A fascinating chart

Compared to China and Africa, India is remarkably well positioned on multiple fronts

Given all that has been going on in the world, I have been through a number of presentations on geopolitics. It is fascinating to see geopolitics through the lens of history and try to understand where we are today.

Most of the presentations start with the changing tides of global economic power. We have seen the rise and fall of great powers over the past 2,000 years, and over time the divergences are substantial. It is also my belief these changing fortunes are cyclical and also counterbalancing. Take the economic strength of India and China. Based on the work of Angus Maddison and looking at global gross domestic product shares through history (purchasing power parity terms), one can see the combined economic weight of India and China was over 50 per cent of the global economy in 1800. Then we see the weakening of both, though India’s collapse has been faster, with a bottoming out at 10 per cent of the global economy in 1980. From there we see the revival, which is ongoing and today the combined share of India and China is at 30 per cent of the global economy. From here India will grow faster with a greater catchup potential and the hope is that we can get back to near 50 per cent over the coming decades.
 

Another takeaway from all the presentations is that despite what we may think and perceive, global conflicts, expenditure on defence, the number of people in uniform — all these data points are much lower today than the historic norm. There was a peace dividend and maybe mutually assured destruction as a deterrent works. Despite the tragedy of Israel/Hamas and Ukraine/Russia, even casualties are not elevated today compared to long-term history. While we may not think so the world remains a far safer place today than it has been historically. Of course it seems that on the margin conditions are deteriorating rapidly and this may accelerate as the US continues to look more inwards.
 

A lesson for investors is that normally, geopolitical shocks have a short, sharp impact of at most a few weeks and then the prevailing macro comes back as the main driver of the markets. Except for the World Wars, it has normally been a good idea to buy any dip caused by geopolitical shocks. We have seen the same with the Russia/Ukraine war as well. Even for the bond markets, the safe haven trade may be in play for a short while, but it does not sustain. The bond bid dissipates quickly.

The most interesting chart I came across was one produced by Deutsche Bank. It points out over the coming years the single-most important chart to understand as a driver of geopolitical tensions is one showing the demographics of China/India/Africa. It points out that as of the end of 2022, all the three blocs had approximately the same population of 1.4 billion people. Their population profiles, however, diverge dramatically from here onwards.
 

For China, from 1.4 billion people today, the population may potentially decline to 750-800 million by 2100. This is based on the United Nations population database. India will see its population initially continue to rise and then come back to near 1.4 billion by 2100. Africa sees its population rise to 4 billion! These are only estimates and things can change, but these are the best estimates we have as of today. If these numbers are even remotely correct, this will have a huge impact on global politics and economics over the coming decades.
 

Even if the current slowdown in China is cyclical, and it eventually comes out of its debt and real estate funk, its longer-term growth prospects are weak. There is no country in the world, through history, which has grown rapidly with a declining and aging population. Productivity cannot compensate beyond a point for a declining workforce. How can China grow faster than 2-3 per cent, with these demographics? China today accounts for 30 per cent of global manufacturing value addition, double the contribution of the next largest, the US. It cannot remain the factory of the world with these population dynamics. There is a massive opportunity on China+1 supply chain independent of geopolitics.
 

After the global financial crisis in 2008, China rapidly closed the relative gap with the US economy even in dollar terms. It was about 20 per cent of the size of the US economy in 2008 (in dollars), peaking at about 80 per cent in late 2020, just before the pandemic. At the time, most commentators felt that China would cross the US economy even in dollar terms by 2030. However, with China slowing, the US accelerating and the strength of the dollar, rather than closing the gap further, since 2020, China has dropped to about 70 per cent of the US economy today. There is very little visibility when or even if China will ever cross the US. Many smart commentators think China has peaked in its relative share of US GDP.
 

Independent of its cyclical challenges, China is entering a period of much slower growth, simply based on demographics. As Bloomberg has pointed out, the global growth baton is being passed on to India and somewhere between 2035 and 2040, India should become, on a sustained basis, the largest contributor to global growth.
 

For India the chart makes the point our demographic window remains open. We have an unbelievable opportunity. We need to invest in education, skilling, and health care. These are the areas in which the maximum focus of public policy must be placed.

In addition to high technology we must accelerate labour-intensive manufacture. Labour-intensive production will have to migrate out of China because it simply does not have the people. We must get our fair share. This is based on ease of doing business, which has to improve.
 

For Africa, the demographic story is sobering. How will it create enough jobs and livelihood for this surging population? Global warming will only accelerate the pressures on agriculture. The pressure of African migration into Europe will intensify. Tragically boat-people issues will only get worse. Will this drive European politics further right as immigration becomes the number one issue across the continent? Given their already considerable fiscal challenge how will the old continent support this inflow of people? This has the potential to disrupt global geopolitics.
 

We are at an uncertain time for the global economy as we look into the future. India is remarkably well positioned on multiple fronts. We are self-sufficient in food, we have demographics in our favour, and renewables will drive energy independence. We have a remarkably vibrant startup ecosystem and capital markets. Software will continue eating the world and it is our strength. We have an opportunity to gain share in manufacturing. Infrastructure will release huge productivity.
 

We cannot afford to squander this opportunity. It will not come again.

The writer is with Amansa Capital