"Within one month our revenues had jumped over 50%."

Indian Economy 2012 Forecast

India's outlook

The Indian economy has come a long way in the past few years, ever since the Indian government decided to open up the economy to private businesses and foreign investors. Since, then the Indian economy has grown at a steadily high rate of growth over the past few decades, when the Indian government lifted the “License Raj” set of rules in 1990. The Indian economic GDP went from $280 billion in PPP to $4 trillion in PPP in 2010. During this time, in terms of PPP the Indian GDP per Capita went from just around $419 to $3408 in 2010. The Indian population also went from 700 million to 1.2 billion from 1981 to 2011. So the India not only increased in population, but also increased in wealth and size. The Indian growth miracle is also considered to be a more stable in comparison to its peers like China. The current Indian growth rate is forecast to be approximately 8-9% for the next few years, providing that the Indian economy does not fall prey to the many obstacles.

While the economy has surged in past few decades, the Indian government has lagged far behind politically and legislatively. India still suffers from chronic power outages around the country, due to poor government management. A lot of private capital has flowed into India’s power sector to solve the problem, but with the government still managing parts of the supply chain, there still continues to be mismanagement and millions of people without power. The situation has become so bad even in places like Bangalore, that companies have decided to solve the problem themselves. Huge IT companies like Infosys and Wipro, have huge tech campuses with their own power sources to guard from power outages. These companies also provide their own bus, security, and in some cases even lodging services to their employees. This is all done because the Indian government has failed to provide these basic services on its own, so companies have picked up the slack as well as the extra costs. While the Indian government has a lot of infrastructure projects in the pipeline, a number of them have gone over budget, over date, as well as being dogged by claims of mismanagement and shoddy work. To be fair this is largely a byproduct of Indian politics, where the building of every small road takes various permits and is open to exploitation by various officials. Then there is the issue of corruption in the Indian economy, with India having a very low ranking on the Corruption Perceptions Index. India was ranked 87 on the Corruption Perceptions Index, which is far lower than Brazil at 69, which is another BRIC country. While the Indian government has passed legislation targeting corruption more extensively such as the Right of Information Act passed in 2005, there are still some serious issues with corruption in India. While India is burdened by poor infrastructure and poor governance, there is also the issue of stalled reforms. The Indian government has still not passed reforms allowing for more foreign companies to compete in domestic industries. The continued lack of good governance might push Indian growth rates lower, then there is also the issue of lower investment in education, fiscal deficit, high inflation, and complex labor laws. But for all its current problems, investors and small businesses should continue to look at India as a market ripe for investment and goods.

While the Indian economy might not be as hot in some regards as the Chinese economy, it also does not face some of the same problems that China does. While there is ongoing talk of a “hard landing” in the Chinese economy wiping out growth rates and putting the Chinese economy in recession, there is no such discussion about India currently. Because for all the faults about India’s democracy, it has largely produced growth rates that are more sustainable, less speculative, more inclusive and more concrete. For example, China’s economy is dominated by exports and the government, with household consumption among lowest at 35% of GDP in 2010 which is lower than it was in 2009.  In comparison, 55% of India’s economy is based on consumption in 2010 which is a 1% increase from the previous year. The Indian economy has slowly been orienting more towards domestic consumption as opposed to the other BRIC economies besides Brazil. The Indian economy is a health mix between the private sector and the government, with many private Indian MNCs in the economy as opposed to the other BRIC countries besides Brazil. Virtually every major company in the Chinese economy is owned by the state, and these SOEs also receive preferential treatment from the government. While India also has its own SOEs, they are no where as dominant in the domestic economy as China’s. Thus, putting more money in the hands of the private sector and allowing for a more wide dispersal of economic growth. As a result, more middle class Indian citizens are capable of engaging in consumption. While most businessmen consider India’s democracy as slow, loud, and cumbersome; there is greater political integration and less chance for widespread upheaval as is the case with China’s government. So while it may be a burden on business in the short-term, it provides for more long-term stability. If one only looks at growth rates, then sure India may be performing less dynamically then the neighbor next door. But keep in mind, that most seasoned investors know that the Chinese government regularly falsifies its economic statistics. This largely occurs due to the way the Chinese political establishment is structured, where local officials want to prove their worth to the central government in order to get promotions and benefits. No such conditions are apparent in India, where local politicians are elected locally and are not appointed by a distant central government. As a result, their is more local stability in India.

There are many other pluses for India such as favorable demographics, strong protections for property rights, protections for intellectual property, as well as more political and economic freedom. While India certainly has its problems, it is no different from when the US was going through its growth pains. According to K.N. Vaidyanathan, former Executive Director of the Securities and Exchange Board and Senior Fellow at Gateway House. Just as in America, Indian billionaires will discover why they need people at the bottom. The American robber baron era, was dominated by regular tales of corrupt and inept politicians, major gaps in income equality, and mass environmental degradation. But just as America slowly overcame these challenges, so too will India. Since, just as America was a democracy and its government system allowed for political debate. So too does India’s government, and many of the problems that investors consider debilitating and unsolvable in India, will eventually be overcome.

My guess is that India will certainly continue to outgrow the West for at least the next 5 years, and might even surpass China in economic growth if the hard landing hits the Chinese economy. Plus, the Indian middle class seems to be getting larger and more conducive to consumption than that of any other emerging economy. This market is ripe to sell into for small businesses and large companies to sell into. Investors should consider looking into investing in consumption based industries. Things such as fast food, retail items, and everyday basic necessities will likely be the hot spots for the Indian economy. As the Indian market has grown, there has been a tremendous surge in demand for media products. India has the most prolific film industry on the planet, and there is an ever increasing number of talk shows, musical programs, and other media products on local Indian channels. The internet is pushing deeper and deeper into even the most rural Indian towns, and these kind of trends are likely to intensify. So while there might be some short term economic hiccups and instances of lower than expected economic growth, India’s economic expansion is very real and is  likely to occur for the foreseeable future since it is largely devoid of the speculative excesses that are hampering economic growth around the world. So investors and businesses would be wise to take advantage of the economic opportunities that India offers. If you have any questions about India’s economy or outlook. Feel free to email me at zadey@globial.com or follow me on my Globial account.

 

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Author:Globial International Business Team

The Globial International Business Team researches, analyzes, and reports on all things related to global trade and business.

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