Indian Economy - Future prospects

Indian Economy – Future Prospects – 31^st 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.