Tuesday, May 3, 2011

India – Emerging Economic Powerhouse




Backed by a billion plus population where every sixth person in the world is an Indian, the fast growing middle class, the competitive world class enterprises and the growing purchasing power, the economy has been growing more than twice as fast as the US economy. It’s a new India. It’s a new journey, a journey from poverty towards prosperity, from tradition towards modernity, from a nation protected in the garb of license raj to a nation ready to compete in the global firmament.

India has come a long way, since it embraced the market economy in 1991. The economy has undergone significant changes since then, which have made it an attractive global destination for businesses and trade, thanks to the forces of liberalization and deregulation that have unleashed an environment which is on par with some of the best in the world. Its strong macroeconomic performance (with average annual GDP growth of about 8%) has propelled it to emerge as the fourth largest economy in the world, on account of purchasing power parity. It has a well developed banking system and a vibrant capital market.

And there is more good news. India is fast emerging as a land of incomparable opportunities. The whole world is looking at India’s unlimited new business opportunities. The country’s economic and other achievements are getting recognized the world over. Even the world’s lone superpower recognizes it. This is reflected in the statement made by the US Secretary of State, Randy Daniels, who remarked, “India is indeed a beacon for peace and growth, not only for the region, but also for the entire world.” More and more global organizations are setting up their bases here. The “Made in India” label is increasingly becoming a respected global brand, for its competitiveness, reliability and quality, more so after the country’s IT industry’s stellar success.

Against this backdrop, the country is all set to become an economic superpower. It is indeed a significant development for a country that was labeled as one of the ‘third world’ nations for nearly 45 years. Now, that is a thing of the past. Indian economy in recent times has shown exceptional resilience in absorbing external shocks like oil market fluctuations and worldwide recession. Today, a new sense of confidence is emerging, a new sense of pride is there, and there is a willingness to emerge as an economic superpower. And that does not look unrealistic. To its credit on the demographic front, 50% of the population is less than 25 years of age. This means that the domestic demand is high and is less dependent on exports. Allan Conway of Schroders, a US-based fund manager expresses optimism about the present growth, as he says “Emerging markets such as India have to rely on international trade in the initial stages of development, but as employment grows and people get wealthier, they become a rich source of domestic demand that can sustain the economy.”



The recent World Bank study describes India as an emerging giant that is likely to become an economic powerhouse in 25 years. The study further reveals that India has a huge pool of well-educated, technically-trained people, proportionately much larger than in China or Southeast Asia; India’s number of scientists and engineers, for example, is second only to that of the United States. If their skills can be tapped, they represent an unparalleled resource. “There is an assessment that India’s power on many fronts is growing steadily and that other countries must develop a working relationship with it,” says Stephen Cohen, Senior Fellow in Foreign Policy Studies, Brookings Institution, US, who predicted the rise of India in his book, “India: Emerging Power”. He believes that India is finally reaping the benefits of steady reform process that will translate into enduring growth. “The biggest change the last decade witnessed was that the world at large recognized that India can deliver technologically superior products, competitively. The country’s expertise in IT, Pharmaceuticals and Heavy Engineering has been accepted globally,” says a CEO of India-based company. He predicts that these three industries will drive future growth.

According to a recent report by Goldman Sachs, a leading global investment banker, the Indian economy is expected to be the third largest in the world by 2050, after the US and China, overtaking France, Germany and Japan. Adam Matthews,

Asia-region specialist with JP Morgan Fleming, echoing the same view said, “India is being rated even higher than China at the moment, and is a hot market right now.” Overall, all sectors of the economy are facilitated by a host of factors, such as growing agricultural production, stable prices, falling interest rates, and, of course, political stability in general, and the restoration of goodwill between India and Pakistan, in particular. On the employment front, Indian IT majors as well as foreign outfits like Microsoft, IBM, Accenture, HP, Sun Microsystems, Dell, Reuters, J P Morgan, Citi Group, HSBC etc. are creating new jobs, which augurs well for the economy.

Emerging Trends
Overall, the economy is witnessing a stable macro-economic framework of high economic growth supported by modest agriculture growth and robust industrial and services sector growth. Accordingly, the strength of the Indian economy is evidenced by key macro-economic indicators like low inflation rate, burgeoning foreign exchange reserves and a favorable interest rate regime. These indicators are at work to help India emerge as the economic powerhouse. On the other hand, it is rapidly creating world-class knowledge-based industries, which have emerged despite less government support and have helped to boost the economy. The IT revolution, telecom growth and pharmaceuticals have changed the face of India. The rapid growth of service sector is turning the country into a global hub for servicing MNC clients. Business Process Outsourcing (BPO) has served the cause of India further to emerge as a preferred destination for MNCs.

After the great success in the field of Information Technology (IT), India now dreams of becoming the most preferred destination for BPO ahead of countries such as Philippines, Mexico and Ireland. The BPO industry comes as a great opportunity for India. It could really be a shot in the arm for the Indian economy going by the country’s rich talent pool. It has the second largest English-speaking people with computer skills in the world after the US and with education being a priority in most Indian families, this is bound to rise in the future. Going by this, BPO is definitely a sunrise sector in India with bright prospects in the long-term.



On the other hand, India’s manufacturing sector is on the strong growth path as global companies are favoring India as the major manufacturing hub to leverage its cost advantages and growing domestic market. On the domestic front, India Inc. is building global brands by taking cost-cutting measures and productivity improvement initiatives. Besides, a combination of business entrepreneurship and social entrepreneurship is developing rapidly. More and more companies are joining this bandwagon. For many years India was considered as the service economy, but revival in manufacturing sector has shown the future potential for the economy. India’s competitive advantage in the manufacturing sector is going well beyond the labor advantage. For instance, the average wage in India is about £300 a year compared with more than £20,000 in Britain. India is well-placed in providing the professionals to industry, well-trained engineers and technicians compared to other developing economies like China, Thailand and Malaysia. India’s inherent strength lies in engineering designs, process innovations and R&D. Besides the labor advantage, India has huge untapped domestic market and abundant raw materials like iron ore, bauxite etc, which are basic inputs for several manufacturing industries.

Against this background, the movement of the Indian rupee was unidirectional. In the last couple of years, on the back of a strong economic growth and increased interest from the foreign investors, the rupee started gaining strength vis-à-vis the US Dollar. However, the rupee appreciation affects India inc., positively as well as negatively. The Net Importers like the oil companies would gain from dollar depreciation but export oriented companies especially in Pharmaceuticals, Software and ITES stand to lose. If the dollar appreciates the fortunes would reverse. Ashima Goyal, Professor, IGIDR suggests that the RBI has to keep in mind not only what is happening to the US exchange and interest rates, but also the changes in the Real Effective Exchange Rate (REER), relative productivity and what competitors such as China are doing.

Challenges Remain 

Though India has great potential; a lot still needs to be developed. But for that potential to be realized, its promise must not be treated as an instrument of short-term electoral popularity. India being an agrarian economy, the performance of agriculture is very important not only from the point of view of economic growth but also for the well-being of the majority of the population. The sector that provides 60% of employment is virtually stagnant and its development has been systematically ignored both by the central as well as the state governments. Besides, the biggest challenge is to raise the per capita income and standard of living of these people. To sustain the tempo of growth, it is imperative to make the sector economically rewarding. Another important issue that needs to be addressed for achieving a vibrant economic growth is regional disparities. In the post-reform era, it is found in many studies that regional disparities in terms of growth have widened. Also, very few states have adopted the reform measures. Experts suggest that to achieve high growth with low incidence of poverty, India needs to focus on regional development.

Overall, there are bad things accompanying good things. Economists say that the broad-based fundamental improvements in macroeconomic scenario should not make policy makers overlook some key areas of concern. Though it is a happy moment for Indians to observe the economy graduating up the ladder of growth, it is too early to celebrate the observation. Not withstanding the fact that the country is witnessing strong growth it is not reflected in the overall improvement of living standards. The government will have to put its shoulders to the wheel in order to attain and sustain the growth rate in GDP. It will have to come up with reforms by way of enhancing public and private investments in infrastructure, strengthening the financial sector and capital markets and deepening structural reforms and regenerating industrial growth. The country must pay attention to its ballooning public debt and inflating high fiscal deficit. It must also consolidate tax reforms and continue fiscal adjustment at both the Central and the State levels. Besides, pressing issues like high level of poverty, lack of proper education to the masses, inadequate infrastructure must be tackled on war footing, and then only India can emerge as an economic powerhouse.

N K Singh, Member, Planning Commission, suggests, “The competitiveness of the Indian economy would need to be substantially improved through a continued soft interest rate regime, lower cost of financial intermediation, credible labor reforms and managing expectations about the appreciation of the rupee - in the face of rising reserves - to prevent erosion of export competitiveness.”

The Global Economic Power in the Making

Although a section of experts express pessimism that India’s economy and economic policy are still relatively inward looking and it seems unlikely that India will become a dominant player of the world economy in the current decade, given the government’s desire to push reforms process, the situation in the next decade may be quite different. The journey towards becoming economic powerhouse has already started and is gathering momentum.

Along with China, India is going to create a new kind of balance in Asia. Goldman Sachs predicts that growth in India could actually exceed that of China by 2015. Further, India will overtake Britain in 2022 and Japan in 2032 to become the third-biggest economy in the world, after China and America. “There is every hope that the present challenges will be tackled successfully in the years ahead. India in 2020 has every reason and chance to become at least a mid-sized economic power,” says V Anantha-Nageswaran, Founder-Director of LIBRAN, Asset Management, Singapore.

Let’s welcome the new confidence to pave the way for an emerging economic powerhouse. The positive factors mentioned above would help accelerate growth rapidly in the coming decades. In the light of these developments, undoubtedly, the future is going to be India’s.

N Janardhan Rao, Lead Economist

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