Before the G20 Summit in New Delhi: Can India Be an Economic Alternative to China? Yes and No.

“Geopolitical conflicts are on the rise, leading to increasing weaponization of economic relations. The EU’s introduction of a de-risking agenda earlier this year is an attempt to strive for more resilience, has diversification of trade and investment, focusing on more like-minded political and economic system partners as a key strategy. India, host of this year’s G20 Summit and now the world’s most populous country (replacing China this summer), is in the spotlight. However, the EU should take a sober stance on deepening its relationship with geopolitical “go-their-own-way” India.”

India has had a mixed relationship with European countries – with the United Kingdom traditionally at the center. The UK’s departure from the EU in 2019 reduced the attractiveness of trade and investment relations with the EU for India.

Nevertheless, the EU remains an important but complex partner for India and vice-versa. Recent geopolitical turmoil has, however brought the two closer together. For example, negotiations on the bilateral free trade agreement (FTA) – halted in 2013 – were taken up again in the summer of 2022.

Relations between China and India have become frostier in recent years, increasing India’s interest in closer cooperation with Western countries. The Asian Big2 hold diverging views on the international role of the BRICS, and India is wary about China’s hegemonic ambitions in Asia, where India regards itself as a key regional player. Xi Jinping’s no-show at the G20 summit in Delhi will not help soothe these tensions.

As more and more European companies look for ways to diversify trade and investment away from China, the EU hopes India can play an important role – with the resurrected negotiations of a trade agreement as a potential door opener. Taking a closer look at India’s potential to be an alternative to China or at least partially replace it, two factors currently speak in India’s favor and three in disfavor.

The EU’s trade relations with China and India

The EU’s current trade relations clearly show that China is one of the EU’s most important trading partners.

• As an export market for goods from the EU, China is the third largest customer. 9 percent of the goods exported by the EU to countries outside the EU in 2022 are destined for China. India is the eleventh largest customer, with a share of 1.9 percent.
• For goods imports, China is by far the EU’s largest supplier. Just about 21 percent of all goods imported by the EU in 2022 came from China. India ranks 10th here with a share of 2.3 percent.

Regarding both exports and imports of goods, the difference between India and China is vast and will be difficult to bridge since the economic structure of the two differs greatly.

The gap between China and India however is narrowing when it comes to international trade in services. But even here, China is in the lead. Given the widespread image of India as an important provider of services, this is remarkable.

In 2021, the EU imported 38.6 billion euros worth of services from China and 20.7 billion euros from India. China’s share of all extra-EU imports of services (4.1 percent) was twice that of India (2.2 percent). For goods imports, China’s share was nine times higher than India’s in 2022.

Not only in terms of volume but also in terms of the structure of export goods, India is unlikely to be in a position to replace China. In 2021, the top exports of China to the rest of the world were broadcasting equipment, computers, integrated circuits, office machine parts, and telephones – i.e. technological products. India’s main export products are of an entirely different nature: refined petroleum, diamonds, packaged medicaments, jewelry, and rice.

Purchasing power development

The attractiveness of a country as a market for EU goods and services depends to a large extent on the purchasing power of its population, with gross domestic product (GDP) per capita as an important indicator.

• In 1990, India’s GDP per capita was still slightly higher than China’s (around US$ 1,670 PPP), at just over US$ 1,400 PPP. Since then, per capita GDP in China has risen much faster than in India.
• In 2022, GDP per capita in China achieved a value of just over US$ 18,000 PPP. This is around 2.6 times higher than the Indian value of US$ 7,050 PPP.

International Monetary Fund (IMF) forecasts predict little change in that ratio in coming years, making China a more attractive market export market for the EU than India for the foreseeable future.

Development of global economic power

The same applies if the share of national GDP of world GDP is considered.

• In 1990, China’s share of global GDP was four percent, only slightly higher than India’s share of 3.5 percent.
• In 2022, China’s share of global GDP was around 18.5 percent, significantly larger than India’s share (7.5 percent).
• By 2028, India’s share of global GDP will grow somewhat faster than China’s share. Nevertheless, according to IMF forecasts, China will remain the much larger economic power than India (share of world GDP of 8.7 percent), with a share of 19.7 percent.

Population development

For a long time, China was the world’s most populous country. However, according to the United Nations, India surpassed China in the summer of 2023. India’s population will continue to grow through at least until 2050. China’s population, on the other hand, will shrink slightly.

Development of the age structure

In addition to population size, the age structure of the population is also relevant for the economic development of a country.

In recent decades, China has had an above-average share of working-age people (15-64)  compared with the rest of the world primarily due to the one-child policy between the 1980’s and 2015.

• This resulted in a lower number of people under 15 – and thus a relatively large working population.
• In the future, however, this population policy will become a growth constraint. By the end of the 2020s, it will cause a noticeable aging of the Chinese population. That will then have a dampening effect on growth.

India’s age structure is different. In recent decades, the country has had significantly higher birth rates than the rest of the world including China. Initially, this meant a high number of children and young people – and thus a relatively low proportion of people of working age.

India is also experiencing lower birth rates as its economy matures, but at a much slower rates than China, due to uneven implementation of population control policies. However, starting around 2030, India will have a more growth-friendly population (a higher percentage of working age population.) The associated increases in GDP and income will make the country an attractive trading partner.

Beyond economics: The EU should take a sober stance on India

Looking only at economic indicators, China seems to be poised to remain a more important partner for the EU than India at least in the short to mid-term. However, a purely economic approach does not go far enough. Due to recent global developments, security and geopolitics play an increasingly important role in shaping the external economic relations of the EU.

The concept of de-risking is key here and it implies the diversification of trade and investment away from China and other authoritarian countries towards more like-minded partners. The EU certainly regards India as such, even though India has traditionally positioned itself as a bloc-free state and continues to do so, if one takes its neutral stance on the war against Ukraine as an example. This also has made very clear that India does not want its policies to be dictated by the US or EU but strives for its own version of strategic autonomy.

The EU should therefore be more sober and less enthusiastic about its relations with India. It should push for the bilateral FTA with some flexibility on environmental, labor and social standards. It should make good use of the newly established EU-India Trade and Technology council to move forward on other issues, such as testing each other’s geopolitical grounds.

India will be a key partner for the EU in the Indo-pacific to counterbalance China’s influence and to strengthen a multilateral approach in the region, which most certainly also is in India’s own interest. However, the EU should not expect India to join the “western camp” with waving flags but rather accept that India has its very own agenda.

About the author

Cora Jungbluth is a senior expert in the Europe’s Future Program at the Bertelsmann Stiftung. Her research focus is on China, foreign direct investment and international trade (especially the role of emerging economies).

Thieß Petersen is Senior Advisor at the Bertelsmann Stiftung, specializing in macro-economic studies and economics. His focus lies on the causes and effects of financial and economic crises as well as the chances and risks of globalization. Among others, he has recently worked on the effects of carbon pricing and the benefits of a potential global climate club.

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