Will India replace China in international trade?

India will replace China as a magnet for foreign investment and world exports due to Xi Jinping's political and economic closure and the deterioration of relations between the West and China.

India stands to be the ideal replacement for China in terms of foreign trade attractiveness.

Little use was made of Xi Jinping's grand proclamations last year on his third appointment to lead the country from the last Communist Party Congress: Dragon's economy is inexorably slowing down.

Although China's GDP growth is estimated to grow by 5.20% (slightly lower than Xi promised), emerging data confirm the slowdown of the Chinese economy. Even 2024 estimates predict a further decline. In 2020, GDP was characterized by a dramatic decline. And while in that case it was a momentary decline, due to the health emergency, this time we may be facing the beginning of something bigger.

For this very reason, India is becoming increasingly important in global political and economic dynamics, and companies around the world, including those from Italy, are shifting their efforts from China to India, aware of the great opportunities this country can offer them.

Since last April, the Indian market has become the most populous in the world (surpassing the very primacy the Dragon country), and is the sixth largest global economy due to its impressive GDP growth rate over the past 10 years (an average of 6.1% annually according to the International Monetary Fund).

In addition, the growing middle class will enjoy greater spending power in the coming years than in the past, fostering interest in foreign brands: according to the World Economic Forum, over 140 million households will become middle class and another 20 million will enter the highest income category by 2030.

But what is behind this great growth? And can India really now aspire to take China's place in international trade?

China's problems

Closure to the West

The first element that has worried international analysts, and put Italian and Western businesses on high alert, is the speed with which Xi Jinping and the Chinese Communist Party are closing many doors to foreign trade, Proclaiming the goal of self-sufficiency..

To do so, one necessarily goes through a closure to the West and a Resulting deterioration of relations with Europe and the United States. The latest example was the case of Taiwan, a point of great economic interest because of its large concentration of companies engaged in making electronic chips.

The visit of U.S. House Speaker Nancy Pelosi in August 2022 greatly angered the Chinese government, as it was seen as an attempt to gain economic and political return from the small state's de facto independence vis-à-vis China. And in response, Xi will increase his influence in the territory in any way possible by investing in the technology sector Fostering the emergence and growth of domestic companies that will operate in the domestic market. Instead, there will be less and less room for foreign enterprises.

The failed “zero-covid” policy”

But there is another problematic element for China, namely the harshness with which the government applied mobility restrictions whenever a new outbreak of Covid contagion arose.

A case in point is the metropolis of Shanghai, which, for much of 2022, Experienced a very rigid lockdown of barred doors, food shortages, and lack of freedom of movement. Later, in late 2022 residents of other cities, such as Beijing, suffered new government-imposed lockdowns.

Everything stopped, and in doing so, the economy did not grow, as per the effect of a failed response to the health emergency. But Xi will never admit the mistake, to avoid negative repercussions on his image and his political conduct of the country: this situation contributed to the Putting many foreign investors on the run.

The bursting of the housing bubble

Finally, as if that were not enough, the third element that is contributing to the slowdown in economic growth, and the general flight of international companies to Chinese soil, is the bursting of the housing bubble. The sector alone is worth 30% of the national economy, which is precisely why the Chinese government has provided unprecedented liquidity to bail it out.

Millions of Chinese citizens refuse to pay their mortgage payments, being indebted to buy apartments that will never be completed by the builders, as they have since gone bankrupt.

Lastly, Shanghai-based Cifi Holdings, struggling with bond defaults and downgraded by the Fitch rating agency to CC, from the previous BB. And in true Evergrande style, the Chinese government is trying to bail out this behemoth as well by increasing its debt and reducing economic growth.

The India opportunity

The costs associated with a more inward-looking China are now clear.. And it is clear that it seems rather unlikely that China's GDP will experience exponential growth, at least in the medium term, especially since the war in Ukraine could last several years.

Openness to foreign investment

For this reason many companies have begun to veer and move toward a high-growth country like India, which in turn has taken notice of this courtship and is trying to attract manufacturing companies. The Indian government has publicly stated its desire to increase the manufacturing supply chain by offering incentives to manufacturers to set up factories.

The campaign “Make in India“, for example, offered $10 billion in incentives aimed at getting international companies to develop, manufacture and assemble companies Made in India products, creating an environment conducive to investment, developing a modern and efficient infrastructure and opening up new sectors to foreign capital.

Reflexively, India has climbed several positions in the Ease of Doing Business index., an indicator that reflects the ease of doing business in a given country: if only in 2016 the country was ranked 130th, In 2020 she came in 63rd, a leap of 67 positions in just four years. In 2020, Italy was in 58th place.

Digital development and young population

Not only that, India is also a country that is experiencing really interesting digital development. By this year, internet users are expected to reach the 840 million people, a figure doubled from only four years ago (in 2017 there were 422 million people).

This growth goes hand in hand with the presence of a large segment of young citizens in India, which continues to increase. If that Chinese Is in sharp decline compared to India's (the working-age population will fall from 930 million today to 817 million in 2050) in India will rise from 674 to 940 million.

Firm and trusting relationship between India and Italy

Finally, historically Italy and India have enjoyed strong trade and political relations. Already during the Virtual Bilateral Summit in November 2020, where Indian Prime Minister Modi and then Italian Prime Minister Giuseppe Conte signed a number of agreements in some strategic fields, such as pharmaceutical production, food processing, and manufacturing, it was an excellent opportunity to further define bilateral relations. These relations were consolidated during the last G20.

In fact, Italy is, as of October 2023, the third largest exporting country in Europe., behind Germany and the United Kingdom, according to a recent study by the Ministry of Foreign Affairs and International Cooperation. And Indian entrepreneurs and managers confirm this trend and the strong interest in Italian products:

Italy has a very positive name among the Indian business community” argues Vishnu Krishna, Director of Octagona India.

“Many Indians know the vast potential that Italy-India cooperation can offer both countries. Anything that is produced or designed in Italy usually has a positive impression on the Indian people. This is the best time in years that Italian companies can take advantage of to enter or expand in the Indian market.”.

Conclusions

The Subcontinent is not an easy market (assuming there are any) and still has a long way to go, but the reforms implemented by the Narendra Modi government in order to improve the ease of doing business, economic environment and competitiveness are beginning to be seen eloquently.

While a little further north in China, the Chinese Communist Party continues to ignore domestic problems related to economic growth and increasingly closing in on itself. Political intervention and regulatory crackdowns will go on to increasingly complicate the investment prospects of foreign companies in China. All while the securities sector will continue to experience, at least in the short term, great difficulties before fully recovering.

In short, India now stands to be the ideal replacement for China in terms of foreign trade attractiveness. And Italian companies, given the strong relations between Italy and India, can take great competitive advantage.

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