseas).

Worries about Chinese competition have so far stopped India from joining the Regional Comprehensive Economic Partnership and instead adopting the policy of “Atmanirbhar Bharat”, of “self-reliant India”. 

This approach includes a range of subsidies for domestic industries and higher tariffs to protect them from foreign competition.

The former have, in fairness, resulted in a big increase in business investment as the country’s large conglomerates plough money into clean energy, electronics and pharmaceuticals, in particular. 

But the latter may be part of the reason why more of the foreign manufacturers that have quit China in the past decade as costs there increase have instead chosen to set up in Vietnam and Bangladesh.

Modi’s electoral prowess has delivered a good measure of political stability but he is prone to big missteps. 

“The evidence from Modi’s nine years in power is that implementation of the structural reforms needed to boost manufacturing will be stop-start at best, ebbing and flowing depending on the political climate,” says Shah at Capital Economics.

More worrying still is the ruling Bharatiya Janata Party’s tendency to deliberately stoke religious tensions with its anti-Muslim chauvinism and the possibility that Modi’s strongman political dominance will harden into outright autocracy.

The recent signs have not been encouraging in this regard. Two senior Indian opposition politicians from different parties have been arrested in recent days. One, a spokesman for the country’s main opposition party, was detained for merely insinuating a controversial tycoon was so influential he was effectively Modi’s father.

Last month, the BBC’s offices in India were raided by tax officials just a few weeks after a documentary critical of Modi was blocked by the government. Documents and phones belonging to several journalists were seized and the offices sealed.

The series – called “India: The Modi Question” – focussed on the role the now-prime minister played in violent Hindu-Muslim riots that took place in Gujarat in 2002 when he was chief minister of the state. 

Allegations of Modi’s complicity in the violence, which left more than 1,000 people dead, resulted in the politician being denied a visa to travel to the US in 2005.

The Indian government has accused the BBC of bias and a “colonial mindset” and pointed out that Modi was cleared of all charges by a supreme court panel in 2012. 

The episode is unlikely to escalate into a full-blown diplomatic spat; the Beeb prefers to avoid asking for formal political support if it can, in order to demonstrate it has an arm’s-length relationship with the British state.

Regardless of the outcome of the current situation, Western governments will have to tread carefully when dealing with India – especially with regards to the thorny subject of foreign policy. 

In a meeting with Vladimir Putin in September, Modi said the friendship between India and Russia was “unbreakable”. He has called for a ceasefire in Ukraine but has steadfastly refused to apportion blame for the situation.

India has long had close ties with its northern neighbour. During the Cold War, Moscow repeatedly vetoed Security Council resolutions concerning the disputed region of Kashmir, which lies on India’s border with Pakistan.

Russia supplies over half of all India’s military kit – amounting to something like $13bn worth of arms in the last five years alone. 

India is also the world’s third largest importer of oil, which presented something of an opportunity for both Moscow and New Delhi when the rest of the world started shunning Russian crude and gas.

The Biden administration and Western allies may have concluded that if India is to act as a counterweight to China, they will have to turn a blind eye to how it acquires that heft. 

India and China share a 2,000-mile disputed border and India is seeking to tool up in order to offset China’s increasing assertiveness in the region.

It’s even possible that in the medium-term this could help the West to cement closer ties with India. New Delhi is, for example, desperate to modernise its airforce and worried about supply delays from Russia, whose war machine is working overtime to supply its own troops operating in Ukraine.

Washington looks willing to step into the breach. It showed off its most advanced fighter jet, the F-35, at the Aero India air show in Bengaluru last month, the first time it had appeared in the country.

For the US and Britain, India’s rise is simply too significant to ignore or resist. Engagement, with caveats, is the order of the day.

For now, the best approach to managing relations with India appears to be an adaptation of Theodore Roosevelt’s maxim about diplomacy: speak softly and carry a squadron of stealth multirole combat aircraft.