India’s gateway to growth
India is cementing its place as a titan economy of the 21st century. flow looks at the significant investment inflows, driven by the country’s sound fundamentals, and its ability to weather geopolitical shocks. We also reflect on the far-sighted innovations driving India’s digital economy forward
T
his year marks the 21st anniversary of the IMF’s 1991 loan to India which, accompanied by its then-fashionable
‘structural adjustment’ conditionality, augured the end of ‘Licence Raj’ – the myriad regulations that had hampered businesses since India’s independence 44 years earlier. But the flourishing economy of India in 2022 also represents something of a coming of age. The 1991 pivot to a more open economy after years of hard work and enterprising businesses has seen India more than make up for lost time, countering historic criticisms of unfulfilled potential.
Economic recovery and resilience India’s direct risks from the Russia–Ukraine conflict are limited, with Indian exports to Russia being less than 1% of its total exports, while imports are about 1.5%, according to Deutsche Bank Research. However, the indirect impact, mainly through the channel of higher global oil and gas prices, is much deeper. “The bigger priority now is to reduce inflation, so that the ongoing growth recovery can be sustained on a durable basis; after all, there is no trade-off between growth and inflation in the medium-term,” explains Kaushik Das, India Chief Economist,
Deutsche Bank Research. While the large FX reserves buffer (almost US$600bn in early May 2022) will help mitigate some of the global spillovers, he welcomes the Reserve Bank of India’s repo rate hike of 40bps, along with a CRR hike of 50bps, because it accords “higher priority to fighting inflation and inflation expectations, without which the repercussion for medium-term growth prospects would probably be dimmer”.
Tailor-made for investors While global events and spikes in energy prices since the Union Budget may cause some slight adjustment to the figures, investors remain confident that India can navigate the turbulence and continue its economic recovery, as it did with the Covid-19 pandemic. However, a -23.9% GDP slump in the quarter April–June 2020 proved a brief stumble, with Prime Minister Narendra Modi’s 2019 vision of a US$5trn economy by the end of 2025 potentially staring at a four-year delay. Despite these headwinds, there are five
very positive underlying trends, reflects Sriram Krishnan, Head of Securities Services for India and Sub-Continent at Deutsche Bank India, together with Anand Jha, Head of Trade Finance and Lending at Deutsche Bank India. The first three relate to financial market infrastructures and capital flows, and the remaining two impact trade flows.
There is no trade-off between growth and inflation in the medium-term
Kaushik Das, India Chief Economist, Deutsche Bank Research
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1. The government’s disinvestment and asset monetisation strategy. The primary impact of this is what Das refers to as “India’s Margaret Thatcher moment”, drawing a parallel between the Indian government’s desire to withdraw from specific areas of economic activity in order to make space for the private sector and that of the UK in the 1980s. The secondary impact is the concomitant
opportunities for private sector expertise, IPOs and FDI that such liberalisation provides. Examples of these include Air India’s (re-)acquisition by the Tata family and the Life Insurance Corp’s IPO that closed on 9 May 2022.
2. India’s ‘demographic dividend’. Many emerging markets benefit from rural-to-urban population shifts and spending boosts from growing middle classes, but India has the added advantage of a median age of just 28.4. This is far below that of China, such that the “discretionary spend of India’s working-age population is at a tipping point”, says Das.
3. Financial inclusion and the ‘financialisation’ of savings. Goods and sales tax reform has brought more transactions into the formal economy which, added to the growing wealth of an expanding middle class, means many more people will bring their savings into the financial and banking systems. Das points out that this influx will facilitate stronger credit growth, with more of the population able to borrow to establish and grow their businesses. But this influx means other opportunities abound in the insurance and mutual funds sectors. One sign that this new money is being put to new uses is reflected in the recent surge of retail investors, with 190 million active dematerialised (or ‘demat’) accounts being opened in the first nine months of 2021 alone. Moreover, this new breed of investor has a growing appetite for selecting new asset classes, moving beyond the traditional gold and fixed deposits into more sophisticated products, including non-Indian assets – for example, large pharmaceutical stocks in the US. Further
Photography: Alamy
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