India's Rising Economic Power PDF

INDIA´S RISING ECONOMIC POWER India has been a Republic since 1950, governed through a democratic parliamentary system. It´s also a major nuclear weapon power, with high military spending. India has been the world´s most populous democracy since the time of its independence in 1947, with a strong l...

INDIA´S RISING ECONOMIC POWER India has been a Republic since 1950, governed through a democratic parliamentary system. It´s also a major nuclear weapon power, with high military spending. India has been the world´s most populous democracy since the time of its independence in 1947, with a strong legacy of British rule of law and administrative institutions. India society is a multilingual and multi-ethnic. There are several religions like Christianism, Islamism, Buddhism, Judaism and Hinduism. In middle age, Muslim armies from Central Asia intermittently overran India´s northern plains, eventually founding the Delhi Sultanate and drawing northern India into medieval Islam. In the 15th century, the Vijayanagara Empire created a long-lasting composite Hindu culture in south India. In the Punjab, Sikhism emerged, rejecting institutionalized religion. The Mughal Empire, in 1526, ushered in 2 centuries of relative peace, under Islamic governance. THE BRITISH EMPIRE RULE: The British East India Company turned India into a colonial economy. British Crown rule began in 1858, with little rights to Indians, exploiting its natural resources and cheap labour. In WWI more than a million Indians fought for the British Empire, a social movement started pushing for legislative and social reforms led by Mahatma Gandhi and the National Indian Congress grew in power. A nationalist movement based on non violent resistance force the independence from the British rule. In WWII Indians vote to not cooperate with the UK. In 1947, the British Indian Empire was partitioned into 2 independent states one with a Hindu majority (India) and other with Muslims majority (Pakistan), a forced partition that caused large human suffering in both parties. India was for many years seen as the poor relation to China, held back by a sclerotic, sprawling state sector and labyrinthine bureaucracy. It still has enormous problems of poverty and poor infrastructure, but it´s beginning to emerge as a rival to its large neighbor with the kind of economic growth figures that were once the pride of Beijing. “India has overtaken the UK to become the world´s fifth-largest economy”, says Shilan Shah (senior India economist at the consultancy Capital Economics) citing recent updated figures from the IMF. Looking ahead, India set to continue its march up the global rankings. In all, we think India will overtake Germany and Japan to become the third-largest economy in the world within the next decade. Indian enjoys one of the largest GDP growth rate in the last decade, becoming the fastest growing emerging market in the last decade. Forecast by the IMF predicts a stable and fast growth of India´s economy in the years to come. Indian stock market is the 5th largest market (4,5 trillion dollars), but India´s market cap is likely to hit 10 trillion by 2030. The share of the IT-BPM sector in the GDP of India is 7,4% in FY 2022. The IT and BPM industries´ revenue is estimated at US$ 245 billion in FY 2023. The domestic revenue of the IT industry is estimated at $51 billion, and export revenue is estimated at $194 billion in FY 2023. The consumer market was 3,15 trillion (US$ 48,37 billion) in 2022. Demand growth is likely to accelerate with rising disposable income, easy access to credit and wide usability of online sales. India has emerged as one of the most attractive destinations not only for investments but also for doing business. India jumps 79 positions from 142nd (2014) to 63rd (2019) in the World Bank´s Ease of Doing Business Ranking 2020. This still falls short of where India should be to attract more investments. The problem is that we were late to take off and catching up is not easy. Infrastructure is being built at a furious pace. The 2 major reforms in labor and land policies being politically sensitive will be a dampener if not implemented. These are political decisions much like the aborted advantageous farm reforms. The more important labor reforms will culminate into 4 central labor codes covering wages, social security, occupational safety, healthy and working conditions, and industrial relations. These new labor codes are authored based on the International Labour Organization (ILO) standards and a consultative process involving various stakeholders. TO EXPERTS: “India is a well-developed market, characterized by a compelling growth narrative supported by strong macroeconomic fundamentals. The entry of a substantial workforce into the formal economy, a population equipped with digital capabilities, and the evolution of a thriving innovation ecosystem collectively contribute to the formation of an extensive talent pool”. Yet, higher commodity prices, better growth in India compared to the rest of the world, and higher global interest rates amid cautious risk appetite could keep the C/A (current account) deficit-wide and contain capital inflows in FY2024. Soon after WWII, in the late 1940s, India, China, Indonesia, Japan, S Korea (a few years later) and other SE Asian countries were at the same starting point. All followed their hybrid methods to establish strong economies. India has become a laggard in this area as it was reluctant to embrace a hybrid path and chose to remain on a socialist glide path. India is primarily a domestic demand-driven economy, with consumption and investments contributing to 70% of the economic activity. Exports fared remarkably well during the pandemic and aided recovery when all other growth engines were losing steam in terms of their contribution to GDP. The contribution of merchandise exports may waver as several of India´s trade partners witness an economic slowdown. According to Piyush Goyal (Minister of Commerce and Industry, Consumer Affairs, Food and Public Distribution and Textiles), Indian exports are expected to reach US$ 1 trillion by 2030. Over the years, the Indian government has introduced many initiatives to strengthen the nation´s economy. The Indian government has been effective in developing policies and programs that are beneficial for citizens to improve their financial stability and for the overall growth of the economy. Over recent decades, India´s rapid economic growth has led to a substantial increase in its demand for exports. Besides this, a number of the government´s flagship programs are aimed at creating immense opportunities in India. *According to the WB, India must continue to prioritize lowering inequality while also putting growth-oriented policies into place to boost the economy. A key part of India´s continued rise will be its ability to grow its manufacturing sector and challenge China as the world´s No 1 exporter. India has already benefited from a large, well-educated, often English speaking middle- class, helping the country to develop world-class IT and pharmaceutical sectors. It also has strong consumer demand, which accounts for about 55% of the economy compared with less than 40% in China. If India wants to be seen as a serious global actor, and not just an important one because of its large population, India must invest among other things → investing in a modern military, bolstering the economy, boosting partnerships with allied democracies and strengthening India´s democratic institutions. India requires strong leadership and decisive action, not just platitudes and appeals to populism and nationalism. *The global community has been waiting for the last 2 decades for India to play a bigger role in Asia and beyond. For the rest of the world, India´s promise is huge: - Its historical civilization - Geostrategic location - Huge labor force of 500 million people - The 4th largest military in the world - A formidable consumer market. But Indian politicians have hesitated in matching their rhetoric about the country being a leading power with building hard power. India in 2047 to be a $35-45 trillion economy, bringing the country into the league of developed nations. India has the advantage of demographic dividend, and its aspirational young population provides a huge opportunity for growth. India is also rapidly transitioning to clean energy, and the country aspires to achieve 500 GW of green energy capacity by 2030. India has become a high-quality manufacturer of valuable goods and services, given the skill-sets and the talent pool available across sectors such as IT, textiles, hospitality, gems and jewelry and each one of these would provide opportunities for investors looking to engage with India. CHALLENGES FOR INDIA DEVELOPMENT: Since 1990, households with high disposable income have risen twenty-fold. The number of households with a disposable income of more than $10.000 has leapt from around 2,5 million in 1990 to nearly 50 million in 2015, according to Euromonitor International. Soon India will have the largest middle class than any other country. *The number of households in the middle class will be half of the population. INDUSTRIES: India´s telecommunication industry is the 2nd largest in the world with over 1,2 billion subscribers. It contributes 6,5% to India´s GDP. After the 3rd quarter of 2017, India surpassed the US to become the second-largest smartphone market in the world after China. At the end of 2011, the Indian IT industry employed 2,8 million professionals, generated revenues close to US$ 100 billion equaling 7,5% of Indian GDP, and contributed 26% of India´s merchandise exports. The Indian automotive industry is the world´s second-fastest growing. In 2022, India became the world´s third-largest vehicle market after China and the United States, surpassing Japan. The pharmaceutical industry in India emerged as a global player. As of 2021, with 3000 pharmaceutical companies and 10.500 manufacturing units India is the world´s third- largest pharmaceutical producer, largest producer of generic medicines and supply up to 50-60% of global vaccines demand. These all contribute up to US$ 24,44 billion in exports and India´s local pharmaceutical market is estimated up to US$ 42 billion. India is among the top 12 biotech destinations in the world. The Indian biotech industry is key in its economic development.  Growth projection: India´s GDP will grow close to 7% in 2024-2025, with the potential to go “well above” 7% by 2030. The economy is expected to expand from about $3,7 trillion this year to $5 trillion in 3 years, making it the world´s third-largest, and could even reach $7 trillion by 2030. 2 growth phases: 1950-2014 and a “decade of transformative growth” since 2014. The state of the economy was “far from encouraging” due to structural constraints, tardy decision-making and high inflation. Post-2014 reforms have restored the economy´s ability to grow healthily, making India the fastest-growing G-20 nation. Qualitative superiority: India´s 7% growth (when the world grows at 2%) is “qualitatively superior” to the 8%-9% achieved during the previous era when the global economy grew at 4%. Pre-independence economic share: India´s share of world income declined from 22,6% in 1700 to 3,8% in 1952. Post-independence economic strategy (1950s): the Indian government adopted a strategy in the 1950s, focused on achieving economic self-sufficiency: - Rapid industrialization - Created large state-owned enterprises (SOEs) *The decadal average growth rate (1952-60): 3,9% Challenges in the 1960s: slowdown in economic growth during the 1960s (decadal growth rate of 4,1%). The 1962 Sino-Indian war 1965-66 India-Pakistan war  Severe drought in 1965 Barriers in 1970s: - Indian rupee devaluation of 57% - Several political instability - Imposition of Emergency in 1975 - Decline in decadal average growth rate, reaching 2,9% Reform initiatives in the 1980s: removal of price controls, initiation of fiscal reforms, revamp of the public sector, reductions in import duties, de-licensing of the domestic industry, promotion of exports. The 1980s also witnessed greater integration with the global economy, with a focus on promoting exports. Modest liberalization combined with significant government spending led to an improvement in GDP growth, reaching 5,7% in the 1980s. External shocks in the early 1990s: - Breakup of the Soviet Bloc posed an external shock - The Iraq-Kuwait war adversely affected trade and disrupted current account balances during 1990-1991 - The external crisis, unsustainable government spending and internal socio- political factors led to a Balance-of-Payments (BoP) crisis in 1991. Reforms in 1991: - Eliminating the complex system of rules, permissions and licenses - Reversing the substantial inclination towards state ownership of production facilities - Ending the inward-looking trade strategy - Real GDP growth averaged 5,8% per annum in the 1990s Early 2000s economic momentum: *India´s reforms yield growth and capital influx: the growth dividends from transformative reforms implemented during the period 1998-2002 played a key role in economic growth. The early 2000s witnessed a global growth boom, and India attracted significant capital flows. *Key measures implemented: - Sarva Shiksha Abhiyan (SSA): focused on universal education - National Rural Health Mission (NRHM): to address rural health needs - National Rural Employment Guarantee Scheme (NREGS): to provide rural employment *Decadal average growth rate was 6,3% per annum in the 2000s. Impact of global financial crisis (2008): the global financial crisis exposed the fragile foundations of the growth spurt in India. Bad debts in banks began to accumulate The bad debt ratio reached double-digit percentages, peaking at 11,2% in March 2018 Much of the bad debt originated between 2006 and 2008 High fiscal deficits and loose monetary policy (2009-2014): during 2009-2014, the government attempted to sustain high economic growth by running high fiscal deficits and maintaining loose monetary policy for an extended duration. *Nominal GDP growth remained high during this period. *India experienced annual double-digit inflation rates for 5 consecutive years from 2009 to 2014. *Twin deficits and overvalued rupee: India faced high twin deficits (fiscal deficit of 4,9% and current account deficit reaching 4,8% in FY13) and the Indian rupee was overvalued during this period. *Crash of Indian rupee in 2013: the Indian rupee experienced a significant crash against the US dollar. Between 2009 and 2014, the Indian rupee depreciated annually by 5,9% on average. *Outcome of challenges: the combination of high fiscal deficits, loose monetary policy, twin deficits and the overvalued rupee led to economic growth stalling during this period. ECONOMIC STRATEGY UNTIL 2014: Transition from closed to open economy (1950-1980): - Import substitution, export subsidies, stringent restraints on technology and investment cooperation - Controls on capacity expansion, licensing requirements for manufacturing industries Pro-business reforms post-1980: import liberalization, export incentives, exchange rate policies and expansionary fiscal policy. This reforms were seen to enhance productivity and boost demand through improved credit availability and high public expenditure. Simultaneously, unsustainable investments, questionable loans, opaque allocation of resources and high fiscal deficits led to a BoP crisis in 1990-91. The BoP crisis triggered comprehensive economic policy overhauls, moving towards a market economy → trade policy reforms, FDI liberalization, industrial policy revamping. Private sector became the major engine of growth and employment generation during the 1990s and 2000s. Foreign technologies were denied due to a close economy, lack of resources and security reasons. Since the 1980s, technology has been progressively used to transform the Indian economy. Challenges in the Indian Economy (pre-2014): - GDP growth below 5% - High Wholesale Price Index (WPI) inflation in food articles - Accentuated structural constraints Structural constraints: - Difficulties in quick decision-making - Subsidies limiting fiscal space for public investment (especially in capital goods) and low-value addition in manufacturing - Presence of a large informal sector and insufficient labor absorption in the formal sector - Low agricultural productivity due to intermediaries, storage shortages and inter- state movement issues Structural reforms and macroeconomic fundamentals (since 2014): the Government of India initiated several structural reforms strengthening macroeconomic fundamentals. India emerged as the fastest-growing economy among G20 nations. Estimated growth of 7,3% in 2023-2024 following 9,1% (FY22) and 7,2% (FY23) Post-pandemic recovery and job generation: urban unemployment rate dropped to 6,6%. Net new Employees´ Provident Fund Organization (EPFO) subscribers in the age group 18-25 consistently exceeded 55% of the total net new EPF subscribers since May 2023. Infrastructure development: record expansion of road, rail and air networks ➔ 74 airports were built in the last 9 years and the number of universities increased from 723 in 2014 to 1.113 in 2023. ➔ Gross Enrolment Ratio (GER) for girls increased to 27,9% in 2020 from 12,7% in FY10. ➔ Total enrolment in higher education rose from 3,4 crore in 2014 to 4,1 crore students in 2023. Effective crude oil management and fiscal support: government provided a 50-year interest-free loan of ₹1 lakh crore to states in FY23 and announced another ₹1,3 lakh crore in FY24. States utilized more than ₹97.000 crore out of the ₹1,3 lakh crore of interest-free loans for capital investment in the first 8 months of FY24. DRIVERS OF INDIA´S GROWTH IN THE LAST DECADE: Financial sector reforms (post-2020): addressing the financial system crisis post-2020 with reforms such as recapitalization, Public Sector Banks (PSB) merger and amendments to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. *Implementation of Insolvency and Bankruptcy Code (IBC) facilitated the clean-up of balance sheets. Simplification of regulatory frameworks and reforms (since 2014): *Enactment of Real Estate (Regulation and Development) Act, 2016 promoting transparent transactions and reducing black money circulation. *Introduction of Goods and Services Tax (GST), reduction in corporate and income tax rates, exemption for sovereign wealth funds and pension funds, and removal of Dividend Distribution Tax to reduce the tax burden on individuals and businesses. *Enhanced tax base, reduced compliances, formalization of the economy and consistently rising monthly gross collections. Private sector engagement and disinvestment policy: *Revival of the disinvestment policy, introducing New Public Sector Enterprise (PSE) Policy for Aatmanhirbhar Bharat to minimize government presence in PSEs. *Introduction of initiatives to enhance manufacturing capabilities, promote exports and provide Production Linked Incentives (PLI). Ease of doing business and MSME sector reforms: *Decriminalization of minor economic offenses under the Companies Act, 2013, resulting in ease of doing business. *Elimination of 25.000 unnecessary compliances and repeal of over 1.400 archaic laws. *Introduction of initiatives such as Emergency Credit Line Guarantee Scheme (ECLGS), redefinition of MSMEs under Aatmanhirbhar Bharat, TReDS for addressing delayed payments and extension of non-tax benefits for MSMEs. Public spending on infrastructure (since 2014): effective capital expenditure by the Union government rose form 2,8% of GDP in FY14 to 4,5% in 2023-24 (BE). Programs like Bharatmala, Sagarmala, UDAN and others addressing infrastructure and logistics bottlenecks. Inclusive growth policies (last decade): - Over 10,11 crore women are given free gas connections - Construction of 11,72 crore toilets for the poor - Opening of 51,6 crore Jan Dhan accounts - Over 6,27 crore hospital admissions under the Ayushman Bharat Scheme - Construction of 2,6 crore pucca houses for the poor CHALLENGES CONFRONTING THE INDIAN ECONOMY: Energy security and transition: balancing energy security and economic growth against the need for energy transition poses multifaceted challenges. *Policy actions related to energy choices have geopolitical, technological, fiscal, economic and social dimensions. Artificial Intelligence and employment: the advent of AI raises concerns about its impact on employment, particularly in service sectors. *An IMF paper estimates that 40% of global employment is exposed to AI, emphasizing the need for investment in infrastructure and a digitally skilled labor force in developing economies. TRACK RECORD OF OVERCOMING CHALLENGES: Pradhan Mantri Kaushal Vikas Yojana (PMKVY): to provide relevant industry skill training to Indian youth for better livelihoods, with around 1,3 crore candidates trained and 24 lakh individuals placed as of December 2023. Renewable energy promotion: focused efforts to promote manufacturing and use of renewable energy, resulting in a combined installed capacity of 179,57 GW from renewable sources, including large hydropower, as of November 2023. Internet penetration: Internet penetration in India crossed 50% in 2022, growing three-fold since 2014. Aadhar implementation: Aadhar facilitated the transfer of over ₹34 lakh crores to more than 1167 crore beneficiaries under Direct Benefit Transfer (DBT), with over 200 crore Aadhaar-based authentications monthly. Financial inclusion: Prime Minister´s Jan Dhan Yojana reached 51,5 crore beneficiaries as of January 10, 2024, with a 3,5-fold growth since March 2015. Notably, 56% of account holders are women, and two-thirds are in rural and semi-urban areas. Covid-19 response: successful implementation of one of the world´s largest vaccination programs using the CoWin app, administering 221 crore vaccine doses to the population aged 18 years and above. Technological leap in space exploration: launched 431 foreign satellites, with 396 launched since June 2014, showcasing advancements in space technology. Proactive approach: India´s “Mission Mode” approach has been effective in addressing challenges, both existing and emerging.  Adaptability: the country´s ability to convert disadvantages into strengths and use technology for inclusive growth demonstrates adaptability and resilience. Growth outlook: India´s growth is estimated at 7,3% in FY24, with expectations of sustained strong growth. Current account deficit: lowering current account deficit to 1% of GDP in FY24. MSME focus: reforms unleashing the productive potential of India´s MSMEs with streamlined regulatory and compliance obligations. Land availability: ensuring land availability at reasonable prices Energy needs: measures addressing the energy needs of the growing economy G20 Presidency: successful hosting of G20 Presidency, marking India´s arrival as a key consensus builder on the global stage Chandrayaan-3: successful reach to the South Pole of the Moon 5G deployment: achieved the fastest deployment of 5G globally SECTORIAL CONTRIBUTIONS: Manufacturing sector´s share in Gross Valued Added (GVA) increased from 17,2% (FY14) to 18,4% (FY18) due to the Make in India mission. Remained robust at 17,7% (FY24) with Production Linked Incentive (PLI) schemes. Construction´s sector´s share in total GVA was 8,8% (FY14) and almost recovered to 8,7% (FY24) after countering real estate price increases and pandemic challenges. Service sector´s share in total GVA increased from 51,1% (FY14) to 54,6% (FY24) due to the pandemic and subsequent unlocking, leading to a surge in non-contact services. Government´s drive towards digitalization (represented by India Stack) plays a substantial role. TRANSFORMATION IN INVESTMENT CLIMATE: The seemingly impressive investment rate in the first decade relied on excessive borrowing and over-optimism, leading to an unsustainable situation. Banks were reluctant to lend to corporates in the second decade, resulting in a decrease in the investment share of GDP. Stresses on balance sheets accumulated in the first decade, contributing to macro fragility, high fiscal deficit, high current account deficit and sustained double-digit inflation. *India was included in the infamous club of “fragile-five” emerging economies. GOVERNMENT MEASURES TO BOOST INFRASTRUCTURE: The government accelerated work on a large pipeline of stalled infrastructure projects by addressing issues like construction delays, administrative inefficiencies, financing challenges, legal complexities and land issues. The government digitized bureaucratic procedures, streamlined project approvals, eased legal constraints, reduced corporate tax rates, implemented a uniform GST regime and opened new avenues for private investors. The Pragati/Project Monitoring Group (PMG) mechanism has played a crucial role in expediting the execution of long-delayed projects. GLOBAL SIGNIFICANCE AND TRUST: Global presence: growing importance in the global economic landscape Global achievements: major strides in various fields, including space exploration and technology deployment Citizen resilience: oath reflects the resilience and determination of Indian citizens founded on trust