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Features & Analysis

India - tomorrow’s story
today’s opportunity

Today’s India is the world’s tenth largest economy by nominal GDP and the fourth largest by purchasing power parity, despite the problems developing nations tend to experience. Here lies the enigma that is India.
Rajesh Varma, Mumbai, India

 

After several decades of annual growth around 3.5%, India moved up to around 6% annual growth during the 1980s and 1990s. Post-Millennium, India’s growth rate has averaged around 8.4% a year. Even in 2009, at the height of the global economic turmoil, India grew at 6.7% - huge domestic consumption and demand enabled India to withstand a financial crisis.

Gerard Lyons, Chief Economist and Group Head of Global Research at Standard Chartered Bank, expects India to grow at an average of about 9.3% a year over the next twenty years. By 2030, he expects the Indian economy to be the third largest in the world.

The Indian success story has not been about exporting goods, but exporting services - especially outsourcing and IT. The service sector accounts for 54% of GDP as opposed to 28% in agriculture and 18% in manufacturing. Although the service sector is expected to lead GDP growth, during the next ten years the Government of India wants to increase the manufacturing share of GDP to 25%. This will lead to opportunities for foreign firms to help develop infrastructure such as roads, ports, education and health care, while increasing India’s manufacturing capacity to feed a growing domestic consumption.

Something expected to help turn India’s economy into one of the largest is its demographic dividend: the benefit it is forecast to experience from a reducing dependency ratio (the ratio of working-age population to dependent population). Some of the benefits of this demographic dividend will be the increase in savings brought about by a rising working population (the dependent population consumes more than it earns, while the working population saves more than it spends). Increasing disposable incomes will also lead to more spending, driving consumption and leading to further growth in the economy.

The government’s foreign trade policy has changed focus over the years from one of protecting producers to a policy of benefiting consumers. This is reflected in the steady reduction in import tariffs covering nearly all non-agricultural products. This, coupled with a series of free-trade treaties with other countries, has created opportunities for businesses wishing to export to India.

The government is also actively pursuing a policy of reducing the size of the public sector through privatisation, in the process increasing public ownership and promoting corporate governance. Currently, about 22% of India’s market capitalisation (as measured by the Bombay Stock Exchange and the National Stock Exchange) comprises former public sector enterprises.

The Indian financial markets are also now robust and fully liberalised, and there exists a strong Securities and Exchange Board. The Reserve Bank of India (India’s central bank) is also seen tobe a balanced regulator, whose prudent policies have kept the Indian economy on an even keel. In banking, India has about 80 commercial banks with more than 61,000 branches. As well as finance, India also has a large pool of engineers and skilled workers, and has the second largest English-speaking workforce in the World.

Over the last decade, the rules on foreign direct investment have progressively relaxed. Today, investment in most industrial sectors is allowed using the automatic approval route. Broadly speaking, this allows 100% foreign ownership in most sectors, except the defence sector (26%) and areas reserved for micro and small enterprises (24%).

Other sectors that restrict foreign ownership under the automatic approval route include telecommunications (74%), insurance (26%), print media (24%) and broadcasting (between 20 % and 49%). Exceeding these limits requires prior government approval.

Some sectors prohibit foreign ownership. These include nuclear energy; rail transport; retail (a policy announcement relaxing this restriction is expected shortly); real estate where the investment fails certain criteria; and gambling, betting and lottery businesses.

If you are thinking of starting a new venture in India you may have concerns over its diverse and complex nature - there are at least 18 widely spoken languages and hundreds of dialects. However, in India, English is the language for business communication. Indians also have a relaxed way of doing business and you can expect business meetings to be interspersed with informal conversation, designed to get to know you better.

India’s thriving economy and growth prospects offer many opportunities to business investors. As always though, be sure to seek professional advice before entering any business relationship.


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