India is at an inflection point. Its recent period of significant growth—faster than the global average—has stalled in the face of global headwinds against trade, volatile commodity markets, stagnant private investment, weaker domestic consumption and constrained government spending in the wake of recent fiscal and monetary reforms.

At the same time, Asia is becoming the world’s powerhouse and economic center. New research from the McKinsey Global Institute finds that Asia could generate more than half of the world’s GDP by 2040 as cross-border flows shift toward the region, which is rapidly integrating; with 60% of goods traded, 56% of greenfield foreign direct investment (FDI) and 74% of journeys by Asian air travelers taking place within the region.

This research identifies 4 distinct sub-Asias—diverse groups of economies with characteristics that complement each other, which are fast becoming increasingly interconnected. As a result, dynamic new flows and networks are appearing, redefining globalization as we know it. The new era will be one of regionalization, and Asia is taking a lead. Historically, India—and other countries in ‘Frontier Asia’ (Bangladesh, Sri Lanka, Kazakhstan, Uzbekistan, etc)—have had relatively low levels of integration when compared with the rest of the region; only around 31% of their flows are intra-regional. Yet, how they now respond to these shifting flows, and the opportunities they present, could be key in defining and delivering its next chapter of growth. Chinese President Xi Jinping’s recent meeting with Prime Minister Narendra Modi could catalyze accelerated economic collaboration between the two countries.

India offers three major ingredients to the broader Asian economy: services, which account for 53% of India’s GDP; a young labour force (younger than China’s median age by around ten years); and new markets for the rest of the region—even factoring in the downturn, GDP in India is expected to grow at well above 5% for the coming period, and incremental consumption is expected to reach $2.4 trillion by 2030.

Through adding the Asia focus, India could expect to target four opportunities to help drive its next chapter of growth. First, as more advanced Asian countries like China move up the economic development ladder, phasing out manufacturing in favour of a shift to R&D and more knowledge intensive manufacturing, there is room for India to seize the baton and become a larger sourcing base for global supply chains. Just the global sourcing value of mobile handsets is over $500 billion in scale, and India could aspire for a 15-20% share of this footprint. Some inroads are being made. For example, India is less reliant on imports of intermediate inputs and final goods, with inputs peaking at 9.6% in 2011 and dropping to 6.2% in

2017. But to fully realize this opportunity, more needs to be done, particularly in terms of improving infrastructure. Investments are needed to improve the logistical backbone supporting manufacturing, incentives are needed to encourage future investments in R&D, and large-scale innovation hubs need to be developed to move manufacturing to the next phase and help to capture the demand opportunity. The recent move towards an attractive corporate taxation regime could provide the much-needed ignition to attract more investment for Make in India.

Second, there are opportunities for India to benefit from the flows of capital and investments powering development as Asia integrates more closely. ‘Advanced Asia’ (Japan, South Korea, Singapore) and China have been huge contributors to the development of ‘Emerging Asia’ (small highly interconnected economies like Indonesia, Malaysia, Philippines, Thailand, Vietnam, etc), with China accounting for 42% of total Asian outbound FDI in 2013-17 and 43% and 61% of Emerging Asia’s imports and exports respectively. India and China have a history of competition, thus flows between the two countries both in terms of trade and people are not as strong as with other countries across the region. So, whilst India is beginning to attract investment from firms across Asia—Softbank, for example, has led several rounds of funding for Indian unicorns—more needs to be done to realize the potential opportunity of investment flows from other countries, and this may mean ‘looking East’.

Third, when it comes to innovation, East Asia has emerged as a leading hub, rivalling the leading innovation hubs globally. East Asia has already gained pole position in driving innovation

relating to key disruption themes such as electric mobility, 5G telecom, and renewable energy. Nearly 65% of global patents stemmed from Asia between 2015 and 2017, derived from the 50 fastest rising innovation cities in Asia, with an opportunity for Indian firms to be a part of this Asia-wide innovation arc.

Finally, a rapidly growing Asia is catapulting its major cities into leading consumption centres, that offers a ripe market opportunity for Indian businesses ranging from IT services, tourism services, generic pharmaceuticals, automotive components, agrochemicals, and so forth. Just with China alone, India runs an over $50 billion of trade deficit, that could be narrowed down by targeting these export opportunities. Our previous MGI research found that about 420 cities in emerging markets could generate 45% of global growth, many of them residing in Asia, that Indian firms could target.

The Asian century is well and truly underway. As globalization gives way to regionalism, and Asia takes a leading position, India could look to many of the opportunities arising out of the region’s rapid integration and shifting networks and flows to help drive its next chapter of growth.

Rajat Dhawan is a Senior Partner of McKinsey & Company and leads the Advanced Industries Practice for the Firm across the Asia-Pacific region. He is based in Delhi.

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