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India is the world’s most populous country and has long since overtaken the People’s Republic of China in terms of economic growth. If the boom continues, will India become the “new China”? Investors should remain cautious, says Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM, because the Indian model reveals structural weaknesses. These are particularly visible in the corporate sector.

India is one of the engines of the global economy. Its rapid growth has made the country the sixth-largest economy in the world; in purchasing power parity terms, it already ranks third. Yet behind this success story lies a puzzling weakness: strong corporate profits combined with weak investment activity.

Indian companies are currently generating profits equivalent to around six percent of gross domestic product (GDP) – a historically high level. Unlike in China, however, a substantial share of these earnings is not being channelled into expanding production capacity, infrastructure or industrial value creation. According to the World Bank, gross capital formation stands at just under 30 percent of GDP, while China reaches well above 40 percent.

“This divergence is a key difference between the two economies,” explains Fischer. While China is systematically expanding its industrial base and building technological capacity, many Indian companies are acting more cautiously. The result is slower productivity gains, weaker industrialisation and a limited creation of high-quality jobs.

This reluctance is particularly pronounced among medium-sized companies. While large conglomerates such as Tata, Reliance and Adani continue to invest heavily in infrastructure, semiconductors and digital technologies, “many medium-sized companies are increasingly focusing on asset-light business models,” says Fischer, “or shifting wealth into family offices instead of investing in new production facilities.”

This is of central importance for India’s future development path. The country has already successfully experienced a consumption- and services-driven growth surge. “The next step, however, requires a stronger industrial base,” says Fischer. Higher investment in manufacturing, infrastructure and technology will be crucial to sustainably increasing productivity and incomes. “High profits alone do not create broad-based prosperity,” Fischer explains. Only reinvestment in innovation, capacity and employment can generate long-term economic momentum.

There is also a timing factor. India is currently benefiting from a young and growing working-age population. However, this demographic window will close in the coming decades. “The current phase therefore offers a historic opportunity to raise the country’s economic base to a higher level of productivity,” says Fischer. This opportunity should be used.

For investors, India remains one of the most attractive long-term growth stories worldwide. “The decisive indicator, however, will be whether the country succeeds in redirecting high corporate profits more strongly into real investment in the future,” says Fischer. If this transition succeeds, India could achieve its next major development leap. Otherwise, growth risks falling short of its considerable potential.