China and India: switching lanes?

While India’s growth is expected to speed up, China’s growth is expected to slow through to 2030.

India’s demand for commodities is slated to grow rapidly, supported by favourable demographics, urbanisation, the expansion of manufacturing and exports and the build-up of infrastructure.

Meanwhile, while China’s demand for global commodities will remain massive, the pace of growth in demand will slow, with India expected to pick up some of that shortfall.

What does this period of transition look like and what does it mean for these nations which are both crucial to global growth?

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China slows

India is poised to become the third largest economy by the end of this decade, even by conservative forecasts.

Our recently published report on India’s growth prospects concludes that its economy can easily grow above 6 per cent annually, culminating in nominal gross domestic product (GDP) higher than US$7 trillion by 2030.

A determined pursuit of wide-ranging reforms could ramp-up real GDP growth to 8 per cent. This contrasts with China’s projected growth slowdown to below 3.5 per cent by 2030.

There are three emerging themes underpinning India’s growth.

The first is India’s public capital expenditure is rising strongly, the second is  India is expanding its manufacturing and exports and the third is that India replaced China this year as the most populous country.

The average population age is 28.4 years, which is nearly 10 years younger than China’s.

All these factors will be reflected in rapidly rising per capita incomes, which will stoke demand for goods, services and infrastructure.

Commodity intensive

As India’s economy picks up pace, its commodity demand will naturally follow.

We estimate that, even in a moderate growth scenario, India’s annual demand for major commodities (oil, coal, gas, copper, aluminium and steel) could grow by more than 5 per cent till 2030. This contrasts with expectations that growth in China’s demand for these items will slow to 1–3 per cent.

But to be fair, India’s commodity demand will grow rapidly from a relatively lower base.

India’s emerging economic growth drivers – manufacturing, exports and capex – are reminiscent of China’s growth take-off that occurred around the turn of the century.

However, the scale and performance of these drivers for India are unlikely to match China’s for several reasons

Unlike China, India does not have a clear opportunity to become a global manufacturing leader for a wide variety of goods.

In fact, India has a ‘late-mover disadvantage’ in key trade segments like electronics, which policymakers are battling through subsidies and other incentives.

India is competing with other Asian economies, such as Vietnam, for a share of exports that China stands to lose because of supply chain relocation.

India’s economy is still service-dominated and will likely remain so for longer, unlike China where the industrial sector was the big driver of growth.

Meanwhile, China’s status as a behemoth in commodity markets is difficult to challenge. It consumes more than 50 per cent of global industrial metals and steel production, while India’s share is merely 2–6 per cent.

India, in short, has a lot of catching up to do over the coming decades, while China will continue to dominate the commodity market in the foreseeable future.

But even if India cannot become a trend-setter, it can become a significant influencer.

A key takeaway from our forecasts of India’s commodity demands to 2030 are that it will find it hard to quickly replace fossil fuels in its energy mix while trying to meet the energy needs of a rapidly growing economy.

Oil’s share in the mix may still rise by 2030, while that of coal may not fall to a desirable level from the standpoint of energy transition.

Natural gas is India’s big bet in curtailing carbon emissions and supporting the transition to low-carbon fuels. Metals and bulks may see a strong rise in demand as infrastructure build-up, rising urbanisation and per capita income provide ample support.

India's per capita income set to rise rapidly

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Pick up the slack

As the two largest Asian economies diverge in their economic growth trends, what will it mean for global commodity markets? Can India pick up the slack that will be left by a slower China?

Our analysis indicates that India will be able to pick up roughly half of the slack left by a slower China in the global commodity markets. However, this proportion will vary considerably by commodity.

Among energy commodities, the pick-up will be most prominent for oil and coal. India will scale up its efforts to decarbonise by 2030, but those efforts may be frustrated by the nation’s rapidly growing energy needs, a significant share of which may still have to be met by fossil fuels despite renewable energy sources gaining momentum.

For gas, China’s own consumption is expected to grow at a healthy pace despite the economic slowdown.

The copper market may not see much downside from a slower China, as the transition to cleaner energy sources will protect its demand growth. In fact, stronger demand from India may eventually leave the global copper market “in the green.”

Our projections of India’s commodity demand by 2030 indicate that domestic production will need to be ramped up and policy steps to support this will be essential.

The benefits of such policy support are likely to take some time to appear and in the meantime India’s dependence on imported commodities will rise.

Energy transition has been an important determinant of commodity demand for both China and India.

The aim to reduce carbon emissions will have an impact across commodities, with demand growth for fossil fuels (except natural gas) slowing after 2030 as renewable energy takes over.

Encouragingly, India’s transition is happening faster than expected and this could help address energy security risks. Solar capacity has risen by a factor of five since 2010 and wind by two-and-a-half since 2015.

A target of 500GW for solar and wind power by 2030 will enhance annual output by 41GW through 2030.

This may temper the trajectory of coal demand, but demand for gas will likely remain strong, given its status as a transition fuel in the move to decarbonisation.

All this means while India will pave its own way but its impact on global commodities will be huge.

Soni Kumari is Commodity Strategist, Daniel Hynes is Senior Commodity Strategist, and Dhiraj Nim is an Economist/FX Strategist at ANZ Institutional.