India’s Middle Class Needs Free Trade

The country’s market for consumer goods isn’t nearly large enough to lure foreign companies.

Jan. 5, 2023

East is East

“East is East” explores the most important news from India and South Asia with a focus on the region’s domestic politics, economics and geopolitics. It appears every other week on Thursday evenings.

By guest author Sadanand Dhume. Sadanand Dhume. He writes a biweekly column on India and South Asia for WSJ.com. He focuses on the region’s politics, economics and foreign policy.

Mr. Dhume is also a resident fellow at the American Enterprise Institute in Washington, D.C. Previously he worked as the New Delhi bureau chief of the Far Eastern Economic Review (FEER), and as Indonesia correspondent for FEER and The Wall Street Journal Asia.

Mr. Dhume is the author of “My Friend the Fanatic: Travels with a Radical Islamist,” (Skyhorse Publishing, 2009), which charts the rise of the radical Islamist movement in Indonesia. His next book will look at India’s transformation since the election of Prime Minister Narendra Modi in 2014.

Mr. Dhume holds a bachelor’s degree in sociology from the University of Delhi, a master’s degree in international relations from Princeton University and a master’s degree in journalism from Columbia University. He lives in Washington, D.C. with his wife, and travels frequently to India.

Journal Editorial Report: The year’s worst from Kim Strassel, Kyle Peterson, Mary O’Grady, Dan Henninger and Paul Gigot. Images: Shutterstock/Getty Images/Zuma Press Composite: Mark Kelly.

Related Video

With his love for alliteration, Prime Minister Narendra Modi often talks India up by referring to its three Ds: democracy, demography and demand. They are supposed to “propel the nation to new heights of economic progress,” to quote one of his tweets. The slogan underscores a widely held belief in India on which Mr. Modi’s economic policy relies—that the country has a large market irresistible to foreign firms. Unfortunately, that isn’t true.

Since taking office in 2014, Mr. Modi has reversed three decades of trade liberalization by raising tariffs and abandoning trade pacts such as the 15-member Regional Comprehensive Economic Partnership. Instead, India seeks to boost manufacturing by pouring 2 trillion rupees (USD 24.3 billion) into production-linked incentives for firms in about a dozen industries, including automobiles, solar panels and electronics. This strategy assumes that India boasts such a large domestic market that it will continue to attract foreign firms even as the country turns inward. But unlike China or the U.S., India doesn’t have a large enough market to make such policies work.

One can see how Mr. Modi and others came to believe in the myth of the massive Indian market. It’s easy to confuse the size of a country’s economy or population with the size of its domestic market. India’s gross domestic product of USD 3.2 trillion makes it the fifth largest in the world. This year India will overtake China to become the world’s most populous nation.

A population of 1.4 billion does indeed translate into a large market for some products. About 1.2 billion Indians own cellphones, of which half are smartphones. Facebook has 330 million users in India, nearly twice as many as in the U.S. India was the third-largest consumer of oil in 2021, behind America and China. According to the Stockholm International Peace Research Institute, India was the largest arms importer in the world between 2017 and 2021. India was the top weapons export market for Russia, France and Israel.

But the size of India’s consumer market has long been hyped. A widely cited 2007 McKinsey report giddily predicted that by 2025 “India will become a middle class country” with 583 million middle-class consumers. In 2017, Morgan Stanley said India’s 400 million millennials were “one of the world’s strongest sources of untapped economic potential.” It described them sitting “in Mumbai cafés, browsing social media accounts on their smartphones while occasionally shopping for new shoes online.”

Reality is much more drab. Though India has many potential consumers, they have very little purchasing power, economists Shoumitro Chatterjee and Arvind Subramanian wrote in a 2020 paper. Though the country’s population matches China’s, India’s “true market” is only about 15% to 20% as large. India represents only 1.5% to 5% of the global market.

The Pew Research Center estimates that only 66 million Indians—less than 5% of the population—have a middle-class daily income of between USD10.01 and USD20 in purchasing-power terms. In China, that number is 493 million, or 34.9% of the population. In short, the vaunted Indian middle class wields much slimmer wallets than its Chinese counterpart.

Take cars, a consumer good that’s emblematic of the middle class world-wide. In 2021 Chinese bought 26.3 million cars, more than seven times as many as the 3.7 million cars Indians purchased that year, by the International Organization of Motor Vehicle Manufacturers’ estimate. For luxury brands like BMW, the Chinese market is nearly 100 times as large as India’s.

The number of Indians who can afford to watch movies on Netflix, FaceTime friends on an iPhone, or stop by a Starbucks for a cappuccino remains vanishingly small. Less than 3% of Netflix’s 223 million users are in India—despite the company’s charging them less than half what it does U.S. consumers. India’s vaunted cellphone market is dominated by inexpensive Chinese brands like Xiaomi. Indians bought fewer than six million iPhones in 2021. Chinese bought about 50 million. Starbucks operates more than 6,000 stores in China, but only about 300 in India.

India’s middle class owes what purchasing power it has to the country’s previous trade liberalisation and deregulation. In their paper, Messrs. Chatterjee and Subramanian point out that exports drove much of India’s high growth after the advent of economic reforms in 1991. Abandoning the country’s orientation toward exports, Messrs. Chatterjee and Subramanian say, is “akin to killing the goose that lays golden eggs.”

Mr. Modi is right to talk up India. That’s his job. But Indian policy makers shouldn’t drink their own Kool-Aid. For now at least, India needs access to global markets a lot more than most global firms need access to India.

Narendra Modi addresses the media at the Parliament House in New Delhi, India, Dec. 7, 2022.Photo: Prakash Singh/Bloomberg News

www.wsj.com