Making big strides
Avinash Vazirani and Colin Croft say India’s fast-expanding economy may offer a silver lining amid a gloomy outlook for the global economy.
India will remain among the fastest growing economies this year, the World Bank said in its latest report on “Global Economic Prospects’’. Even as the rest of the world is grappling with highly restrictive financial conditions and persistent inflation, South Asia’s largest economy is expected to expand 6.3% in 2023, powered by growth in private consumption and investment, and a robust services sector
The Covid years and the resultant disruption of supply chains due to China’s stringent policy sensitised the world to the pitfalls of overly relying on one country. Rising tensions between the US and China also mean companies are increasingly looking to diversify away from India’s larger neighbour. The “China-Plus-One-Strategy’’, where companies look to set up a manufacturing base in another country besides China, is beginning to receive a lot of attention from investors.
We are already seeing evidence of growing investments into India. Annual foreign direct investment1 has grown from $3.6 billion a decade ago to $46 billion in the fiscal year ending March 31, 2023. Foxconn, the world’s biggest contract manufacturer and a key supplier for Apple, plans to invest about $1.5 billion in India. Pegatron, another Taiwanese supplier to Apple, has already invested $150 million in manufacturing in India, and is in talks about opening another facility. Following a meeting with Prime Minister Narendra Modi during his state visit to the US, Tesla CEO Elon Musk said the electric carmaker will be in India “as soon as humanly possible.’’
Underpinning growth in manufacturing is a nationwide Goods and Services Tax, which was introduced more than five years ago to replace a complex web of state and local taxes. The cut in the effective corporate tax rate to 25.2% from 34.9% four years ago is expected to give a fillip to growth and profits. A special lower rate of 17% was also announced for new manufacturing companies. Rapid progress is also being made on building roads, supported by windfall taxes. The government has been building an average of about 24 kilometres of road per day and targets to increase the pace to 34 kilometres in 2024, aiming to complete 12,500 kilometres next year.
The optimism surrounding India’s prospects is no pie in the sky and is driven by robust consumer demand from an expanding middle class and a population with a high proportion of young people. Massive aircraft orders placed by Indian airlines are a case in point. IndiGo recently placed an order for 500 narrow-body planes from Airbus, the largest in the aircraft manufacturers’ history. This news came hot on the tail of Air India’s announcement of orders for 470 Boeing and Airbus jets.
India now handles more real-time payments between businesses than any other country, accounting for over 40% of such payments worldwide, according to the Morgan Stanley report. The number of transactions reached 9.4 billion in May 2023, almost four times the volume generated two years ago. Boston Consulting Group, in a report, forecast India’s digital payment market to more than triple to $10 trillion by 2027.
Open Network for Digital Commerce (ONDC) is another platform that’s part of IndiaStack that seeks to promote e-commerce, with even Amazon committing to join the network. We believe through this initiative the government is democratizing digital trade by breaking down barriers and creating alternatives to rent-seeking platforms.
India has enjoyed political stability over the past decade due to the majority enjoyed by Modi’s Bharatiya Janata Party. That could change if the national election next year throws up a coalition government, which could slow the pace of decision making. However, it’s important to remember that reforms that started in 1991 didn’t stall even when the political scene was dominated by coalition government in the 1990’s and 2000’s.
Rapidly changing weather patterns could be another challenge and may impinge on India’s agricultural sector. More than 50% of India’s population is dependent on farming although it contributes just a sixth to the overall output. Lower crop output may dent rural demand and slow growth.
2 The movement off a business process of a company in one country to the same company in another country
3 The practice of engaging an external company in a foreign country to do another company’s work, usually as a cost-cutting measure
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