India: a sleeping economic giant gets set to reawaken

February 2015  |  FEATURE  |  ECONOMIC TRENDS

Financier Worldwide Magazine

Since Narendra Modi’s Bharatiya Janata Party won an overwhelming majority in India’s elections in May 2014, the country, as well as the international community, has been awaiting the first signs that the new prime minister is turning his pre-election, pro-growth promises into economic reality.

That the Indian economy has massive potential is not in doubt. A recent report by PwC suggests that it could achieve a 9 percent growth rate and become a $10 trillion economy by 2034. The economic model espoused by Modi, pre- and post-election, includes export-oriented manufacturing, heavy infrastructure building and urbanisation. To many economic analysts, this suggests a shift from India’s current services-driven growth trajectory to a model based on the mass deployment of labour and capital.

So what are the prospects for India’s economy in the coming years and what are the major challenges that need to be faced? The aforementioned PwC report, ‘Future of India – the Winning Leap’, highlights a number of solutions which PwC says could put India on the road to unprecedented economic growth.

Solutions from the private sector

These include solutions from the private sector which PwC suggests fall within three categories: (i) Fierce Catch-Up – following traditional approaches or technologies to surmount challenges, but at an accelerated pace. For example: improving energy transmission and distribution efficiency; (ii) Significant Leap – adopting new or different approaches or technologies, which may have been developed elsewhere but would also work in India. For example: shifting from coal-based power generation to nuclear or solar energy; and (iii) Leapfrog – a radically different approach or paradigm shift that entails applying a new and potentially disruptive business model. For example: moving from central to distributed power generation.

“A young demographic, paired with a burgeoning middle-class that is digitally enabled, is a once in a lifetime opportunity for India to develop economically and socially,” said Mr Dennis Nally, chairman of PricewaterhouseCoopers International Ltd. “India can only build shared prosperity for its 1.25 billion people by transforming the way the economy creates value. For India, to create 10-12 million jobs every year in the coming decades, corporations and entrepreneurs must work together to help deliver new solutions and build capabilities for growth.”

Sharing Mr Nally’s belief in the power of the entrepreneurial spirit is Deepak Kapoor, chairman of PwC India. He said: “Corporations alone can’t fuel growth and innovation needed to power India’s Winning Leap, and hence the entrepreneurial sector must also play a major role as they possess qualities critical for developing innovative solutions, the willingness to take risks, an aptitude for fast decision-making, and bold leadership.

“The government also needs to extend support by creating national platforms that enable this growth and improving the ease of doing business index. For instance, immediate changes that could be harvested could be in areas like ease in starting a company and in paying taxes”.

Concurrent research

Concurrent with the PwC research, Deloitte published its own analysis report into the prospects for economic growth in India in 2015 and beyond. In ‘Competitiveness: Catching the next wave’, Gary Coleman, Deloitte’s managing director of global industries and the report’s co-author, considers what the government and the corporate sector should be doing to help stimulate growth and investment. He said: “Reforms in areas such as labour and land acquisition, as well as improvement in the ease of doing business should raise India’s GDP growth from current levels in the coming years. A decline in inflation, engineered by a tight monetary policy, may also allow for an interest rate reduction in 2015.

“This, combined with confidence in a reform-minded government, could lead to a surge in investment spending and faster growth. Continued investment from the corporate sector in infrastructure, construction, and education will also stimulate growth. To keep momentum, the government should continue to reduce bureaucratic controls and increase transparency. However, if reforms stall in the next 12 to 18 months, optimism is likely to fade”.

Mr Coleman’s last, more pessimistic view of the future prospects for the Indian economy is shared by Dr Leon Berkelmans from the Lowy Institute for International Policy who is broadly unconvinced, citing India’s economic history as evidence for his contention.

 “India has shown that it can grow quickly,” says Dr Berkelmans. “There was a time in the mid 2000s when it was growing well over 7 percent per year. Growth reached a peak of 10 percent per year. However, I would argue that identifying the exact cause of that growth spurt is difficult to pin down. That’s what makes me pessimistic that it can be repeated. There is a long history of countries having an acceleration in growth that was not sustained, and without an identifiable cause. I would say India falls into that camp.

 “This goes to an under-appreciated fact about the Indian economy. The relationship between reform and growth is not that well understood. The Indian economy’s growth rate did move from about 3 percent to around 5 percent on a sustainable basis, but that shift did not occur with the reforms of the 1990s. It began in the 1980s and it is not entirely clear why. That is not to say that I think there should not be reform, it is just unclear how much this will boost the top line growth numbers. Priorities for reform would include labour reform, reform of government subsidies, and tax reform, among many other things. There’s a lot to be done,” he adds.

The Indian World Economic Forum

The extent of the work to be done to re-establish India as an economic powerhouse was underlined at the Indian World Economic Forum which took place in New Delhi in November 2014. Hosted by the World Economic Forum alongside the Confederation of Indian Industry (CII), the meeting, entitled ‘Redefining Public-Private Cooperation for a New Beginning’, asked the fundamental question: as investor interest in India increases, what challenges and opportunities are shaping its growth outlook?

Anand Mahindra, chairman and managing director of the Mahindra Group and co-chair of the meeting, said: “The Indian economy is like a giant flywheel. It’s not easy to get it going and it takes some time and momentum. But things are moving. You don’t try big bang reforms. Usually big bangs leave a big crater on the ground. You need steady consistent reforms – a reform a day. In my own experience, things like licences to produce have been opened up. In India, we basically need to clean the pipes.”

Fellow attendee, Gita Gopinath, professor of economics at Harvard University, added: “I feel very strongly that India is at a turning point right now. The macro economy is in better shape than it has been in the past few years and we finally have a stable political government that is undertaking reforms.”

Professor Gopinath is particularly excited about the reforms that have been made to India’s excessively regulated labour market and exorbitant compliance costs – regulation which many believe is the biggest drag on Indian economic performance.

Taking advantage of the intellectual, technical and engineering prowess of its labour force is of paramount importance to India, believes Gary Coleman: “One of India’s advantages is clearly its educated and relatively low-cost workforce. This can boost innovation-driven entrepreneurship if India eases the ability to start a business and offers a level playing field on which to compete. Low labour costs and a large working population also positions India to grab an increasing share of manufacturing from China as that country’s labour costs increase and its workforce ages. India’s engineers can also help grow the country’s manufacturing sectors, such as automotive and appropriate skilling of the labour force by creating paraprofessionals who can help India move ahead faster.”

Tackling inflation

Holding back this desire to press ahead is the issue of inflation – a major blight on the Indian economy in recent years. However, Raghuram Rajan, head of the Reserve Bank of India (RBI), has taken steps to tackle the problem and the rate has dropped considerably from its average of 9.23 percent between 2012 and 2014.

Getting inflation under control is certainly a major step in regenerating the Indian economy, confirms Dr Berkelmans: “Having a central bank governor of the quality of Rajan will help the Indian economy achieve its inflation goals. The best the Indian government can do is tackle some of the reforms they have on their plate.” Mr Coleman agrees, but goes further. “India could be entering a sweet spot where it is poised for high growth with the help of credible actions from both fiscal and monetary authorities,” he vouches. “But slow growth and high inflation as a result of onerous regulation,  policy paralysis and inadequate infrastructure investment, have caused bottlenecks in the economy.

“To boost manufacturing and encourage FDI, thus stimulating growth, India must improve the ease of doing business by reforming labour laws and foreign investment restrictions, simplifying steps to establish a business, improving transparency, and increasing access to basic infrastructure. The government also needs to invest in education and training so skills match market needs.”

Future outlook

The 2014 election in India which installed Narendra Modi as the new prime minister was viewed as one of the most critical in the country’s near 70-year history. The economic proposals contained in Modi’s election manifesto are now being implemented as policy reforms and the global community is watching and waiting.

The data contained in the PwC report on the economic prospects for India – Asia’s third-largest economy – paints an encouraging picture: opportunities in the form of a 9 percent rate of growth, a $1 trillion price tag for infrastructure, retail market potential of $1.3 trillion by 2020, and jobs for the country’s more than 400 million young people.

“I am bullish on India,” says Mr Coleman. “The government seems dedicated to pro-business policies and recent engagement with large economies is promising in terms of investment and trade. The government is addressing structural bottlenecks, improving governance, and focusing on manufacturing. India has several sectors that offer significant potential, some growing faster than GDP, including infrastructure and construction, banking, financial services and insurance. With smart investments that help grow these sectors, India has all the ingredients to become a significant economic power.”

Clearly, the economic outlook for India in the years to come is positive. The new government is pressing ahead with its program of reforms, platforms for growth are in place, and there is a concerted effort by corporate India, supported by a sense of entrepreneurialism, which bodes well for the country’s future – clearly a sleeping economic giant poised to reawaken.

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Fraser Tennant