Will India Build Infrastructure Like China Did?

Growth Spurs Commodities Consumption in China and India

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In the world of commodities, production comes from specific areas of the world where the geology or soil supports efficient output of raw materials. When it comes to consumption, these staple goods are critical around the globe. Almost everyone on planet Earth is a commodity consumer; we require nutrition, energy and shelter and raw materials are the core building blocks that meet those needs.

China's Rapid Growth of Infrastructure and Commodities Consumption

Over the past few decades, high growth rates when it comes to population and wealth in China has made the Asian nation the world’s leading commodity consumer.

As of August 2016, approximately 7.345 billion people on planet earth and over 1.37 billion were within China’s borders. With 18.65 percent of the world’s citizens in China, that nation requires a commensurate share of the resources of the world.

Moreover, the rapid growth rate that changed China from an emerging market economy to the world’s second-largest gross national product meant that building infrastructure and moving the nation into the twenty-first century required more than its pro-rata share of commodities. The Chinese government, over recent years, has secured substantial flows of goods as a result of supply transactions, investment in existing production or where possible, direct control of raw material production.

One example of the latter was China’s purchase of 100 percent of the world’s largest pork producer, Smithfield Foods, in 2013. The acquisition of this U.S. domicile company is likely to have a significant impact on the availability of ​hogs/pork around the world in the years ahead.

 

If you ask any commodity trader which nation is the greatest player in raw materials today, the answer will always be China. China has been a huge producer and the consumer because of its population and economic growth over recent years. However, while China will always be a critical factor in commodity supply and demand, other nations in the world that are likely to emerge as major, if not dominant, consumers in the years to come.

India's Growing Economy

The United States has the world’s largest economy, but it is only in third place when it comes to population. The nation with the second largest populous is India. More than 1.266 billion people live in the country, a number that rivals China and is almost four times the size of the United States in total inhabitants. With over 17 percent of the world’s people in India, the economy of the nation is the world’s seventh. However, in 2015, economic growth in the emerging nation was at 7.3 percent, higher than the growth rate in China which was at 6.9 percent, and much greater than U.S. growth which was around the 2.4 percent level.

The total size of the Indian economy in 2015 was at around $2.09 trillion, while the U.S. economy was at just under $18 trillion and China’s was $10.982 trillion. Given the size of the Indian population and the highest rate of economic growth for a nation with over 31 times its closest competitor based on 2015 GDP numbers in real dollars, there is a tremendous upside growth potential for India. As the world’s second most populous nation, the demand for raw materials from India will grow dramatically in the years ahead as the country moves from an emerging market to a major consuming nation on the world scene.

The economic growth in India and the size of its population means that the country will require more raw materials in the years ahead. If India’s economy growth at a fraction of the rate seen in China over past decades, the people of India will be eating more food, using more energy and building more infrastructure which will put additional strains on the world’s limited production of commodities. More raw material demand will translate into higher prices for the future.

Will India Be the New China?

Additionally, while the growth rate of the Chinese economy dropped from double-digits to 6.9 percent in 2015; remember that Chinese growth is still quite amazing even these days. The total size of the Chinese economy had swelled dramatically over recent years and even a much lower rate results in a much bigger nominal growth number for the overall economy.

China will always be the world’s largest consumer of raw materials because of its population and growing wealth. However, India could be hot on China’s heels in the years to come because of its total population and the trend in economic growth. China and India are both billion-people-plus nations, the only two on earth, and together they amount to more than one-third of all people inhabiting our world.

As the Chinese economy grew and became the second largest in the world, diets changed to include more complex proteins, and individual wealth grew causing consumers to buy more goods. We are likely to see the same changes in India in the years ahead if the rate of growth continues on its current path. The demand size of the fundamental equation for commodities continues to grow with population and producers will have to work overtime to satisfy future demand. Competition for raw materials around the world is likely to increase causing prices to go along for the ride in the years to come.