“Start Up India, Stand Up India” ~ Narendra Modi, Prime Minister of India
In the almost seven decades since India became an independent nation, the country has transformed not only its economy but image as well. Once known as the “Land of Snake Charmers” and now celebrated for its Mars Mission, India is among the fastest growing economies in today’s world.
The Indian economy grew at 2.3% in 1951-52, the time when the first five-year plan rolled out to rebuild the nation after independence. Economic growth was trapped below 4% for almost three decades, before it broke resistance in the 1980s. The 1990s mark the beginning a revamped India which became open to foreign investment and privatization by doing away with the “Licence Raj” and adopting policies of liberalization. The economy grew at 5.8% during the 1990s irrespective of the meager 1.1% growth in 1991 – a crisis year for the nation. The graph peaked to 6.9% during 2000-2009 and 7.3% during 2010-14.
In the recent past, many global organizations have improved their economic outlook for India, while many agencies have lifted their rating. What has made these institutions go optimist on India again? Here are some factors which support India’s rise and will help the economy on a high and sustainable growth path.
Indian politics have been fairly stable in the past ten years, but the stability is somewhat superficial as the governments were in reality formed through complex coalitions after much negotiation and compromise. Any government with multiple alliances finds it difficult to push its agendas through the parliament as there are always conflicts of interest. This is something that caused “policy paralysis” in the country, which started to dampen economic growth. With the Bharitiya Janta Party (BJP)-led government coming into power in 2014, the political scenario in India looks more stable than ever before. A government with a neat majority and effective leadership is better positioned to give shape to the agendas in the party’s manifesto (on the basis of which it was elected) and take crucial decisions more freely and quickly, bypassing red tape. The present government, which has just completed one year in power, has a chance to create a favorable and attractive investment climate in the country, something it has started working on.
However, multiple challenges need to be tackled with the right mechanisms in place to improve the conditions for doing business. (Related reading, see: Should India Be On Investors' Radars?)
Despite the fact that the world population is on the rise and is expected to reach 7.72 billion in 2020, the number of people who belong to the working-age population in developed countries is expected to fall, while on the contrary the number of people in this age bracket are expected to rise in developing countries like India. This could give India a chance to benefit from the “demographic dividend.” India is expected to become the world’s youngest country, as it would be the home to 64% of its population of working age by 2020. However, just having the right age population isn’t enough; India needs to invest in the skill development and education for its youth along with creating an ecosystem that can gainfully employ its young population. The government has initiated programs such as the “National Skill Development Mission” for creating a skilled labor force. (Related reading, see: How Demographics Drive The Economy)
Consumerism, which can also be called consumer aspiration, is rising at a fast pace in tier 1 and tier 2 cities of India on the back of growing purchasing power, the spread of education and most importantly awareness through social media, creating demand for goods and services. However, the penetration into interiors of the country is still low, which signals towards ample potential in the times to come. Studies reveal that the product categories experiencing maximum growth are automobiles, fashion and fine dining. A study by ASSOCHAM and Yes Bank stated that, “the consumer spending in India is expected to quadruple to $4.2 trillion by 2017.” One of the biggest beneficiaries is likely to be the Indian luxury market that is “poised to expand threefold in next three years and the number of millionaires expected to multiply three times in another five years” according to the study. This would boost business opportunities in products like fine dining and hotels, travel and tourism, spas and concierge service, pens, home décor, watches, wines and spirits, jewelry, apparel and accessories, fine art, automobiles and real estate.
(Related reading, see: How Is The GDP Of India Calculated?)
The country imported 37% of its oil needs in 1990; 25 years later, India imports 80% of the oil consumed, making it the third largest importer of oil after U.S. and China. Trending low oil prices are very favorable for India, which struggles with a huge oil import bill as well as subsidy burden. The government, which takes the brunt during rising oil prices via the subsidy it provides, is for a change set to benefit from the fall. According to a report mentioned in Business Standard, a leading financial newspaper in India, “the government had budgeted for an average crude oil price of $70 a barrel for this financial year. If the average price of $58 a barrel is sustained for the rest of the year, it will lead to a saving of $12 billion (₹78,000 crore) in companies’ import bill, and of around $1.67 billion (₹10,800 crore) in the government’s subsidy bill. Every $1 fall in crude oil prices brings the import bill down by $1 billion (₹6,500 crore), and the government’s subsidy burden is reduced by $138.46 million (₹900 crore).”
With the backdrop of lower oil prices, the inflationary risk in the economy reduces, and this has given the Reserve Bank of India, a chance to cut interest rates in the economy. A drop in interest rates helps to pep up the economy as it encourages consumption and investment. Per a report by Nomura, “every $10-a-barrel decline in oil prices can boost India’s gross domestic product (GDP) by 0.1 percentage points; lower wholesale price inflation by around 0.5 percentage points; improve the annual current account balance by 0.5% of GDP; and improve the fiscal balance by 0.1% of GDP.” (Related reading, see: Top Factors & Reports That Affect The Price Of Oil)
India has the work force, raw material, reserves (like steel and iron), moderate weather conditions, vast coastlines as well as inland water bodies, almost everything to make it into manufacturing hub. Yet it hasn’t happened in all these years. Although there are a few sectors like chemical, pharmaceutical, auto and auto ancillary as well as textiles that have thrived, a huge untapped manufacturing potential exists in India. The government aims to unleash this potential and raise the share of manufacturing in the gross domestic product (GDP) to 25% from the present 17% by 2022 via its “Make in India” campaign. The present contribution towards GDP by manufacturing is much less as compared to peer nations like China (31%), Malaysia (24%), South Korea (30%), Thailand (33%) and even Indonesia (22%). The sector cannot only turn into a major contributor to GDP but also act as the much needed employment generator for the nation. There are certain critical areas like infrastructural bottlenecks, complex regulatory frameworks and skill development of labor force that need to be addressed before the government's ambitious target can be met.
The Bottom Line
India the “golden bird” of the ancient times is set to soar again provided it gets the right launch pad through government initiatives and implementation. There is immense opportunity given the favorable internal and external factors that can back the fundamentals of the Indian economy. However, certain essential issues must be dealt with to keep India flying high.