Why everyone in business loves India right now

Hong Kong/London CNN

Tim Cook was treated like a hero when he arrived in India to open Apple’s first physical store there earlier this month.

The CEO received cheers and applause. He was presented with an old Macintosh, and he held court with country officials, including the Prime Minister NarendraModi.

Cook's latest visit, which is the result of a high-level executive from a global corporation, shows the growing interest shown by corporations and governments in doing business in India. Pret A Manger - a fashionable British sandwich chain - opened its first outlet just days after Cook's historic trip to India. The company was betting on the growing middle class in the country.

India will surpass China as the most populous country in the world this weekend. This milestone will cement India's growing reputation as the darling of global economics.

The new status of Taiwan has prompted questions about whether the economy can use its demographic strength in order to replace China.

India, a country of 1.4 billion people, is a clear investment opportunity. Recent geopolitical changes have only strengthened this argument. India, as the largest democracy in the world, is a prime candidate for economic cooperation between Western countries and those that share similar values.

Partha Sen is a professor emeritus of the Delhi School of Economics. He said that many companies and countries had 'put all their eggs into the China basket' until recently. India is part of a diversification movement as tensions between Beijing and the West continue to escalate.

India's so called 'demographic divide', the potential growth in India's economy due to a large population of working age, is a huge opportunity. The vast Indian consumer market, as well as its pool of cheap labor, is attracting more global brands and trading partners.

The Indian government signed free trade agreements to increase exports and boost its industrial sector. This move has been well received by the rest of the world.

India has signed agreements with Australia since 2021. It also has agreements in place with the United Arab Emirates, Mauritius, and Australia. India is currently negotiating with the European Union and the United Kingdom.

Russia is interested in strengthening ties with India, as its trade with the West has declined since it invaded Ukraine last year. Shilan Shah is the deputy chief emerging market economist at Capital Economics. He says that this move could be risky because it would require New Delhi to balance between keeping Washington happy and warming up to Moscow.

In recent months, the United States and India took steps to strengthen their relationship, especially in defense and technology. They are trying to combat an assertive China.

In January, Washington launched a partnership between the White House and India, hoping to help both countries compete with China in artificial intelligence, military technology, and semiconductors.

The United States hailed the deal for reinforcing "our democratic values and institutions," even though India's recent crackdown against opposition politicians and media has undermined these ideals.

Air India purchased more than 200 Boeing aircraft in February. This was the third largest sale for Boeing ever. Joe Biden has praised the'strength of the US-India Economic Partnership'

He said: 'Together, with Prime Minister Modi I look forward in deepening our relationship even further, as we continue to face shared global challenges'.

A month later, US Commerce Secretary Gina Raimondo and a group senior executives from US firms visited New Delhi. She signed an agreement there with Indian leaders in order to discuss the coordination of investments between their semiconductor industries.

Raimondo, speaking at the Indian Embassy in Washington last weekend, said that there would be two technology ecosystems. One is consistent with democratic values and the other not.

'Economic miracle?'

India's demographic and economic fundamentals drive business interest, not just geopolitics.

The International Monetary Fund (IMF) expects South Asia to be the best performing nation among emerging and advanced economies in this year. It is expected that GDP will grow by 5.9%. Comparatively, the German, UK and US economies will stagnate while only the United States is expected to grow by 1.6%.

According to the Centre for Economics and Business Research, if India can maintain its momentum it will surpass Germany as the fourth largest economy of the world in 2026 and knock Japan off the third spot in 2032.

According to data from 2021, India's population of working age is more than 900 millions. Capital Economics predicts that India's workforce will surpass China in the next few decades.

The Biden administration is embracing India's growth expectations with unbridled excitement.

Donald Lu, US Assistant Secretary of state for South and Central Asian affairs, said to Indian news agency PTI that last week: 'We would like to be a part of your economic wonder.'

India's impressive growth in GDP and population belies an increasing headache.

Kaushik Bashu, a professor of economics at Cornell University, said, "If you look at all the data, including GDP growth and the national income, India is doing well." He added that 'the bottom end of India's not doing very well'. India's employment situation is the main reason.

India's unemployment remains higher than its pre-pandemic level at 7.1%. Basu said that the Indian jobs crisis, which has been described by some analysts as a "looming time bomb", is becoming one of the country's most pressing problems.

Growing manufacturing

Economists believe there is an easy solution to the unemployment problem: Build more factories.

Thamashi de Silva, a Capital Economics assistant economist, said: 'This globally competitive, labor-intensive manufacturing industry is the key to unlocking this demographic potential.

Capital Economics' Shah noted that manufacturing will account for less than 15 percent of India's GDP or employment by 2021. This is a relatively low percentage compared to other countries.

The need for additional assembly lines is a result of companies looking for new production centers.

Apple (AAPL), after experiencing supply chain snags on the mainland of China, has significantly expanded its production in India. Cook promised to continue investing in India during his last week's visit.

Modi and Foxconn's chief executive had met in India a few weeks earlier. The Taiwanese electronic maker that supplies Apple was one of India's fastest-growing manufacturers late last year. It is now looking to expand.

Apple's increased production and investment has raised hopes for a new electronics ecosystem to be formed in India and encouraged other multinationals, said De Silva.

Obstacles in front

India will benefit from companies diverting their supply chains away China. However, "several obstacles" will prevent this shift. Alexandra Hermann is a lead economist with Oxford Economics.

She cited strict labor laws, high duties on imports and logistical challenges. She told CNN that although India's tech-exports have been steadily growing in recent years but places like Taiwan and Vietnam "have so far benefitted more from the search of alternative import sources".

According to the World Bank, despite improvements in India's infrastructure, its logistics costs remain higher than those of China, South Korea and Japan, Malaysia, and Thailand.

Basu, of Cornell University, said that the government must now come up with an innovative plan to absorb excess labor through manufacturing jobs.

He said: "Do it right and you will reap the benefits." If you do it wrong, this will be very worrying for the Indian Economy.