Global Business

India's Economic Transformation

Promising macroeconomics, pro-growth initiatives and evolving monetary policy are presenting tremendous potential for overseas investors.

DEVAL VYAS, EXECUTIVE DIRECTOR, COMMERCIAL BANKING
July 3, 2017

Historically, India has been a challenging destination for foreign investors, but changes to the nation’s tax and regulatory codes could unify its fragmented regional markets and streamline new investment. Additionally, Indian Prime Minister Narendra Modi’s administration has launched a raft of political reforms and development initiatives to encourage investment, promote exports and provide banking and telecom services to the nation’s underserved rural population.

These changes are laying the groundwork for the modernization of India’s workforce and the rise of the digital economy on the subcontinent. And while recent demonetization efforts may have been painful, they are encouraging the Indian economy to make the leap from undocumented cash transactions to seamless mobile and e-commerce banking services.

The Macroeconomic Outlook

Faster growth, falling deficits and tame inflation make India a relatively stable climate for foreign investment. India’s GDP growth is accelerating, with the economy projected to expand by 7.2 percent this year.1 The Indian workforce is experiencing a productivity surge as the population grows more educated and urbanized, and improvements in infrastructure and human development should help Indian businesses harness the nation’s immense human capital.

The young average age of the Indian workforce is also encouraging for the nation’s long-term growth prospects. Nearly 28 percent of the Indian population is under the age of 14, compared to only 6.1 percent over age 65.2 This means that the workforce—already 500 million strong—is projected to add 12 million additional workers annually, and the Modi administration has set a goal of creating 400 million new jobs by 2020 to absorb the population surge.3

Inflation regularly topped 10 percent in past decades, but in summer 2016, the government and the Reserve Bank of India (RBI) partnered to target a 4 percent inflation rate, with a plus or minus 2 percent range of tolerance.4 India’s monetary situation could promote sustainable growth and incubate an increasingly stable and business-friendly environment.

Regulatory Reforms and Pro-Growth Initiatives

In past decades, India earned a reputation for red tape, bureaucratic obstruction and regulatory hurdles, especially for foreign companies seeking entry to the domestic market. But since the launch of economic liberalization in 1991, India has made significant progress toward dismantling the old protectionist regime. Caps on foreign direct investment (FDI) in industry are steadily lifting, and the Modi government has adopted the explicit goal of increasing FDI and spurring growth domestically. Prominent programs include:

Entering India

9

Under the current regulatory environment, there are five routes for foreign businesses to enter the Indian market:

Tax Reform

An overhaul of India’s tax structure took effect in July 2017, which represents the most comprehensive economic reform since the 1990s.10 The reforms replace the patchwork of state-level value-added taxes, excise duties and service taxes with a single nationwide goods and services tax (GST).11 The GST is tiered, with most goods taxed between 12 percent and 18 percent, with lower taxes on some food products and higher taxes on luxury goods.12 This unified tax structure will simplify operations for Indian businesses and create a more cohesive national market for goods.

Demonetization Pains

Following the US presidential election on November 8, 2016, Modi announced one of the most significant monetary policies to impact India in recent history. In a televised address to the country, he voided, with immediate effect, the Indian Rupee 1,000 note (USD 15) and 500 notes (USD 7.50), which combined to make up 86.4 percent of cash in circulation by value13 in a country with more than 1.2 billion people and where nearly 90 percent of all transactions occur in cash.14 This drastic policy change was reportedly undertaken to curb corruption and expose related tax evasion.15

Since its initiation, the demonetization program’s focus has moved from corruption to digitization. By bringing people into the formal banking system, the reforms will expand access to the digital economy and level the playing field for large and small businesses alike, while positioning the Indian economy for more organized and transparent growth into the future.16

Mobile Banking’s Expected Rise

Demonetization has also spurred the rapid growth of India’s mobile banking sector. The country recently passed 1 billion mobile phone users and expectations are that the number of smart phone users will grow rapidly over the next several years. 17 Furthermore, more than 950 million Indians now have access to the infrastructure necessary for cashless transactions.18

Doing business in India is complicated. The nation is undergoing a rapid transformation. Immense markets are opening to international commerce, and new infrastructure is bringing hundreds of millions of people into the global economy. Managing entry into the Indian market requires knowledge of the nation’s rapidly shifting regulatory and commercial landscape, but for companies that are willing to take the risk, the emerging Indian economy holds tremendous potential.

Virtual Banking: Improving Efficiency and Access to the Indian Market

When J.P. Morgan’s limited number of branches in India restricted access for our business clients, we launched a virtual banking online portal to expand our presence nationwide. Regulatory restrictions on expanding our network of physical branches proved prohibitive, but a new digital presence now allows clients to use a range of banking services from anywhere in the country.

The virtual branch offers a user-friendly interface while complying with rigorous infrastructure and application architecture standards to ensure security and reliability. The first phase of the virtual branch rollout allows clients to make statutory payments and submit documents. Eliminating the need for paper or facsimile transmissions increases both visibility and efficiency for our clients. Clients can use their existing J.P. Morgan ACCESS® Online credentials to use the virtual branch, where they can take advantage of seamless entitlements, rapid turnaround times, and end-to-end track and trace capabilities.

1J.P. Morgan Economic Forecasts

2https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

3http://blogs.wsj.com/briefly/2015/07/22/indias-labor-force/

4http://www.newindianexpress.com/opinions/columns/shankkar-aiyar/2016/aug/14/Indias-troubled-tryst-with-iflation-and-the-cost-to-the-economy-1509069.html

5http://www.livemint.com/Politics/xaNsPPwllWVOR9k3MJBQKJ/Is-Make-in-India-beginning-to-bear-fruit.html

6http://smartcities.gov.in/content/innerpage/what-is-smart-city.php

7https://www.strategy-business.com/article/Indias-Triple-Play?gko=4d4ef

8http://knowledge.wharton.upenn.edu/article/financial-inclusion-india-aims-move-beyond-bank-accounts/

9http://dipp.nic.in/investors/Investor%20Guidance/entry-strategies-foreign-investors

10http://indianexpress.com/article/business/economy/gst-rollout-from-july-1-what-do-industry-experts-have-to-say-4725971/

11https://www.bloomberg.com/politics/articles/2017-03-29/india-moves-closer-to-launch-landmark-tax-reforms-from-july

12https://www.bloomberg.com/news/articles/2016-08-10/quicktake-q-a-how-india-s-new-tax-might-help-business-not-hurt

13http://www.economist.com/news/leaders/21711040-narendra-modi-needs-take-measures-mitigate-damage-his-rupee-reform-has-done-indias

14http://fletcher.tufts.edu/~/media/Fletcher/Microsites/Cost%20of%20Cash/COC-India-lowres.pdf

15https://hbr.org/2017/03/early-lessons-from-indias-demonetization-experiment

16https://www.forbes.com/sites/wadeshepard/2017/01/03/after-day-50-the-results-from-indias-demonetization-campaign-are-in/#4937429f50d1

17https://www.forbes.com/sites/saritharai/2016/01/06/india-just-crossed-1-billion-mobile-subscribers-milestone-and-the-excitements-just-beginning/#cf929387db0b

18http://economictimes.indiatimes.com/news/economy/policy/india-ready-for-4-times-jump-in-digital-payments/articleshow/56557986.cms

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