How will the west react when India’s economy surges?

It now makes massive sense for the UK, and indeed Europe, to build closer economic ties with what will soon be the world’s third largest economy, writes Hamish McRae

Within a decade India will go from being an important economy to a massively important one (Getty/iStock)

The UK has signed an “enhanced partnership” with India and it seems likely that the EU will open formal trade talks shortly.

You can see this in terms of competition between the UK and the EU – who will sign a trade deal first? – but I think it is more helpful to see it in terms of India opening its economy to the world. After all, the EU tried to do a free trade agreement with India back in 2007 (when of course the UK was a member) but negotiations were abandoned in 2013 “due to a gap in the level of ambition between the EU and India”, as the European Commission website reports. 

The economic balance has shifted massively over the past decade. India was then a much smaller economy than the UK. Now it is roughly the same size – it probably passed the UK last year, but we don’t have full figures yet.

Project forward and the balance changes further, with India passing Germany and Japan to become the world’s third largest economy by 2030. An HSBC study a couple of years ago calculated that the top 10 order in 2030 would be China, the US, India, Japan, Germany, UK, France, Brazil, Italy, Korea – with China passing the US in the late 2020s. 

The China boom story is widely appreciated, and there certainly will be a bumpy ride as it and the US vie for global leadership. The India story has received much less attention, and deserves much more.

So within a decade India goes from being an important economy to a massively important one. Equally important, India is likely to remain the world’s third largest economy for the rest of this century. A paper by The Lancet last year noted that India would pass China in the 2020s to become the world’s most populous country, and would continue to be so through the next 80 years at least. Though it would still have a lower GDP per head than China, and of course the US, the combination of technical advance and a growing labour force would cement its position at number three. It is quite plausible that by the middle of this century, not only will India be number three, but that it will be a larger economy than the entire EU.  

People in the west will have different reactions to this. My own, with two reservations, is to think it is wonderful. Come to the reservations in a moment: focus on the wonderful first. It is wonderful that economic growth will enable the world’s most populous country to give a better life to its people. Right now the world is troubled by the way in which the pandemic has hit the country and its struggles to cope. But the more economic wealth it can generate over the next couple of generations, the more resources will be available not only to tackle future health emergencies but to improve health more generally.

Life expectancy in India has risen steadily, reaching nearly 70 in 2018 according to the World Bank – roughly where the UK was in the mid-1960s. It will continue to rise in the years ahead. Indeed by the middle of the century India will have become a predominantly middle-class society in living standards, educational opportunities, and social aspirations. 

The two reservations are governance and the environment. On the first it would be arrogant for anyone in the west not to acknowledge the uneven performance of western democracies in recent years. If India, the world’s largest democracy, has some rough edges, so too do some places nearer home. Nevertheless, there are genuine concerns that those rough edges may hold back the pace at which the country can advance, and share the growing wealth the economy is generating.

The environment may be an even deeper concern. There are already a lot of people in a huge (but not that huge) country. Population density was 382 people per square kilometre at the last census in 2011. It will be higher now. That compares with 280 people per square kilometre in the UK and Britons think of themselves living on a crowded island. Climate change presents an enormous challenge and whatever the rest of the world does, India will have to set aside resources to mitigate the impact on its people. There is no escaping how tough this will be.

Trade deals are not essential to trade. Investment deals are not essential to investment. India is already the second largest overseas investor in the UK, after the US and ahead of Germany and France. But it does make massive sense for the UK, and indeed Europe, to build closer economic ties with what will soon be the world’s third largest economy. So let’s welcome the fact that we are all doing so.