Indian Economy – Future Prospects – 31st July 2014
R.Kannan – Hinduja Group
Write Up in the Global Economic Summit Held on 11- 13 , September -
Mumbai
India’s potential for economic
growth is between 7 – 8% in the immediate future and 8% - 9% in the medium
term. It should be possible to achieve a
growth of 7% within one year from now and it could be taken above 8% in the
next three years. In the long term we could aim for a growth of 9% p.a going forward for at least ten years.
Indian Economy is in the take off
stage again. After achieving a growth of more than 8% for a few years, the
growth decelerated on account of developments in the global economy and the
domestic issues. After a reasonable
growth, the kind of deceleration of growth was not expected. Due to increased
social activism and the issues relating to coalition management at the central
government level, led to impasse in decision making and many of the sectors
which were attractive for doing business became unattractive during the last
three years. After a successful working of Coalition model for several years,
the model failed to sustain the momentum going forward. The objectives of
various coalition partners were in conflict with each other and the working
arrangement failed in delivering the desired results.
After several years, a government
with a majority has come to power at the centre and the government will not be required to waste its time on management of coalition and
coalition issues and it would be able to concentrate on issues relating to Social , Economy , Technology development and
other pressing issues. The issues relating to Global Economic Melt down are
also being addressed and the global economic environment is improving but not
at a pace which is desired by the global leaders. India with other fast growing
countries in the world can contribute to the overall increase in global
economic growth in the coming years.
The experience of the Prime
Minister in achieving a good growth in Gujarat in Industrial and Agricultural
development is likely to go a big way in replicating this model in several other
parts of India. The policies announced by the government are forward looking
and they had set an objective to increase the rank on doing business and the
World Bank President was of the opinion that in the immediate future, India
could move up fifty ranks from the
present level, if appropriate response is developed by the government to kick
start the economic growth again. The sentiments of investors including the foreign investors are also very favourable today in kick starting the investment process
in the Indian Economy.
Indian Economy is inherently very
strong and the Economic growth is well supported by all the segments of the
economy including the development in rural areas. After the increased
penetration of mobile phones in rural areas, the services business in rural
areas has started gaining momentum. India has the largest number of
entrepreneurs in the world and there are lot of small entrepreneurs and traders
in the unorganised sectors which help to sustain the economic momentum.
To attain the full potential of
Economic growth , proactive policies have to be formulated and implemented in
various areas of the Economy.
Agriculture. India is one of the largest producers of agricultural
produce in the world and it is ranked Number one and two in many products.
Agriculture is also contributing to exports in a big way. The productivity in
agriculture in many of the commodities are less than half of the best in the
world and there is a lot of scope for improving the agricultural productivity.
The government is targeting a growth of 4% in Agriculture per annum and if we consider the present productivity levels, we
could look at a stretch target of 8% growth in Agriculture and 6% under normal
circumstances. Even achieving a growth of 4% p.a. was found to be difficult and
there were shortfalls in achieving the target in many years. Few of the states
in India, had shown that it was possible
to achieve a growth of 8% in agriculture . This growth could be achieved by
creating cooperative structures for agricultural produce in all the states,
ensuring remunerative price for farmers without any government subsidy and consolidation
of land holdings for adoption of automation ( under cooperative structure ) and
adopting the best practices . This could be achieved through creating new organisation
structures for agricultural management, contract farming, remunerative price to
farmers, knowledge sharing and extensive training. By adopting these strategies, we can also
ensure that the year on year sharp decline in Agriculture’s share in the
overall GDP could be arrested.
Industrial Policy. The government has already prepared plans for
increasing the contribution of manufacturing from 15% of GDP to 25% of GDP. The
government has allowed 100% FDI in Many
sectors of the economy and there is an increased liberalisation in limits being
effected in various sectors of the economy, year on year by the government. Recently
the FDI caps in Defence and Insurance were increased and many more such
announcements are expected to be made in the near future.
One of the reasons for high
growth in any sector or industry world over is
ensuring the development of a viable
Eco system for an industry and
availability of inputs ( Land, Labour, Capital and Machinery ) at
affordable and low cost rates. The government’s initiative in developing specific industry focussed industrial clusters
will ensure the development of a suitable eco system. But for a secular growth
for the industry, there is a need to ensure other factors of production are
also available at competitive rates. The
government is already trying to address the issues of Land and Labour. The
government had announced a few policies
relating to labour, which should provide flexibility to corporates, optimum
utilisation of labour. The government is in process of formulating policies to
acquire land at competitive rates for industrial and Infrastructure
development. There is already an
enabling environment for adoption of best technologies from across the world in
various sectors of the economy. The IT hardware sector is being given a boost
to grow in line with the growth in IT services sector, There is a need to
reduce the cost of capital for the investors and also make sure long term funds
are available for high capital intensive projects.
The mechanism created in the
Cabinet secretariat to speed up large projects through Project Monitoring group
has started yielding results. Many of the pending projects were cleared by this
group and companies have started taking initiatives to speed up the
implementation of the cleared projects. Similar mechanism is being contemplated
to be set up in various state levels to speech up projects which have capex of
less than Rs.1000 cr. There is an enabling environment now to revive the plans
for capital projects and capital expenditure. The new push should goad
companies to plan for new large projects for expansion of capacity.
Fiscal Policy. India is reporting fiscal deficit every year and
this trend is likely to continue for several years to come. India has got one
of the lowest Tax / GDP ratios in the world. Considering the increasing
contribution of services to the Indian Economic growth , more and more services
are being brought under the service tax net. In this budget, it is projected
that the revenue from service tax will exceed the collections from Customs
duties and Excise duties. The subsidies given by government is one of the major
issues of concern and it was showing a rising trend. The revenue earned by
government falls short of the collections on Revenue account and the deficit
has to be met by raising resources on capital account. The fiscal deficit was
showing a rising trend and drastic measures had to be taken to reduce the
fiscal deficit. Now that the deficit is
coming under control , the expectations are that this could be improved further.
In the immediate future, the objective is to maintain the present credit rating of India.
The new government is planning to undertake measures to improve this rating. Improvement of country rating will help Indian
companies to raise foreign funds at attractive rates. Since our rating is low
today, Indian companies have to pay premium on the funds borrowed from abroad.
To shore up the revenues and
exercise control on expense, the government has to ensure improved compliance
of the tax policies, targeting the
subsidies and substantially reducing them; generate resources from under
performing / non performing assets of the government including shares in PSU’s
and land holding of the government. There is a need to manage the fiscal
deficit by exploring all the available
options and one major criterion could be considered , i.e., how the options
being considered would affect the performance of the Industry and Economy.
Before deciding on options, including the change in tax policies and
incentives, the socio economic benefits of the new planned policies should be
reviewed.
In the light of new developments
across the world, now countries are adopting Macro prudential policies, whereby
the policies implemented by government are in synch with the policies
implemented by central banks and there is a focus on systemic risk. There is an
increased focus on Inflation, Unemployment , Economic and Industrial growth. In
this light, the Fiscal policies being formulated should take care of the
interest of all the stake holder’s in the economy.
Monetary policy. The recent crisis in the world has increased the
role of Central banks in ensuring the stability of an economy and the financial
services systems. Central banks around the world had played a major role in
bringing in the required stability to financial systems and taken the role of
close monitoring of economic variables to develop appropriate response. The
banks have adopted easy monetary policies, ensured liquidity in the system and
brought in appropriate responses from time to time . The central banks focus on
key monetary variables and one of their main focus is inflation targeting. Indian
Central bank has played a pioneering role in weathering the global economic
storm and brought in policies which ensured the stability of the financial
system in India. Going forward, the monetary policies should ensure easy
availability of credit for good projects at affordable rates . The monetary
policy has to take care of economic growth, employment levels and inflation. There
is a need to increase the availability of credit to good projects and reduce
the interest rates.
Trade Policy. India has a
large deficit today and this is likely to increase considering the fact that
the reliance on imported energy is likely to increase going forward. One of the
recent initiatives taken by the government is to encourage exports from India
to various other countries in the world. Now the Indian embassies based abroad
are helping Indian companies to identify
the opportunities for exports. Over the years, India also has become globally
competitive in many sectors. India today has emerged as the Global Hub for
IT/ITES, Auto and Auto components, Pharma and Bio tech, R& D services and
in several others areas. There is a good eco system available in the above
sectors to achieve globally competitive standards by Indian companies. Going
forward, the government has to draw up a list of countries with whom India runs
a trade deficit and prepare action plans for reducing the deficit with the countries,
where the deficit is very high. The emerging industries, the emerging
entrepreneurs and SME’s should be encouraged to look at the export
opportunities and we have to identify few more areas for development including
Health, Education , Defence production and others. Achieving higher growth in
Manufacturing and Agriculture would help the country to increase the
global competitiveness in many more
products. By increasing the global competitiveness, it should be possible to
reduce the trade deficit, which is one of the main concerns for Economic
stability.
Trade policy of India today
enables the foreign companies to invest though
FDI in many sectors of the economy. But the FDI received every year by
India is still miniscule compared to the FDI received by other countries in the
World . There is an increased interest by investors around the world to invest
in Indian manufacturing and the government is in the process of making
investments in India easier and there will be new announcements regarding Trade
facilitation. The requirement of large funds for infrastructure including the
plan to develop 100 smart cities is already attracting the interest of
investors around the world. The recent budget allowing infrastructure and
investment trusts and allowing banks to
issue infrastructure bonds will attract more foreign investments.
Implementation of Policies. In many sectors of the Indian economy,
there are policies which encourage the growth and development. There are issues
regarding how they are being implemented. The investors find issues, during
project implementation stage. The government has identified , this as one of
the major areas of focus and attention is being given to simplifying the
procedures in project approval and implementation stage.
Future of the Indian Economy is
really good. There is a confidence prevailing among both domestic and
international investors on the Indian Economy today and these sentiments have
to be converted into investments going forward. Considering the interest from
investors from all over the world, Indian Economy is poised to realise its
growth potential and the Stake holders from various parts of the economy have
to play a constructive role in realising
the full potential.
