India is ripe for an investment boom: Nomura’s Rob Subbaraman

India seems to be caught in a perfect storm with every possible macro variable stacked against it, especially in wake of the tariffs slapped by the US against India and the current geopolitical turbulence in West Asia. But a long-time Asia observer Rob Subbaraman, head of global macro research at Nomura, believes India is primed for an investment boom as China comes to terms with its own growth compulsions as its exports engine cools off. While India may not see a manufacturing effect as powerful as that of China, even “at half its intensity” the growth payoffs would be tremendously beneficial for the country. Subbaraman, in an interview with Fortune India, mentions that while the narrative in India is more pessimistic, the long-term growth arc is unmistakably in favour of the country. Edited excerpts:

What is your assessment of China's overcapacity problem? How has it evolved through Trump 1.0 into Trump 2.0?

Even prior to Trump 1.0, there were emerging signs of a China 2.0 shock. So, irrespective of the US tariffs, China was facing this challenge of producing more than it could consume domestically. This is to do with their very focused industrial model that led to too much domestic production without enough focus on lifting consumer spending. A lot of this production was increasingly being exported overseas.

Through Trump 1.0 and into Trump 2.0, two things have happened. One, the overcapacity problem in China has intensified. Two, on the demand side there was the pandemic, followed by the consequent lockdown across the world, but particularly in China, followed by a property market collapse. That really dented consumer confidence. So, consumption has been weak in China ever since the pandemic and the property market slump. Yet, China continued with its production and investment as exports stayed strong.

Nomura’s China chief economist, Dr. Ting Lu, has a chart showing the two big engines of China growth in the past: exports and property investment; both used to be very strong. Of late, even as property investment line is flattening out, with a downward slant, exports continue to rise.

The other part is that under the Trump administration's second term, there's been a massive increase in US tariffs on China, and as a result, China redirected its exports towards other regions such as Europe and Asia, in particular. Hence, the overcapacity problem in China is now being disproportionately felt in Europe and Asia.

There's always this black box around China's cost of production. Did they play the volume game, or is it now that they are selling at a loss? Could you throw some light on the cost economics?

It's hard to be specific as the data are not great on that. But qualitatively, 10–15 years ago, China was producing, and I don't mean just Chinese companies, but multinationals operating in China with bigger margins, and larger profits. But those profits dwindled with the intensification of this oversupply problem.

We hear a lot more about price wars in China, which is the whole reason why the government, last year, started an anti-involution campaign: to try to stop this behaviour where, in certain industries, companies were just striving to gain market share even if it meant operating at a loss. One macro sign of the volume game and cut-throat price wars is China’s GDP deflator, which has been negative, indicating deflation, for 12 quarters in a row.

Some surveys reveal that the share of loss-making state-owned enterprises (SOEs) has been increasing. Over the past 12 to 18 months, price wars were visible in solar panels, and, most recently, in the electric vehicle sector. So, the short answer is yes, margins [of Chinese companies] have been getting thinner over time.

How much of China’s export surplus is driven by MNCs and how much by Chinese-origin companies?

In terms of incremental investments, there's not much coming from MNCs, with FDI inflows having dramatically slowed down in recent years. While a large share of China's exports is by multinationals operating in China, that share is steadily going down. Of China’s total exports, the share of foreign-funded enterprises was 54.7% in 2010, 36% in 2020 and 27.1% in 2025. The decline shows how Chinese-owned enterprises have grown rapidly as the economy opened up to trade and investment and, eventually, dominated China’s exports.

The other challenge is that, at face value, it looks as if exports from China to the US have slowed dramatically. But it's not as bad as those headlines suggest because there has been the redirection of trade, called transshipments to get around the high US tariffs, to third countries. Through these countries, the shipments go to the US.

At the same time, MNCs are looking for alternative manufacturing hubs outside China. Around 20–25 years, MNCs in China were not just benefiting from cheap labour and costs but also enjoyed the potential of a huge burgeoning domestic market to sell into. That market is still there, but consumption isn’t as strong. As a result, MNCs are looking to diversify, partly for geopolitical reasons and partly because it's become more expensive in China as competition from locals has become intense. Besides, there's a pull factor that other emerging markets are opening up: India is an example of that. Indonesia, potentially, is the other. Hence, after the past couple of decades of massive FDI, possibly excessive, into China we're now seeing some of those excesses being reallocated elsewhere.

Have you heard of the flying geese model?

No.

A Japanese economist Kaname Akamatsu came up with the term in the ’30s. The idea is that all economies started at some point being low income, agricultural-based, and then you have economic development. As you develop, costs and wages go up, and then ultimately companies will start to look for new production centres overseas where there's cheaper labour.

The idea in the geese model was: Japan was the Mother Goose. After World War 2, it industrialised, producing textiles, and then it started to move into consumer electronics. But then costs went up, Japanese companies started to invest in what was then known as the Asian tigers: Taiwan, Singapore, Hong Kong. Then their costs went up, and then in the 1990s, the shift was towards China and ASEAN.

But the interesting aspect here is that the Asian crisis in '97 decimated ASEAN: Thailand, Indonesia, Philippines, and Malaysia. So, these economies kind of never really experienced flying geese. Everything went to China because the country wasn't affected by the Asian crisis as much.

What's happening now is, maybe there was this period where ASEAN was being left out, but now we're starting to see ASEAN and, to an extent, India--though the numbers don't show it so much yet--growing in importance as FDI destinations. So, the new part of this flying geese model is coming to ASEAN and India.

But the only difference is the velocity of growth. If the flying geese model was never exploited at scale by other Asian countries, the payoffs for ASEAN nations, including India, may not necessarily play out the way it did for China because there is surplus capacity that China continues to hold in just about every industry?

You're right. We are seeing some reversal of that, but we're not going to see anything to the extent that China experienced. That was quite an unusual situation.

So, to that extent, do you see a manufacturing boom in India playing out any differently as services have been our mainstay?

Interestingly, my colleague Sonal Varma, who covers India, tells me that most Indians she meets are very pessimistic. But I'm bullish on India going forward.

Let me give you a few points. One, you're right that India kind of went from agriculture to services and missed manufacturing in its development. That has a lot to do with historically not enough focus being put on infrastructure investment, on structural reforms, deregulation, labour market, and ease of doing business. I'm getting more optimistic on those things. Look at what's been happening in terms of the amount the government is spending, capex share as percentage of GDP, what's happening in terms of labour deregulation, and VAT rationalisation. There's a lot of things that essentially indicate it's getting easier to do business in India. So, the environment for becoming a manufacturing hub is ripening for India, and I expect rapid adoption of AI in India to greatly improve productivity, notwithstanding some disruptions along the way.

Second, incremental FDI that was going to China will get redirected towards other big EMs, and India is a prime candidate. Whether that is Chinese companies or MNCs.

Third, given the geopolitics, India stands out as a market to diversify into. Based on IMF data of the world's top economies, India is very close to overtaking Japan. It's only two or three years when India could be the third biggest economy after the US and China. India’s domestic market is getting to that critical mass. If it grows at a nominal rate of 10%, it's kind of like China in the early 2000s, suddenly foreign companies cannot not be in India. The opportunity set is there, so long as the authorities don't mess it up.

But unlike China when it welcomed MNCs post-WTO, there was a tech transfer. The Chinese not only built products for MNCs but developed their own R&D and created their own propriety IPs. Today, that same tech transfer Chinese companies are not willing to do in India. Even MNCs which are coming into India, the tech remains with them. So, to that extent, the rub-off may not necessarily be to the advantage of Indian companies.

I don't think it's a huge difference. When China opened up to WTO, there were requirements that a defined output of foreign companies would have to come via a joint venture, so much would have to be sold domestically and so forth. There were, in contracts, agreements around certain tech transfers. But at the same time, US companies, which were predominantly doing it, kept their most important IP with them. The designing of technology and things like that were still done in the US. They were only using Chinese labour.

But as you start to see these multinational companies setting up shop in India, it does lead initially to a lot more competition, which is good. That leads to efficiency gains. You'll also see, with JVs, transfer of skills and technology. It was the same in China — it took time, but China learnt a lot from the massive FDI that came in, and that FDI also generates more domestic investment. The investment begets more investment, and that gets growth going.

Over time, India will learn things even if companies are not willing to share everything. I agree that it's not going to be as powerful as it was for China but even if it's half as powerful, I think it will be a huge benefit for India.

But again, the difference is about scale. Even when companies come in, they get their own ecosystem partners. Apple has become the largest exporter of mobile phones from India but it's still largely an assembler. The economics of component manufacturing will work only if you have a strong domestic market to cater to?

What you're describing is what happened to all countries when they first get a big influx of FDI. This is how they start. It's quite normal.

But unlike automobiles, where barring luxury car makers, every other successful foreign company has achieved a high level of indigenisation, but that happened over three decades or so. So, will it take a similar timeframe for an identical manufacturing footprint to play out in other sectors?

I don't think it would be that long. The first step is to get the FDI, and that's happening. Then, if you have a large working young population, and if you have good soft infrastructure in terms of education and health, the workforce will start to learn from these MNCs that are employing a lot of Indians. The next stage is when some bright entrepreneurs will say, 'We could do that. Let us set up our own SME and start to do this.' The government may start sponsoring as well. Indian home-grown corporates will start to emulate and compete against the MNCs with their own home brands, which often can be more popular. It might seem like big hurdles and something that does not happen in just one year, but the stars for me are aligning for India to have a major investment boom.

In the interim, coming back to your primary thesis of China looking at Asia as its next growth engine in terms of exports — 2025 was a record-high trade surplus for China. Is this the best you're going to see from China in terms of trade surplus? Will China's export engine cool off, because Asia may not necessarily fuel the kind of appetite that Chinese companies have?

I think so. We're at extreme levels in terms of China's trade surplus and export share in the world. We have rising costs in China. Margins are very thin. So, I think it's right for the Chinese and MNCs to look for new markets, new factories around the world to focus on. People have been talking about China needing to rebalance from investment and production to services and consumption for a long time; it's still very, very slow.

But people also talk about the US having a very large current account deficit and living beyond its means, spending more than it earns. It's got the opposite problem of China. Both of these need to adjust. The world imbalances have got very large. Japan also has surpluses. So, on one end you have the US' big current account deficit in dollar terms, and then you have China, Japan and Germany with huge current account surpluses. We need adjustments to these, and if it keeps going this way, at some point markets can force it. The buzzword is de-dollarisation. It could happen at some point.

If markets force it, it can happen quite abruptly; having big adjustments in exchange rates, would suddenly make it a lot more attractive to have exports, maybe not in China, but in other places. If the renminbi appreciates substantially against the dollar, slowly or very rapidly, China as the export powerhouse is going to slow down over time, and we'll see other big EMs starting to take up some of that slack.

Will that mean a large part Chinese capital, which went and acquired companies in the US, in the Europe, will look at India and other Asian countries? Will that be the second big shift?

Maybe. Though geopolitics matters significantly on how that plays out. Often the political economy is much more important. So, we'll have to see how relations play out going forward. We're in a very interesting geopolitical environment right now and, potentially, relations could change over time. If you go back to before World War 2, you saw big changes in relations; allies suddenly became foes and so forth, because it could be very important determinant for M&A activity.

Private capex in India has really gone down post Covid, and that also ties into the increasing consumerisation of the Indian economy. Not to mention, consumer businesses being richly valued in the public market over traditional commodity businesses. But more importantly, the thawing of India’s stance on Chinese FDI at a time when domestic capacity utilisation threshold has been stagnant in India at 70-75% level makes it’s a tough trade-off.

It's a good question. You're saying the worst case would be: massive Chinese investment comes into India, and it crowds out private investment — so while India has strong growth, but it is really the FDI that then gets exported out or it's sold in India, but the profits go to MNCs.

I'm more optimistic than that, because I think in India the stars are aligned for a pick-up in domestic investment as well. I'm of the view that we're entering a new inflation regime — a structurally lower inflation regime — because of a lot of gains in productivity from digitalisation of the economy, the FDI, the government capex that's happened, and prudent monetary policy. I expect the current energy price surge to be a short-term phenomenon, and so long as India sustains prudent monetary and fiscal policies, I expect structurally lower underlying inflation. Lower structural inflation means lower interest rates by historical standards, and you don't have these boom-bust cycles in India, which are terrible for private investment.

Further, corporate balance sheets are very healthy now. They can potentially lever up a bit if they need to. Besides, the FDI and the government CapEx, which has been reasonably strong, are going to start to — instead of crowding out —crowd in private investment. The environment is ripe for the Indian corporate sector to start to expand. The economy is doing really well overall — though it doesn't sound like that when you speak to local investors! But India has been growing at 7% in real terms and it's been fairly consistent.

We're in an environment where private investment can pick up, and that's going to create more jobs. It's going to be positive for capital markets. Those things will also lead to a pick-up in consumption as well.

The other interesting thing, in the medium-term, is whether the Indian currency, which has been in a one-way trend against the dollar, is reaching its peak [depreciation]. People drop their jaw when I say this, but the dollar–INR will start weakening in the coming years. Initially the RBI will intervene to rebuild its reserves, so we won’t see a quick strengthening of the INR against the dollar, but it could stabilise, maybe, in the next 12 months or so, and then start to strengthen in the coming years.

The single biggest reason why the dollar–INR has always been going up is because India has had higher inflation than its trading partners, and so it loses competitiveness, and the way to regain it is for the currency to weaken. In a structurally lower inflation regime, there’s a better chance of the dollar–INR going the other way. There's no gospel on why the rupee has to always weaken. That could be very interesting for India, for business and for investment as well.

Before the global financial crisis, 2003 to 2007 was the only period where India had had fairly low inflation and pretty good growth but, interestingly, in that period the dollar–INR, actually, went down.

As the Chinese engine realigns itself towards the Asian economy will MSMEs, which remain the bulwark of India's growth story, experience significant pain before seeing the benefit?

I'm sure there will be some pain in some sectors more than others, and especially for some mid-sized companies that are less efficient. But when you look at that from a more medium-term perspective, that restructuring will lead to more efficiencies over time. Competition is heating up and if India has the right kind of fundamentals, in terms of good infrastructure, good education, good labour force — the right conducive environment for healthy competition — it can make the nation stronger over time. But yes, there will be some growing pains through this.

Will that also have a ripple effect on the banking system as MSME loans have been the biggest growth drivers in recent years?

Not all MSMEs will face the pain. Some will, but others will, probably, benefit a lot, as we get more investment and more jobs and more activity in some sectors. So, in balance, the financial sector will, actually, benefit the most.

There are still so many variables at play. The tariff issue is still not settled. Do you see a middle ground happening? Do you think it's settling down, or will this period of uncertainty continue even as China does what it is doing as per your thesis?

I am optimistic that there will be a middle ground.

Right now, because of the growing rivalry between the US and China, China is very focused on its manufacturing and particularly higher-end manufacturing. But over time there will be an increasing focus on trying to boost consumption and the services sector, and more internal-driven growth rather than relying on exports. I'm hopeful that the geopolitics, over time, will improve.

It will be hugely beneficial for this region if countries start focusing more on the complementarities. By that I mean advanced economies, particularly in North Asia, and Singapore too that have aging populations and large pools of pension savings. Right now, those savings still tend to get refunnelled into the US, instead they could be invested more in South and Southeast Asia.

To that extent, will India's China+1 strategy play out the way it was envisaged, even if the timelines are stretched?

I think so. Notwithstanding the current energy price surge, if India is in a structurally lower inflation regime, it will be a real game changer. Structurally lower interest rates, and cleaner balance sheets of corporates could create an environment that is ripe for an investment boom.