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How India is Stepping Out of China’s Shadow

India's economic growth will yield more shipments of export cargo and import cargo in international trade.

How India is Stepping Out of China’s Shadow

As two of the most significant economies driving global growth today, commentators often compare the emerging market behemoths, China and India. In recent times, the two countries have eclipsed Brazil, Russia and South Africa, their BRICS counterparts, in terms of economic growth. However, there are significant differences between the two Asian economies.

China’s economic growth has reached a more mature level, and it faces greater challenges in terms of its aging population and low capital productivity. China is currently attempting to rebalance its economy, trimming industry overcapacity, as well as reducing corporate leverage and overall debt, whereas India is significantly behind in terms of economic development and stands to benefit playing catch-up in terms of growth. These differences lead us to be more positive about the trajectory of growth for India relative to China.

India is significantly behind its East Asian neighbor in terms of development metrics like GDP per capita and urbanization. This implies to us that its economy stands to benefit from implementing low- hanging fruit policy initiatives.

Moreover, India may benefit from structural drivers of growth; over the next decade, the country is expected to add over 110 million workers aged 15 to 64 to its workforce, while the declining dependency ratio is another indicator of the country’s expanding working-age population. The lower the ratio, the more workers the economy has, and this generally spurs growth if the labor market has enough jobs to offer. Meanwhile, India’s growing middle class is projected to contribute over $1.7 trillion to the economy by 2020, creating a more consumer-led economy.

Factors such as improving labor productivity, better education, and urbanization create more growth opportunities for India. A combination of a growing middle class and increased commercialization of the rural sector (and ultimately infrastructure development) could potentially set the stage for increased urbanization in years to come. While job growth in major metropolitan centers has slowed down, employment prospects in their peripheries have increased by almost 12 percent. According to the World Bank, more can be done to tap into the unrealized potential of cities in South Asia, where the population is expected to grow by almost 250 million in the next 15 years.

India’s domestic consumption-led model, which has been its advantage for quite some time, means the increasing commercialization of the rural sector and infrastructure development can push the economy forward. India’s rural economy is at the heart of the government’s growth strategy and is one of the main focuses of the 2016-2017 national budget. While it will likely remain a focus for investors as well, it’s important to remember that the rural economy can be vulnerable to non-economic influences, such as patchy monsoon rains.

India has little household debt and a lesser likelihood of inflation, so the country’s favorable demographics can sustain rapid growth without the risk of overheating the economy. The International Monetary Fund projects India’s GDP growth at 7.5 percent in both 2016 and 2017, ahead of its projections of 6.3 percent and 6 percent, respectively, for China.

Sukumar Rajah is the managing director and chief investment officer (Asian Equity) for Franklin Templeton’s Local Asset Management Group.