Asia’s wounded tiger

The Indian economy has faltered in recent years, as international investors remain sceptical of the country’s potential. Can a series of reforms jump-start growth and entice much-needed capital into the country?

 
 
November 13, 2012

Generally considered second only to China as the economy to watch going into the 21st century, India has long offered huge potential but little tangible evidence of becoming an economic powerhouse. Since government policies during the 1990s liberalised the economy, India has seen impressive growth rates, attracting the attention of global investors. However, this vast and complex country; a melting pot of competing cultures – of the colossally rich and horrifically impoverished –  and a intimidatingly extensive bureaucracy, is one that gives investors as much alarm as cause for optimism.

Recent figures have shown that inflation has risen higher than expected, with wholesale price inflation jumping 7.55 percent in August, caused partially by higher food prices that were a consequence of the unusually weak monsoon season. Responding to the lacklustre economic figures, the government announced a range of measures to liberalise the economy, going further than it has done at any stage in the last eight years. With ratings agencies S&P and Fitch giving India a negative outlook, the government had no choice but to announce a range of measures to prevent the country becoming the first of the so-called BRIC countries to be downgraded. Designed to revive the flagging economy, the policies drew praise and condemnation from across the country in equal measure.

Prime Minister Manmohan Singh addressed the country upon launching the reforms by pointing out that the global economic turmoil had impacted on India, and meant that action was needed: “The challenge is that we have to do this at a time when the world economy is experiencing great difficulty. The United States and Europe are struggling to deal with an economic slowdown and financial crisis. Even China is slowing down. We are at a point where we can reverse the slowdown in our growth. We need a revival in investor confidence domestically and globally.”

While the governing coalition led by Prime Minister Singh’s Congress Party said the moves were intended to cut the budget deficit, slash subsidies and increase investment, opposition parties from both sides of the political spectrum were aghast at the plans. The right, mainly repesented by the opposition Bharatiya Janata Party, called for strikes after a cut in the subsidy for diesel fuel, while the far-left Communist Party of India, Marxist (CPM) was furious about allowing more foreign investment.

Sitaram Yechury, leader of the CPM told the Financial Times: “The tragedy is that our Prime Minister has begun to worship the US Congress, wants Indians to be slaves, and foreigners to be our masters. We will not accept foreign direct investment (FDI) in retail. We will protest this decision till our last breath.”

We have not even scratched the surface. The market is going to start roaring

Deepak Lalwani, Founder of London-based consultancy Lalcap, which specialises in India, told World Finance that the reforms were necessary, but opposition parties were making political hay out of the situation: “There is short-term pain to have long-term gain. The whole issue has become more politicised, rather than there being an understanding of the economics of it.”

Help from overseas
The unhappiness with the change in foreign investment laws has been particularly contentious. The retail brand sector will allow 51 percent of foreign ownership, by companies such as Wal-Mart, while the aviation industry will soon allow foreign carriers into the market. Singh responded to the concern about increased FDI in the retail sector by saying: “Organised, modern retailing is already present in our country and is growing. All our major cities have large retail chains. Our national capital, Delhi, has many new shopping centres. But it has also seen a three-fold increase in small shops in recent years. In a growing economy, there is enough space for big and small to grow. The fear that small retailers will be wiped out is completely baseless.”

Lalwani, however, says that the concerns of the average Indians are valid, and that they need to be reassured of the benefits of FDI: “There are around 20 million involved in ‘kirana’ (general) stores, a lot of which are family-run businesses. In a country where there’s no social security net, if somebody is out of a job that means there is nothing for them to fall back on. It’s a pretty Spartan life. If you’re out of a job, who is going to feed your family and look after the house? So the fears are very real. They think that the minute the big corporations come in they will stamp out the small guy. That is why people are protesting.”

Singh also pointed out that the increase in FDI would benefit other industries, particularly in agriculture: “Those who bring FDI have to invest 50 percent of their money in building new warehouses, cold-storages, and modern transport systems. This will help to ensure that a third of our fruits and vegetables, which at present are wasted because of storage and transit losses, actually reach the consumer. Wastage will go down; prices paid to farmers will go up; and prices paid by consumers will go down. The growth of organised retail will also create millions of good quality new jobs.”

Infrastructure is something that needs to be invested in throughout the country, and Lalwani agrees with Singh that attracting foreign investment is the most realistic way of building it. “Infrastructure has not really been looked after for the last 30 years by India, so we are way behind. The government does not have the money because it’s been running a quite high fiscal deficit. The question is who’s going to provide the money? Who’s going to fix the rural infrastructure? It has to come from private sources. The foreign players have the capital, as well as the know-how and technology. It is not a situation that is ideal, but it is necessary. It’s very difficult and a long-term problem, but they are trying to address it.”

Our Prime Minister has begun to worship the US Congress, wants Indians to be slaves, and foreigners to be our masters

He adds that relaxing and tidying up the bureaucratic web that exists must be achieved to help reassure investors that infrastructure projects are financially viable: “They need to be bankable projects. There are a large amount of risks to investors. For example, land acquisition is a complete minefield, and so regulations need to be cleared up.”

top of the relaxation of FDI rules, the government also announced that four state-owned firms will be sold off to the private sector to raise approximately $2.3bn. Singh believes that his record in office has coincided with India’s emergence on the global stage and a transformation in the living standards of Indians across the country. “In the past eight years our economy has grown at a record annual rate of 8.2 percent.  We have ensured that poverty has declined much faster, agriculture has grown faster, and rural consumption per person has also grown faster.”

The complexity of India means a number of barriers to growth in the country. However, the opportunities remain considerable. The recent reforms that the government has put in place has meant that overseas investment will bring with it improvements in infrastructure, as well as expertise. The overarching theme for the country is about modernisation and catching up with other leading superpowers, as Lalwani says: “India needs capital, but also technology and modern business methods. The big picture is modernising the country.”

With the reforms in place, India could be set for a resurgence. Lalwani certainly thinks so, adding that the country remains relatively untapped by investors: “We have not even scratched the surface. The market is going to start roaring.”

Relationship with Pakistan
India and Pakistan have long fought over a number of areas and resources, most notably the region of Kashmir, which borders the northwest of India and east of Pakistan. Despite recent accusations of terrorism emanating from Pakistan’s Inter-Services Intelligence Directorate (ISI) security service towards India, the two countries are currently engrossed in a series of discussions aimed at pushing them into a new era of trade relations.

The recent seventh round of talks between Indian commerce secretary S R Rao and Pakistan Commerce Secretary Munir Qureshi in Islamabad has looked at forming strategic links, such as a gas pipeline through the Attari district in the Punjab towards Lahore in Pakistan, the setting up of joint business councils, and further cooperation in trade.

Strengthening these ties in trade is obviously sensible for both countries. The majority of trade is done on the regional level, and having severe restrictions between two large neighbouring countries with lofty economic aspirations can be harmful.

It’s clear that both sides realise the need for better cooperation, with Qureshi telling reporters after the event: “We have finalised these agreements related to customs cooperation, mutual recognition of required standards and the mechanism to address grievances for boosting the trade between the two countries.”

Northern India
In recent years, northern India, encompassing the capital and many of the most famous cultural landmarks the country has to offer, has seen rapid economic growth. Growth rates averaging around eight percent annually have propelled the northern states, including Punjab, Uttar Pradesh, Rajasthan and Haryana, to their current status as some of the most prosperous in the country. This growth is partly as a result of the so-called ‘Green Revolution’ in agriculture, which saw the introduction of high-yielding varieties of seeds and better use of fertilisation during the last 50 years.

Delhi, India’s capital and political heartland, has seen some of the sharpest growth in the region over the last few years, averaging just over 11 percent increases each year since 2008. Significant investment has been made in the capital, with a slew of Western-style luxury shopping malls built to cater for the increasingly rich middle class. Improving the infrastructure network, with projects such as the newly built Delhi Metro, was done hurriedly in anticipation of the 2010 Commonwealth Games that attracted the  world’s attention.

Uttar Pradesh has the third-largest economy in India, with a net state domestic product of $128.15bn. Dominated by agriculture, the state produces around 70 percent of India’s sugar. While Lucknow, the state’s capital, mostly exports textiles, the region is currently in the process of attracting greater foreign investment in the technology sector. Noida, which borders Delhi, has become a popular hub for IT firms.

One of the major projects in the country is a mammoth cross-state infrastructure and manufacturing development that stretches from Delhi in the north to the financial capital of Mumbai in the west. The Delhi-Mumbai Industrial Corridor is described as a ‘mega-infrastructure’ project worth as much as $90bn. Significant improvements in transport, including new high-speed trains and increased motorways, are being promoted as a way to link the two cities, while regenerating the areas between them into a manufacturing engine-room for the country.

In August, it was announced that Japan’s partly state-owned bank, Japan Bank for International Cooperation, would take a 26 percent stake in the project, while the Indian government is set to encourage further outside investment in order to push the project ahead.

Western India
The the western states of India are the country’s economic powerhouse, generating a massive 24 percent of national GDP and 23 percent of all tax revenue. Although agriculture employs the most people in the region, Mumbai’s financial services industry and Goa’s tourism attract large amounts of money, especially from overseas. It is to these parts that international businessmen tend to gravitate, and this has been reflected in the service industry’s considerable growth in recent years.

Goa has seen growth rates of around 17 percent during the last two years, reflecting the relative prosperity of the state. It has a GDP per capita higher than any other state, and two and a half times higher than that of the entire country. Tourism accounts for the most of the regions’ output, although Goa also has a productive mining industry. However, it was announced in September that mines were temporarily closed after a government investigation into the illegal trade of iron ore had cost the country $6.25bn over the course of the last five years.

Maharashtra, the country’s wealthiest state, includes India’s trading powerhouse Mumbai. The city, with a GDP of around $210bn, is the fourth most populous in the world and is dominated by financial services and its good connections to the rest of the world. It contributes 6.16 percent of India’s GDP and 40 percent of foreign trade. Most of the country’s leading firms, including the Tata Group and Reliance, are based there, while many foreign financial institutions base their south Asian operations there.

Southern India
Southern India is primarily agricultural, with 48 percent of the population working to produce a vast array of products that are heavily reliant on the monsoon season. This year’s lacklustre monsoon, which saw Kerala receive just 80 percent of its normal rainfall this year, has badly affected the performance of the region’s agriculture sector and fuelling the country’s inflation rate.

Bangalore is one of India’s major economic cities, hosting many of the leading tech firms in the country, including Hindustan Aeronautics Limited, Wipro and Infosys. There is also a thriving biotechnology industry, with just under half of the 265 India biotech firms based in the city.

The state of Karnataka, in which Bangalore can be found, had a state GDP of $58.23bn in 2009, although its growth rate has been slower than that of other regions, averaging around six percent during the last three years. Increased investment in the region in infrastructure is set to see a $22bn project, the BIAL IT Investment Region, built over the next few years.

Eastern India
The relatively impoverished east of the country was formerly the central point at which much of the operations of the British Empire’s trade occurred. Strategically positioned by the coast facing eastern Asia, Kolkata (or Calcutta, as it was known before independence), saw the bulk of trade between the rest of the British Empire, Europe, the US and China.

The region is now home to some of India’s leading educational institutions, including prominent universities like the Indian Institute of Technology in Kharagpur, 120km west    of Kolkata.

West Bengal, which until the 1947 partition was joined with neighbouring Bangladesh as Bengal, is India’s fourth most populous state, and is dominated by its service industry, which accounts for nearly 58 percent of output. Kolkata is now the leading commercial and financial centre in the east, and is being promoted by the government as the ideal location for trade with east Asian countries like Myanmar and Thailand.

Jharkhand is a state that is rich in minerals and houses some of the country’s leading industrial cities, such as Ranchi, Bokaro Steel City and Jamshedpur. Bihar, to the north of the state, also has a large service industry, but is also one of the poorest in the country. It has a large income divide, and the lowest GDP per capita in India.