India runs on too few cylinders to replace China's sputtering growth engine: HSBC

Even though India's growth prospects have sharply brightened of late, it is unlikely to replace China as the world's growth engine in a few years, according to HSBC.

"The numbers don't exactly add up. Assuming no dramatic change in growth rates, and even assuming that India will accelerate and China slow further structurally, the latter is simply too large to have its importance for the world economy readily eclipsed," writes Frederic Neumann, chief Asia economist, co-head Global Research Asia at HSBC.

But that doesn't mean India will not provide extra fuel for growth in other economies. India will undoubtedly make a hefty contribution to world demand for commodities, consumption and capital goods, Neumann says.

"India, too, will become a far bigger player in global trade, possibly attaining a similar, key role in services exports as China occupies in goods supply chains today. Still, still, still…however you look at it, India at the moment runs on too few cylinders to take up the slack from China's sputtering growth engine," Neumann writes along with HSBC economist Justin Feng.

The International Monetary Fund (IMF) and the World Bank forecast India's GDP to grow 6.3% during 2023-24. India overtook the U.K. to become the fifth largest economy in the world in 2022 and it now looks set to be the world's third largest economy in less than a decade.

While China's growth is downshifting, it was still massively larger by nearly $15 trillion dollars last year, says HSBC. "Even with China's growth slowing, and India's accelerating, the gap between the two economies will continue to rise for the foreseeable future, expanding to $17.5 trillion dollars by 2028 on the IMF's forecasts," the report says, adding that this difference is equal to the current size of the European Union's economy.

China accounts for around 30% of world investment, while India's share is less than 5%. Even assuming zero growth in China, and a tripling of investment spending growth in India from its recent average, it would take another 18 years before India's investment spending catches up to China's, says HSBC.

China's global consumption share stood at 14% while India's consumption share is still stuck below 4%. "It would take at least one and a half decades for India's consumption to catch up where China is today in terms of total spending – with the global share likely lagging many years behind," the research note says.

"None of this is to say that India is not going to have an impact. It will, no doubt – though it won't be enough to shield the world economy should China's economy stumble badly," the report says.

According to HSBC, China may still contribute twice the GDP to the world economy than India does by the end of the decade. China's growth has been hugely commodity-intensive over the past couple of decades, in part because its growth was investment-led. China consumes more thermal coal, zinc, iron ore, nickel, aluminium, and copper than the rest of the world combined, and has a considerable demand share in other raw materials as well. By contrast, India's demand share is far lower currently.