India's Size Illusion

India’s Size Illusion

Arvind Subramanian and Josh Felman,

PROVIDENCE – Russia’s invasion of Ukraine has upended the liberal international order, forcing India to reassess its security and economic strategies.

The government’s decisions will be shaped by its assessment of the country’s military and economic strengths, but it should resist the temptation to equate them with India’s size.

True, India’s economy is undeniably large. According to the International Monetary Fund, India is the world’s third-largest economy in purchasing-power-parity terms, with a GDP of $10 trillion, behind China ($27 trillion) and the United States ($23 trillion).

At market exchange rates, its GDP of $3 trillion makes it the sixth-largest economy, behind the US, China, Japan, Germany, and the United Kingdom.

But India’s economic size has not translated into commensurate military strength. Part of the problem is simple geography.

Bismarck supposedly said that the US is bordered on two sides by weak neighbors and on two sides by fish. India, however, does not enjoy such splendid isolation. Ever since independence, it has been confronted on its Western frontier by Pakistan, a highly armed, chronically hostile, and often military-ruled neighbor.

More recently, India’s northern neighbor, China, also has become aggressive, repudiating the territorial status quo, occupying contested land in the Himalayas, reclaiming territory in the east, and building up a large military presence along India’s borders.

So, India may have fish for neighbors along its long peninsular coast, but on land it faces major security challenges on two fronts.

Despite these challenges and its sizable economy, India has struggled to generate adequate military resources. Defense expenditure is notoriously difficult to estimate, especially for China and Pakistan, which have opaque political systems.

But annual combined defense spending by India’s two adversaries is likely to be three times the $70-75 billion that India spends. And the effective gap is probably even larger because India’s politically driven emphasis on military manpower has crowded out spending on military technology.

In short, India may have a large economy, but dangerous geography and domestic politics have left it militarily vulnerable.

Then there is the question of market size. As Pennsylvania State University’s Shoumitro Chatterjee and one of us (Subramanian) have shown, India’s middle-class market for consumption is much smaller than the $3 trillion headline GDP number suggests, because many people have limited purchasing power while a smaller number of well-off people tend to save a lot.

In fact, the effective size of India’s consumer market is less than $1 trillion, far smaller than China’s and even smaller relative to the potential world export market of nearly $30 trillion.

But you wouldn’t know it from India’s current economic strategy. As we have pointed out elsewhere, India has actually turned inward in the past few years, increasing tariffs, subsidizing favored firms, and staying out of regional integration agreements in Asia, the most dynamic part of the world economy.

Strikingly, this inward turn was not the result of economic failure. Since the 1990s, when trade was liberalized, India’s economy has grown by an average of 6.5% per year, propelled by a 13% average annual increase in exports of goods and services in dollar terms, a rate surpassed by only China and Vietnam.

But this success has proved to be an orphan, abandoned in favor of a tried-and-tested policy that (in more extreme form) failed miserably for three decades after 1950.

One possible explanation for the government’s decision is that it has succumbed to the illusion of size. It has repeatedly claimed that India’s economic promise is based on the “3Ds”: democracy, demography, and demand.

And it has been concluded that domestic and foreign investors can be lured into tapping this ever-elusive demand through subsidies and protection.

The temptation of size is also evident in the security domain, where India has refused to condemn explicitly Russia’s invasion of Ukraine, despite the humanitarian tragedy it has unleashed.

This has created an awkward irony: Democratic India has implicitly aligned itself with an authoritarian axis, two of whose members, China and Pakistan, are hostile neighbors.

But India has calculated that, because it is indispensable to addressing the rise of China, its stance toward the Russia-Ukraine conflict will have no serious consequences for its relations with the West.

In reality, however, India’s response to Russia’s invasion is more a reflection of weakness than an expression of independence.

If India were truly free to choose, it would uphold the inviolability of territorial sovereignty, especially that of weaker countries.

Finding a way out of this unenviable situation will require considerable effort. Most obviously, India will need to depend less on Russia for arms supplies.

Russia itself will be too damaged to, and too dependent on China to be willing, to remain a reliable, trustworthy supplier.

More subtly, it will need to augment its defense resources by encouraging faster economic growth and maximizing the value of military spending.

The latter will entail addressing key shortcomings such as the inefficiency of domestic defense manufacturing, the paralysis of procurement decision-making since the scandals of the 1980s, and the imbalance in resource allocation that favors personnel over sophisticated hardware.

On the economic front, India should look beyond its borders and set its sights on the global market – and recent developments are creating an exceptional opportunity for it to do so.

The Russia-Ukraine war will heighten investors’ sensitivity to the nature of the political regimes in countries where they operate, which will intensify existing pressures to shift production out of China.

India is uniquely positioned to grasp this opportunity if the country would only pivot to seize it.

India needs to accept and act in line with, its current status as a middling power. Over time, rapid and sustained economic growth could make India the major power it aspires to be.

Until then, it must look past the illusion of size and reconcile itself with strategic realities.

Arvind Subramanian is a senior fellow at Brown University and a distinguished non-resident fellow at the Center for Global Development. Josh Felman is Director of JH Consulting.

Copyright: Project Syndicate, 2022.