India's been touted as the new China — but here are 4 key areas where the South Asian giant is still playing catch up

• Some investors see India as the new China, but the South Asian economy still has to narrow a few gaps.
• India is lagging behind China in national literacy, infrastructure investment, and a supply-chain ecosystem.
• These factors make it difficult for India to surpass China as the factory of the world.

India is shaping up to be the biggest growth story of the moment, as evidenced by tech giant Apple and chipmaker Micron's recent efforts to enter the market.

The country's potential appears brighter after its population surpassed China's, prompting many observers to tout the South Asian country as the next economy to watch. 

There's so much optimism about India that Goldman Sachs forecasts India's economy will surpass the US by 2075.

But India isn't an easy landscape for foreign investors to navigate. 

This is "not the first time people have said India is on the rise and then watched it make a series of major political errors or have political problems at home that stalled that growth," Pramit Chaudhuri, the head of the South Asia practice at Eurasia Group, told the firm's GZERO Media outlet.

"It might happen, but it would require India to get a lot of things right," Chaudhuri added.

Here are four ways India is still playing catch-up to its Asian rival, China.

1. India lacks the supply chain ecosystem of China

Despite Prime Minister Narendra Modi's push to attract foreign direct investments since he took office in 2014, India's manufacturing system still lags behind China.

"India lacks the manufacturing ecosystem that has been a key driver of China's phenomenal economic growth," analysts at Swiss bank UBS wrote in a May 17 note titled "Is India the new China?"

Experts told Insider in December that while India is seen as an up-and-coming contender to China thanks to its burgeoning young population, it still doesn't quite have the set-up to be a manufacturing powerhouse.

According to these experts, India doesn't have the interconnectivity of a large ecosystem like in China, where products are built from parts sourced directly in the country.

Indian manufacturers often need to import parts from outside the country — thereby adding to the cost of the finished product, they said. 

2. India's infrastructure investments lag China's

One reason India hasn't built up the extensive web of manufacturing facilities that China has managed to construct is that it hasn't been spending as much on infrastructure.

For example, in pre-COVID 2019, China invested about 6.5% of its GDP in infrastructure development, while India invested just 4.5% — something the government is working on boosting, per UBS' May 17 note.

However, the Indian government has committed to ramping up infrastructure spending, Modi's administration announced in February. It raised capital investments by 33% in this fiscal year to 10 trillion Indian rupees, or $121 billion.

3. India's social indices still lag behind China's

Even though India's population surpassed China's, its social indices — such as literacy rates — still lag behind those of the East Asian nation, according to Eurasia Group's Chaudhuri.

About 78% of Indians are literate — but the percentage drops to 62% for women, according to data released by the Indian government in November 2019. On the other hand, as of 2020, about 97% of Chinese nationals were literate, per World Bank data. 

A lower literacy rate means that India doesn't quite have the big pool of skilled labor that China has — and this labor pool has been a major part of China's growth story.  

Furthermore, about 1.6 million Indians were enrolled in vocational education in 2021, according to the country's government. In China, about 5.6 million people enrolled in higher vocational colleges in the same year, state-owned outlet China Daily reported, citing the education ministry.

4. Business processes can take longer in India due to decentralized decision-making

As the world's largest democracy, decision-making can get complicated in India. 

"As a federal system, power and decision-making are decentralized in India, with differences at the state level in political leadership, quality of governance, regulations, taxation, and labor relations," the US International Trade Administration wrote in September, in a post outlining market challenges in India.

While China also has issues like compliance and licensing, it can still move more quickly than India, simply because the South Asian nation is "much more democratic and there are just too many stakeholders to satisfy," Ashutosh Sharma, a research director at market researcher Forrester, told Insider in December.

It took 18 days to start a business in India in 2019 — double the time it took in China, according to World Bank data. The report this measure came from has since been discontinued.

But India is still a bright spot in the current global economy, with tremendous growth potential, analysts say.

"All in, we think India's secular growth outlook is more promising than China's. Still, the economic development gap between the two countries will take a long time to meaningfully narrow, in our view," UBS analysts wrote.