India economy: Why everyone wants to work with the world’s largest democracy

Hong Kong/London(CNN) When Tim Cook arrived in India earlier this month to open Apple’s first physical store in the country, he was welcomed like a hero.

The CEO was greeted with cheers and applause, presented with a vintage Macintosh and held court with the country’s officials, including Prime Minister Narendra Modi.

Cook’s visit, the latest by a top global executive, exemplifies the rising tide of interest that corporations and governments are showing in doing business with India. Just days after his landmark trip, Pret A Manger, a trendy British sandwich chain, set up its first outlet in the commercial capital of Mumbai, as it bet on the country’s growing middle class.

India will surpass China to become the world’s most populous nation this weekend, according to calculations from the United Nations, in a milestone that will only cement its growing image as darling of the global economy.

Its new status has cast attention on whether its economy will harness that demographic strength to displace China in other ways.

The case for investing in India — a nation of 1.4 billion — is clear, and only bolstered by recent geopolitical shifts. As Western leaders look to boost economic cooperation with countries that share similar values, India, the world’s largest democracy, stands to gain.

Until recently, many countries and companies “had put all their eggs in the China basket,” said Partha Sen, professor emeritus at the Delhi School of Economics. As tensions continue to flare between the West and Beijing, there is “a move to diversify away, and India fits right into it,” he added.

India’s so-called “demographic dividend,” the potential economic growth arising from a large working-age population, represents a major opportunity. Its vast consumer market and pool of affordable labor is also drawing more attention from global brands and trading partners.

Cozying up

In a bid to boost the industrial sector and lift exports, the Indian government has sought to sign free trade deals, a move that’s been warmly received around the world.

Since 2021, India has struck agreements with Australia, the United Arab Emirates and Mauritius. It is also negotiating deals with the European Union, the United Kingdom and Canada.

Russia, whose trade with the West has slumped since its invasion of Ukraine last year, is also interested in increasing ties with India. The move is seen as risky, as it requires a tricky balancing act for New Delhi of keeping Washington happy while warming up to Moscow, according to Shilan Shah, deputy chief emerging markets economist for Capital Economics.

The United States and India have taken steps in recent months to strengthen their ties, particularly in defense and technology, as they attempt to counter the rise of an increasingly assertive China.

In January, the White House launched a partnership with India that Washington hoped would help the countries compete against China on artificial intelligence, military equipment and semiconductors.

The United States touted the deal as reinforcing “our democratic values and democratic institutions,” even as those ideals have been undermined by India’s recent crackdown on opposition politicians and the media.

In February, Air India bought more than 200 aircraft from Boeing (BA) in the American planemaker’s third-biggest sale ever. President Joe Biden hailed “the strength of the US-India economic partnership.”

“Together with Prime Minister Modi, I look forward to deepening our partnership even further as we continue to confront shared global challenges,” he said.

A month later, US Secretary of Commerce Gina Raimondo visited New Delhi along with a group of senior executives from US companies. There, she signed an agreement with Indian leaders to discuss coordination of investment in each other’s semiconductor industries.

Speaking at the Indian embassy in Washington last week, Raimondo said: “In the years to come there will be two ecosystems of technology. One consistent with our democratic values, and another not.”

‘Economic miracle?’

Beyond geopolitics, India’s economic and demographic fundamentals are driving business interest.

The International Monetary Fund expects the South Asian nation to outperform all major emerging and advanced economies this year, logging GDP growth of 5.9%. By comparison, the German and UK economies will stagnate, while the United States will grow only 1.6%.

If it can maintain its momentum, India will overtake Germany as the world’s fourth largest economy in 2026 and knock Japan from the number three spot in 2032, according to analysis by the Centre for Economics and Business Research.

India’s working-age population stands at more than 900 million, according to 2021 data from the Organisation for Economic Cooperation and Development. In the next few years, its workforce could be bigger than China’s, according to Capital Economics.

The Biden administration has embraced India’s expected growth with unbridled enthusiasm.

“We want to be part of your economic miracle,” Donald Lu, the US Assistant Secretary of State for South and Central Asian Affairs, told Indian news agency PTI last week.

But India’s impressive GDP and population growth belies a growing headache.

“If you look at the overall data — GDP growth, the entire national income growing, India’s doing moderately well,” said Kaushik Basu, an economics professor at Cornell University. “The bottom end of India is not doing well,” he added. “The key reason for that is in terms of employment, India is doing rather poorly.”

At 7.1%, India’s unemployment rate remains above its pre-pandemic average. Basu told CNN the jobs issue, which some analysts have called a looming time bomb, was becoming one of India’s biggest problems and may be exacerbated as the population grows.

Growing manufacturing

Economists say there is a clear answer to the employment problem: build more factories.

“The demographic potential and the key to unlocking that would be developing this globally competitive and labor-intensive manufacturing sector,” said Thamashi De Silva, an assistant economist for Capital Economics.

As of 2021, manufacturing accounted for less than 15% of India’s economy or employment — relatively small by global standards, noted Shah from Capital Economics.

Luckily, its need for more assembly lines comes as companies are scouting for new production hubs.

Apple (AAPL) has expanded production significantly in India after suffering supply chain snags in mainland China. Last week, during his visit, Cook pledged to invest further across India.

Weeks before, the chief of Foxconn also visited India and met with Modi. The Taiwanese electronics maker, which supplies to Apple, was one of the fastest-growing manufacturers in India late last year and is looking to expand.

“Apple increasing production and investment in India has certainly raised hopes of forming an electronics ecosystem in the country and more broadly encouraging other multinationals as well,” said De Silva.

Obstacles ahead

India will benefit as companies diversify their supply chains away from China, but “several obstacles” will impede this shift, said Alexandra Hermann, a lead economist at Oxford Economics.

She cited stringent labor laws, high import duties and logistics challenges. Although India’s tech exports have grown steadily in recent years, places such as Taiwan and Vietnam “have so far benefited more from the search for alternative import sources,” she told CNN.

Despite improvements in infrastructure, India’s logistics costs are still higher than in China, South Korea, Japan, Malaysia and Thailand, according to the World Bank.

Basu of Cornell University said the key now was for the government to come up with a plan to absorb the excess labor by creating manufacturing jobs.

“Do it right, and this is a dividend,” he said. “Do it wrong, and this is going to be extremely worrying for the Indian economy.”

CNN’s Vedika Sud in New Delhi contributed to this report.