New markets bring new opportunities. Unlike the majority of the world’s economies, India’s financial situation is improving. In fact recently, India has taken the limelight off China, who is currently suffering a stage of economic instability
India is one of the strongest emerging markets of today, and we will go on to explain its current economic situation, future estimations and some details might reveal the secrets of the Asian Panther.
Situated in the south of Asia, India has a surface area of 3,287,260km2 making it one of the biggest countries in the world.
It has a population of 1,295,291,543 people, and is a country of high population density with around 394 habitants per km2. It therefore has one of the world’s highest populations, where 65% are of working age. It is a fairly young country which has an annual growth rate of 1.25%, and predictions state that by 2050 it will be one of the most populated countries on the planet. Only 31.1% of the population live in urbanized areas. The capital is New Delhi, and the currency is the Indian Rupee.
India has become a rising star, belonging to the well-known group of BRIC countries (along with Brazil, China and Russia) and offering many business opportunities in diverse sectors. It is surprising to see that India has currently overtaken China in terms of economic growth whilst the latter has actually slowed down. The dynamics of its economy, the abundance of labourers with high technical and English speaking qualifications, the dimension of the internal markets, the development of ICT, the extensive use of English, the entrepreneurial spirit throughout the country and the lack of debt are among the many reasons making India and attractive market.
An economic breakdown of India
In terms of the country’s economic context, India has gained 11th position in the against the rest of the world in terms of its economic potential. The fiscal year of 2014/2015 marked an upturn for activity, where the GDP grew by 5.5%. This growth should continue throughout 2015/2016 (given that figures for the 3rd trimester of 2015 showed a 7.4% annual growth), and will be sustained by low oil prices, a higher level of trust between businesses and the first effects of the structural reforms.
Until May 2013, India was a deprived economy, and it was at this point where the FED announced that they were to normalize the monetary policies. Since then, the country has been on a steady path thanks to two main factors. The first is the effect created by the lowered prices of raw materials, where it became a net importer (it’s the 4th greatest consumer of oil and oil imports represent 6% of the county’s GDP).
The second is the effect of the monetary policies which not only controlled inflation but also allowed the governor of the Central Bank to gain credibility from investors as a result of the reinforced management. Currently, the prices of raw materials and the sensitivity of investors for high levels of deficit and public debt are the potential risks to bear in mind.
India is economically very diverse. The primary sector has lost some relevance and its future will depend heavily on the development of activities with higher added value, as well as a reduction in its dependence on the monsoon season. Since 1991, the industrial sector has provided a great opening for private initiative and the investment of foreign capital. Of this sector, the textile industry represents around a 5th of the country’s total exports. It is however the service sector that has provided the most dynamics to this Asian economy, contributing to over half of the country’s GDP.
In terms of the exterior sector, the current account deficit in India, which reached 4.9% of the GDP in 2012 fell to just 2.6% in 2013. However, a rise in import figures (as restrictions for oil imports are lowered) and an increase in the purchase of oil reduced the negative balance of the 2014 current account. It is predicted that the deficit will only tighten after 2016, supporting the expansion of the export of goods, mainly as a result of the strength of the manufacturing sector.
The overall diagnostic is positive and according to the research study made by Caixabank growth between 2016 and 2017 is estimated to be around 7%. The increase in activity, investment in infrastructure and the monetary easing will counteract the rise in the prices of raw materials.
Pending questions about the Indian economy
In spite of this data, India is still a poor country: the GDP per capita is low, close to 25% of the population live in slums, and gender inequality is a problem. Half of children under the ages of 5 suffer from malnutrition, tensions still exist between Hindus and Muslims and unemployment is bordering on 7% of the working population. Another problem is involving the deficit of infrastructure, meaning that the country has problems with the flow of logistics, and production bottle necks. Similarly, the Human Development Index (HDI) which was drawn up by the United Nations to measure the progress of the world’s countries gave India 609 points in 2014, ranking it as 130 of 187 of the countries included.
To combat these problems, a reform of the Public Administration is essential.
To eliminate poverty, the Red Tape would have to end, public spending would need to increase for basic services and in order to liberate capital and invest in infrastructure, it would have to reduce state conglomerates.
Reforms made to the working market however are much more complicated, and require legislation incentives allowing women to have a role in the world of work, given that the cause of the low working activity is as a result of gender inequality. The second issue to be addressed is the improvement of productivity.
Similarly, the fiscal reports of the accounting and finance sector cannot be ignored. The government would have to reduce obstacles and regulations for companies in order to create potential for foreign investment and boost the manufacturing sector, as well as eliminate distorting taxes and differences between states. Finally, it would have to offer more centrality to the privatization process. The telecommunication sector has been generally successful, but the results from steel sector from the start of the year were disappointing.
The rate of inflation remains at a high level, and was 10% in 2013. The weakness of the Rupee (an increased price of imports) and deficiencies in terms of offer (eg. Transport inefficiencies and storage) are some of the reasons behind the pressures of inflation. To add, 2014 was a bad year for India in terms of agriculture (Crops were severely damaged at the start of the years due to strong rains). Prices were also affected by the limited strengths of the government in terms of rationalising subsidiaries. Consequently, inefficiency in the suppression of programs distorted production and caused problems with prices in the fight against cartels, who store agricultural products.
Whilst measures were introduced to eliminate inefficiency in relation to demand, recent initiatives of the monetary policy from the Reserve Bank of India will act somewhat as a counterpart. The final rate for annual variation of the CPI published for India was in January 2016 and was 5.9%.
The public deficit has reduced representing 4.5% of the GDP in 2013-14, facing 4.9% of the previous fiscal year. In 2014, it reached 7%, and 7.5% in 2015.
Also, it must be noted that India is positioned as 130 of 189 in the World Bank’s Doing Business Report, a report which classifies countries according to their ease of doing business. Furthermore, the Corruption Perception Index of the public sector in India was 38 points, placing it at 85 out of 174 of the countries published.