India’s Growth Trajectory

Dec 1

Recently, I have been speaking with fund managers investing in India, and they all seem convinced that India is repeating China's economic miracle. They have a strong bullish outlook on the country, and their investment thesis is based on the following key arguments:

Demographics and Urbanization: India has a large population undergoing rapid urbanization, with rural workers migrating to cities. This creates a large, cheap labor force, as well as new consumer and savings power, similar to China’s early-stage development.
Manufacturing Growth: As China’s manufacturing moves out, India is positioned to capture this opportunity, driven by overseas demand. Additionally, India's services sector is already well-developed, allowing it to absorb outsourced international business effectively.
Government-led Infrastructure and Foreign Investment: India’s government is pushing infrastructure and real estate investment, while foreign capital inflows and rising household savings are creating a positive economic cycle through increased bank lending.
Perceived Pro-Capital Policies (Bonus Factor): Many believe that India, as the world’s largest democracy, is inherently more capital-friendly, leading to higher valuations.

At first glance, this investment case seems compelling, but I disagree—especially on point #2 regarding India’s manufacturing potential.

Key Weaknesses in India’s Manufacturing Growth Model

When China rose as a manufacturing powerhouse, it was largely because the Asian Tigers (South Korea, Taiwan, Hong Kong, Singapore) lacked the capacity and resources to absorb massive manufacturing demand. These economies were too small, import-dependent, and focused on exports. As their labor costs rose, China became the natural successor—especially after joining the WTO, benefiting from a pro-globalization era and vast economies of scale.

Now, however, the situation is very different:

China Dominates Manufacturing Across All Segments:
- Unlike in the past, China now controls the entire manufacturing spectrum, from low-end to high-end production.
- In cutting-edge fields such as semiconductors, batteries, robotics, and AI, China is also among the global leaders.
- This limits the space for India to emerge as an alternative—there is simply no gap left to fill.
The Global Economic Environment Has Shifted:
- Trade protectionism has increased, making it harder for India to follow China’s export-led model.
- Global demand growth is slowing, meaning it is mostly a zero-sum game rather than an expanding market.
- A country of India’s scale (1.3 billion people) relying on manufacturing for growth is unrealisticbecause the world does not have enough excess demand to absorb such an economy.
- The golden era of globalization that benefited China no longer exists.
China’s Overcapacity and Export Strategy Will Keep India in Check:
- China has massive idle capital, a huge workforce needing jobs, and excess production capacity that must be exported.
- China is aggressively reducing import dependency (domestic substitution strategy).
Chinese firms are expanding globally, targeting developing markets and non-U.S. economies with strategies like:
- Temu & TikTok Shop (cross-border e-commerce)
- BYD’s overseas factories (EV manufacturing expansion)
- Steel and shipbuilding dominance
China operates like a black hole, absorbing all available global demand, leaving little room for India.
- The model of "manufacturing-led national rise" worked for Japan, but it stops with China.

India’s Structural Weaknesses: A Stuck Economy

India faces a fundamental economic dilemma—it is trapped between two extremes:

Too weak for high-end manufacturing:
- India lacks the infrastructure, capital, and technical expertise to compete with China in advanced industries.
- High-end products are unaffordable domestically, making export markets essential—but India cannot compete globally.
Too inefficient for low-end manufacturing:
- Bangladesh is already more competitive than India in low-end sectors like textiles and apparel.
- China’s existing manufacturing efficiency makes it difficult for India to outcompete in mid-range production.
- India’s supply chain resilience is weak—COVID-19 showed how fragile Indian manufacturing really is.
Labor Market Issues:
- Unlike China, which had a highly skilled and disciplined workforce, India’s education levels are inconsistent, and the caste system and gender discrimination reduce economic efficiency.
- Many rural migrants end up in urban slums or informal sectors with little real economic contribution.
- Without strong external demand, domestic consumption alone cannot sustain rapid industrialization.

The Myth of "Democracy is Always Better for Business"

Foreign investors often overrate the role of democracy in economic success. In reality:

Democracy does not guarantee economic growth—many developing democracies struggle because they fail to concentrate resources on core industries.
India’s political system is highly fragmented, leading to bureaucratic inefficiencies, corruption, and entrenched elite interests.
Modi lacks the ability to overhaul these systemic issues—many assume reforms will succeed, but history suggests otherwise.

The assumption that democracy is inherently better for capital is a major misconception. Some forms of governance—when structured effectively—can allocate resources more efficiently, particularly in industrialization stages.

India’s Growth: A Unique Path, but No Economic Miracle

India is growing, and its economy will likely remain among the fastest-growing globally. However, the narrative of "India is the next China" is deeply flawed.

India is not following East Asia’s industrial model—it is forging its own, less manufacturing-dependent path.
India has great companies—there are pockets of opportunity, particularly in consumer sectors benefiting from a rising middle class.
But Indian stocks are expensive—valuation premiums reflect hype and retail speculation, not strong fundamentals.

India’s Stock Market: A Speculative Boom?

The current Indian equity market boom resembles China’s 2007-08 bull run, driven by:

Retail speculation and leveraged trading—many new investors lack deep market knowledge.
Massive foreign inflows and partial manufacturing windfalls from global supply chain shifts.
Overvaluation and potential corrections—as reality sets in, adjustments will occur.

If my assessment is correct, as more investors realize India is not “the next China” and its economy underperforms expectations, a major market correction is likely.