21 Januar 2024
Anyone looking to the future and wanting to see which countries will play an increasingly important role in the future cannot ignore India. In April of this year, India replaced China as the world’s most populous country with 1.43 billion inhabitants. Compared to China, Japan and Europe, India has the youngest population and, according to the United Nations, it will be the country with the highest proportion of working-age population in 2050. Ten years ago, India was the tenth largest economy in the world; today, the country is number five. The Asian subcontinent is also becoming increasingly important in geopolitical terms. Due to the tensions with China and Russia, the Western world has discovered India as a new beacon of hope and is investing a lot of energy in bilateral relations. Prime Minister Modi visited Australia in May and Washington in June to promote more investment. Germany’s Federal Minister of Economics, Robert Habeck, traveled to India to push ahead with negotiations for a free trade agreement. The question is whether the plans and expectations of Western countries can be realized with the realities in India and what hurdles need to be overcome.
What is hardly known in this country is the enormous digitalization push that India has imposed on itself in recent decades, generating extraordinary growth. At the end of the 1990s, India was still an extremely poor country in which 77% of the population had to live on less than 50 cents a day. Only two percent of citizens paid income tax and 40 percent of all births were not registered. In the early 2000s, the then Prime Minister Manmohan Singh realized that comprehensive digitization could offer a unique opportunity to modernize the country and lift the population out of poverty. After years of preparation, the Unique Identification Authority of India (UIDA) was founded in 2009 with the help of Infosys, which in turn launched the Aadhaar program, a huge database in which almost every Indian is now registered with a fingerprint and iris scan. By the end of 2022, 99% of all Indians will have received an ID number via Aadhaar. Every citizen will need this number to draw state pensions, receive food rations, get married, open a bank account or apply for a cell phone contract. Aadhaar is the largest biometric database in the world.
In 2016, the Indian government also withdrew old 500 and 1000 rubi notes and replaced them with new bills in order to dry up the black money market. In the same year, the Reserve Bank of India introduced a standard for the digitization of retail payments (UPI system), making India the world leader in the number of digital payments. In order to simplify trade in the country, the tax patchwork in the various federal states was dissolved and a uniform nationwide sales tax (Goods and Services Tax) was introduced on July 1, 2017 (18% on average). Taxes are paid online and data is reconciled online.
All these measures have curbed corruption in India and enabled more than 400 million Indians to escape poverty. The original Digital India Act is being renewed and is to be introduced as a bill in parliament this year. The economy is also on the rise. The massive slump in gross domestic product of minus ten percent in 2020, caused by the coronavirus pandemic, was more than compensated for with growth of 8.8 and 8.0 percent in 2021 and 2022.
As remarkable as these developments are, the challenges are just as great. Just like Xi Jinping in China, the current Prime Minister of India, Narendra Modi, has the dream of positioning India as an independent economic world power. But Modi is a Hindu nationalist. Step by step, he is trying to keep dissenters and minorities, mainly Christians and Muslims, who make up 20 percent of the population, within their boundaries. They are supposed to adapt to the rules of the majority. Among his supporters, Modi has mobilized tens of millions of dollars for his election campaign next year. The authoritarian traits of Modi’s BJP party are leading to polarization in Indian society and increasing violent riots.
In addition to these political problems, there are still considerable economic challenges. Despite the enormous progress made, a third of the population still lives in poverty and 45% of the population depends on agriculture for their livelihood. India still does not have a free trade agreement with the EU and demands customs duties on imported goods from Europe. Bureaucracy and corruption remain a huge problem and slow down the willingness of international corporations to invest. Their investments fell by 16 percent in 2022 for the first time in decades. India is also suffering excessively from climate change and air pollution, which is slowing down the economy and leading to food shortages. The tomato harvest, for example, is suffering due to an initially severe heatwave this year, followed by flooding. The price of tomatoes has quadrupled as a result.
To summarize: India’s importance in a multipolar world will almost certainly increase. The world’s most populous country is not a nation that dreams of annexing islands or territories or knocking Europe or the USA off their thrones. India acts pragmatically and seeks partners, not friends. This is precisely why it is becoming an increasingly important player on the world stage as a counterpoint to the great power ambitions of China and Russia.
With this in mind, investors should keep an eye on the BSE Sensex, the best-known and most important share index on the Bombay Stock Exchange in India. It tracks the performance of the 30 largest companies traded on the Mumbai Stock Exchange and shows an impressive performance. Over the past three years, the Sensex has significantly outperformed the DAX and the S&P 500 index – both in local currency and in euro terms. The Sensex is also clearly ahead over a ten-year period. And there is much to suggest that India’s stock market will continue to achieve above-average returns over the next ten years.
