Last year, the International Monetary Fund announced that China had surpassed the United States as the world’s largest economy, as measured in terms of purchasing power parity.
This announcement was used an occasion for economists and commentators to label our time “The Chinese Century,” contrasting it with the previous 100 years, which belonged to America. While 2014 may have been the year that China replaced the United States as the world’s largest economy, 2015 could very well be the year in which India replaces China as the world’s fastest-growing large economy.
That’s at least what the Indians themselves are claiming. In an interview with The Financial Times, Arun Jaitley stood by his government’s prediction that the Indian economy will grow between 8.1% and 8.5% this fiscal year, outpacing the Chinese economy, which is predicted to grow at around 7% this year. “I think we can do better” than China’s predicted growth rate, Jaitley said, though he said that this accomplishment, “doesn’t give me satisfaction,” because of how much larger the Chinese economy is relative to India’s.
In one sense, such changes in the world’s economic power rankings aren’t of consequence. China might have a larger economy than the United States, but the average American is still much richer than the average Chinese citizen. Furthermore, economic growth is not a zero sum game. The U.S. Economy, or the Indian economy for that matter, is only helped by faster growth in China.
But economic power translates into geopolitical power, which can have a real effect on business. Take, for instance, the global reaction to China launching the Asian Infrastructure Investment Bank with the support of staunch U.S. Allies like Germany and the United Kingdom. Though these countries might be wary of legitimizing China’s economic power, they can’t afford to forgo membership in a bank that might give companies in their home country a chance to cash in on large development projects abroad (or the chance to be at the center of a future off-shore center for trading China’s currency, the Renminbi).
And if, over the course of the next 10 or 15 years, India is able to do even half of what China was able to do since joining the World Trade Organization in 2001, it would mean a lot more geopolitical power for India and huge opportunities for American companies looking to do business there.
India’s demographics are working in its favor. As a result of China’s one-child policy, the world’s most populous nation is aging much faster than other middle-income countries, and the United Nations expects India’s population to surpass China’s by 2028:
This demographic tailwind, combined with the fact that women participate in the Indian economy at a much lower rate than in China or the rich world, means that 13 million people will enter the Indian workforce every year for the next 15 years. If India can transform these workers into educated and productive consumers, the benefits to the world economy could be enormous.