Indian Growth Story a Bright Spot in the Global Economy
At a meeting of the G20 Finance Ministers in September 2015, International Monetary Fund (IMF) Chief Christine Lagarde said that though global growth will likely be weaker this year, India remains one of the few bright spots in the global economy. Several recently released economic indicators bear out this optimism about India.
1) Surge in FDI
Recently released data on global greenfield foreign direct investment (FDI) shows that FDI in India has more than doubled on a year-on-year basis. By the end of June of this year, India’s inbound FDI totaled roughly $30 billion, up $18 billion from last year. This surge in FDI can be attributed in part to India’s improved macroeconomic environment and growing institutional capacity. This year, India climbed from 71 to 55 (out of 144 countries) in the World Economic Forum’s Global Competitiveness Report 2015-2016.
India’s efforts to relax FDI limits as well as investment-friendly initiatives such as ‘Make in India’ and ’Digital India’ have been well received globally. The current government’s efforts to improve the ease of doing business, including its renewed effort to resolve tax cases, have resulted in an increasingly positive investor sentiment. The Modi government has also expedited regulatory clearances and made the process of obtaining industrial licenses less cumbersome.
Ernst & Young’s recently released survey of global CEOs ranks India as one of the most attractive investment destinations in the world. 60 percent of respondents ranked India among the top three global investment destinations, with 32 percent ranking it as the most attractive destination. If Modi can keep foreign investors excited about the “New India” opportunity, which will require him to successfully implement recent reforms and push through those remaining in the pipeline, then India could replace China as the undisputed, most favored investment destination.
2) Fastest growing economy
Although India’s central bank, along with the IMF and Asian Development Bank (ADB), recently lowered India’s growth forecast from 7.5 percent to 7.2-7.3 percent, this revision is more a reflection of slowing global growth rather than changes in India’s macroeconomic fundamentals. Even at this lower rate, India will likely remain the fastest growing economy in the world, surpassing China for the foreseeable future.
Recently released economic indicators reflect India’s impressive growth forecast:
- Total indirect taxes collected grew by 35.8 percent in the first half of 2015
- The number of government-funded projects increased for the fifth consecutive quarter
Recent pro-growth reforms that have passed or are in the legislative pipeline include:
- Land acquisition reforms being pushed through at the state level
- Labor reforms at the state level, with national legislation in the pipeline
- Small and incremental administrative reforms have helped to jumpstart stalled projects and increase government accountability
Improved investor sentiment, resistance to external shocks, and stable growth in trade and domestic consumption are among the factors expected to maintain India’s growth trajectory.
3) Index of Industrial Production (IIP) higher than expectations
India’s industrial and manufacturing growth accelerated to 4.2 percent in July, much higher than what analysts had predicted. Much of this was attributed to a jump in the manufacturing sector’s output, which grew by 4.7 percent, compared to a decline of 0.3 percent in July 2014. The Purchasing Managers’ Index (PMI) for September also showed improved manufacturing activity.
Industrial production has been supported by the Modi government’s efforts to overhaul India’s archaic regulatory framework, create a competitive environment among states to attract investment, and facilitate investment in manufacturing.
Whether the accelerating growth in this sector is a blip or a trend remains to be seen, but these positive numbers are an indication of the direction the country is taking, with the focus on manufacturing set to remain.
4) Inflation continues to fall
Inflation, as measured by the Consumer Price Index (CPI), has fallen steadily in the past year. India’s CPI hovered above eight percent for most of the first half of 2014, but has since declined to 3.6 percent.
Although India has benefited immensely from the drop in global crude oil prices, the Indian government is still focused on reigning in public spending and reducing the fiscal deficit. The government has not increased Minimum Support Prices (MSP) for crops and has reduced the government’s subsidy burden by removing the controls on fuel subsidies. Furthermore, India’s central bank has helped to keep inflation in check by maintaining a pragmatic monetary policy.
Heavily focused on meeting its inflation target of six percent by January 2016, the RBI has slashed its repo rate by a record 50 basis points. The RBI is on track to meet its target.
While all of these indicators suggest that India’s economy is beginning to recover from its long slump, some indicators have yet to improve:
- Exports fell 16.17 percent in the first five months of this fiscal year compared to the same time last year
- Private investment is yet to revive, with government investments largely driving the investment activity
- Bank credit remains low and rural wage growth has slowed down
Nevertheless, amidst China’s downturn and slowing global growth, India remains an attractive and compelling opportunity for global businesses.