As India’s economy gathers steam, optimism for renewed growth is high
With a population in excess of 1.3 billion people, GDP of some $2.6 trillion in 2017, and a GDP growth rate of 6.7% the same year, India is a true economic powerhouse. The country has certainly outshone average global economic growth and the trend looks set to continue in 2018. Indeed, according to data from the International Monetary Fund, India’s economy is expected to grow by about 7.4 percent – which is significantly higher than the 3.9% growth predicted for the world economy, and the 4.9% growth attributed to “developing and emerging market and developing economies”.
The sense of optimism felt about the Indian economy by many commentators is fuelled partly by the fact that the country appears to have absorbed the twin shocks of the government’s demonetarisation policy in 2016 and the introduction of a Goods and Services Tax (GST) in 2017. The introduction of GST, along with various measures to boost foreign inward investment, also helped to garner greater confidence in the economy.
After demonetisation and ‘Goods and Services Tax’ (GST), the Indian economy is moving towards “normalcy” and the central bank will continue to monitor inflation numbers and liquidity data to decide on the next course of action in their monetary policy, according to Nikhil Shah, Associate Director, Business & Financial Services Consulting, Frost & Sullivan (see page 10).
However, despite this growth and general optimism, much work remains to be done to ensure these heady growth rates are sustained. In a recent report, the IMF pointed out that to sustain rapid growth and raise incomes for the country’s 1.3 billion people, India would need to build on the success of its reforms.
Ranil Salgado, the head of the IMF team for India, likened the Indian economy to an elephant starting to run. “To sustain and build on these policies and to harness the demographic dividend associated with a growing working-age population (which constitutes about two-thirds of the total population), India needs to reinvigorate reform efforts to keep the growth and jobs engine running. This is critical in a country where per capita income is about $2,000 U.S. dollars, still well below that of other large emerging economies,” Salgado said in an interview with the IMF Country Focus.
With the recovery from the currency demonetisation and GST well underway, Salgado also offered some interesting insights into how GST will help the economy in the coming years. “The goods and services tax created a unified national market for the first time by lowering internal barriers to trade—effectively establishing a free trade agreement for a market of over 1.3 billion people,” he said. “The tax is also expected to increase the amount of economic activity taking place in the formal sector of the economy—leading to better quality and more reliable jobs. As a result, the goods and services tax should improve productivity and boost medium-term potential growth, while also creating room for the government to increase much needed social and infrastructure spending.”
In terms of the banking system – a critical pillar of any economy – Salgado highlighted the fact that India recently implemented a new insolvency and bankruptcy code. This should make it easier for creditors to seek repayment from debtors who are in arrears, according to Salgado.
In a nod to problems faced by banks globally in the aftermath of the financial crisis of 2008-9, India’s central bank and government have also sought to improve banks’ recognition of bad assets and to recapitalise public sector banks. “Ultimately, these efforts will help to solidify bank balance sheets and support the flow of credit to the rapidly expanding economy,” Salgado said.
Foreign Direct Investment
As a growing trade partner – across a broad range of products and services – to countries in Asia and beyond, India also stands to benefit from improving its integration with global markets. “The country has made a lot of progress, in that most foreign investments are now allowed to enter sectors of the Indian economy under what is known as ‘the automatic route’, Salgado told the IMF Country Focus. “This amounts to a meaningful reduction in bureaucratic oversight, and greatly increases access to the Indian market for foreign investors.
However, Salgado added that more can be done to sustain the recent foreign direct investment inflows and remove trade barriers including: reducing trade documentation requirements and procedures; lowering tariffs; continuing to improve the business climate; and improving governance.
Middle East ties
One area where India has met with huge success in terms of developing economic and cultural ties is the Arabian Gulf, and especially the UAE. Indian business leaders who spoke to this publication hailed the developing relationship between the UAE and India, and view the ties as hugely beneficial to both countries.
In May, Dubai Investment Development Agency (Dubai FDI), an agency of the Department of Economic Development (DED), completed a tour of three Indian cities, Mumbai, Hyderabad and Kochi, as part of plans to increase foreign investment.
Dubai FDI met with solutions providers in sectors including logistics, aviation, biotechnology, engineering, construction, financial services, healthcare, industrial machinery, pharmaceuticals, tourism and hospitality in the three Indian cities, according to the UAE’s state news agency, WAM.
UAE-India trade is estimated to reach $100 billion by 2020, and Dubai’s industrial, residential, tourism and entertainment sectors, along with existing airports and sea ports, will play a major role in achieving the milestone.Major areas where UAE-bound FDI was invested in 2017 included manufacturing, renewable energy, aviation, travel and tourism, logistics, technology and healthcare, according to Dubai FDI.
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