Roaring Indian economy

Unlike developed economies that are on steroids, India is growing at a consistent pace with policy reforms, improved investor confidence, increasing domestic demand and foreign investments.

In 2001, Jim O'Neill, the Global Economic Research Head at Goldman Sachs, coined the term BRIC for Brazil, Russia, India and China. He predicted that the four countries would build a global economy and run the show. A decade later in 2013, he sounded frustrated with India, and asked in a paper, "What's wrong with you guys?" - directing his remarks at policymakers in India for not initiating the next leg of reforms in the $2-trillion economy.
After a reasonably good spell in the last decade with an average growth rate of about 7 per cent, lack of reforms and open policies clawed back the progression to sub-optimal levels. The economic climate, however, has started improving now and things are looking better. India grew at 7.6 per cent last fiscal, outpacing China and emerging as the fastest growing large economy in the world. With better monsoon and uptick in domestic demand, the country is expected to maintain its growth trajectory and sustain this pace in coming years. The government forecasts the economy to expand at 8 per cent or more in the next couple of years.
Following recent developments, O'Neill, who retired from Goldman Sachs in 2013, seemed pleased with India once again. In a recent interview to a US-based news channel, he said that his predictions were right for two countries, referring to China and India. O' Neill's changing views reflect that of major foreign investors who are once again looking to invest in India and expect reforms to be introduced sooner rather than later.
Major financial institutions such as the World Bank, International Monetary Fund and Asian Development Bank second the claim of the Indian government that expects the Asian tiger to roar at a faster and consistent pace from hereon.  

Factors propelling growth
Unlike major world economies that are on monetary and fiscal steroids for the last few years, India is on a self-accelerating growth, ably supported by low oil prices, increased capital expenditure, prudent monetary, and reform-minded policies. For the financial year 2016, India grew at 7.6 per cent - its highest in the last five years.
Many factors are at play behind the fast chugging wheels of the economy. The first is the lower import bill, which nearly halved in fiscal 2015-16 to $64 billion from $112.7 billion in the previous year. This helped direct revenues to improvise infrastructure across the country.
"A lot has been done during the last year (2015) to improve the ease of doing business in the country, which includes an increased capital expenditure in the second quarter of last fiscal. Increased investments have helped improve performance in core sectors such as coal, steel, and infrastructure," says Rupa Rege-Nitsure, Group Chief Economist, L&T Financial Services.
Inflation, which right now is at a 22-month high, is largely driven by food inflation and is expected to come down following a good monsoon this year. Industrial production, on the other hand, has picked up in May on the back of manufacturing and mining, following a contraction in the preceding month. Except for the contraction in natural gas and crude oil on account of structural bottlenecks, the core sector too has been resilient in the current fiscal and is likely to support industrial activity going forward.
As per the Reserve Bank of India (RBI), there are some signs of green shoots in manufacturing with purchasing managers and the industrial outlook survey indicating a pick-up in new orders for both domestic and external sectors. Business confidence is also strengthening in recent months.
The services sector is becoming broad-based and witnessing sharp acceleration through new businesses. Businesses are more optimistic on better economic conditions and thus have planned higher marketing budgets.
The confidence in the economy is positively affecting different sectors such as automobile, which is registering an increase in sales across most segments, railway, ports and international air freight traffic, foreign tourist arrivals, and domestic air passenger traffic, thus providing an underlying momentum for the upturn. The gradual improvement in the services sector is becoming broad-based.
In the external sector, merchandise export growth moved into positive territory in June after 18 months. This upturn was reasonably widespread, covering chemicals, marine products, handicraft, plastic, rice, electronic and engineering goods, states RBI's policy document.
However, imports continued to decline in the April-June quarter, albeit at a slower pace than in recent months.
While the pace of foreign direct investment (FDI) inflows slowed in the first two months of  2016-17, net portfolio flows were stronger after the Brexit vote. The foreign exchange reserves have risen to $365.7 billion by August 5 this year.
"As far as the economy is concerned, the macro-economic story of India based on fundamentals is looking good. The current account deficit is under control, growth is moving up, and although the quantum is slow, it is gradually picking up. External factors also look very good. All in all, this is a much-better story of the Indian economy compared with the world," says Dharmakirti Joshi, Chief Economist, CRISIL.

Reforms on the anvil
Over the last few months, the government has aggressively opened doors of the economy to attract investments from abroad and prop up growth. In June this year, the government eased FDI cap for nine key sectors. The main sectors include defence, aviation and food processing sectors. It also did away with the need for prior government approval for up to 74 per cent FDI brownfield investment in pharmaceuticals.
The most recent successful reform on the anvil is the introduction of the Goods and Services Tax (GST), hopefully by the next year. Successive governments in India have been mulling over the idea of a unified GST regime for years, but none have been this close to making it a reality.
GST is extremely crucial for the Indian economy as it aims to transform into a manufacturing hub and gush the pace of its economic engines at a faster pace. For now, businesses and manufacturing are crippled by the fragmented tax regime that pushes up costs by 20 to 30 per cent.
The idea behind implementing a unified tax regime is to attain uniformity, ensure faster movement of goods in the country, without giving up the power of the states. This is the reason why unified tax system exists in more than 160 countries worldwide. The new tax will replace all versions of indirect tax levies including VAT, Octroi, excise duty, service tax, and other state-level taxes - all in all some 17 indirect tax levies - and help bring down the cost of capital goods. Consequently, it will bring down the overall cost of goods and services since manufacturers will be freed from the burden of multi-level taxes and the tax will be levied only at the destination.
In the long run, it should raise returns to investment across much of the economy, strengthen government finances over the medium-term, and add to the GDP growth too. HSBC estimates an 80 basis point rise in GDP growth over three to five years, and NCAER pegs this at 0.9 to 1.7 percentage point jump.
"According to a World Bank study, benefits for highly logistics dependent companies could amount to as much as 200 bps improvement to return on sales. Clearly, this will greatly improve the ease of doing business in India and also improve the competitiveness of Indian companies abroad. The tax net will increase as well, as more entities are being brought under GST. In addition, taxes for services are likely to go up. For products, details will depend on the final tax rate that is decided. A revenue-neutral rate of 15-15.5 per cent with a lower bound around 12 per cent and a standard rate of 18 per cent is likely to be overall inflation neutral for the country," says Dr Wilfried G. Aulbur, Managing Partner India, Chairman - Middle East and Africa, Head Automotive Asia, Roland Berger.

Going forward
The momentum of growth is expected to accelerate further mainly on account of two factors that will pull demand in rural and urban sectors. Firstly, the normal monsoon experienced this year will bring down food inflation and bolster agricultural growth and rural demand.
Another stimulus to consumption spending is expected from the disbursement of pay, pension and arrears following the implementation of the seventh pay commission to government employees across the country.
"For India, growth will be triggered more from these domestic factors rather than externally, especially since the global economic growth is still anaemic. For the current fiscal, CRISIL expects a GDP growth rate of 7.9 per cent, which is 30 bps higher than estimated by the Reserve Bank of India," adds Joshi.
As India roars once again, all eyes are on the country and we are more optimistic than ever.

- suneeti@khaleejtimes.com

• India