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Markets and Economy
India’s New Growth Story
DEVAL VYAS, India Head, Commercial Banking
May 23, 2018
Over the last two decades, India has been one of the fastest growing economies in the world, with an average GDP growth rate of 7.5 percent between 2014 and 2017. Now, India’s GDP sits around $2.4 trillion, representing 3.65 percent of the world economy.
The country has a history of bureaucracy and heavy regulatory requirements that have made it difficult for multinationals to do business there in the past. But India has seen significant changes over the last few years that are making it more attractive to investors willing to take a long-term view of opportunities in the country.
Changing Demographics and Spending Habits
India’s unique demographics are one of its key drivers of growth. Its large English-speaking population makes it easier to integrate into the global marketplace. And compared to other countries in the region—which are grappling with an aging population and impending workforce shortage—India’s population is young and highly educated. Approximately 65 percent of the country’s residents are under the age of 35; it also has the largest student population in the world, producing approximately 8 million graduates every year. As these graduates enter the workforce, they’re helping drive innovation and ensuring there won’t be a slowdown in productivity. However, it’s also critical for the country to achieve a higher growth momentum to be able to create enough jobs for its young and educated population.
On the consumption side, a burgeoning middle class is increasingly driving demand for products and services ranging from automobiles to smartphones. Today, approximately 28 percent of the adult population falls into the category of middle class; by 2025, that amount is projected to be more than 40 percent. The average Indian consumer also has robust savings, suggesting increased consumption will be sustainable well into the future.
The country is becoming more and more digitally connected, with a big emphasis on growth in the technology sector. India is home to 450 million Internet users and 300 million smartphone users, with smartphone use being the primary access channel to the Internet. India has the second highest number of smartphone users in the world—trailing only China—suggesting a significant opportunity for smartphone manufacturers and application developers to expand their reach in the country.
Although India is moving up the list in global Ease of Doing Business surveys, there’s still progress to be made. Policymakers and government officials are increasingly recognizing the need to enact reforms that simplify both starting and running a company in India, as well as doing business within a broader global economy. Over the last few years, there have been significant policy and regulatory changes to this end.
Key areas of reform include:
Retail sourcing. In the past, regulators enforced local sourcing on retailers and required specific approvals for investments. These policies have since been significantly relaxed, making the process easier for companies to set up single-brand retailing. Foreign retailers often operate as a joint venture with an Indian distributor, but relaxing regulations on retail will allow them to acquire the stake and have full ownership and control.
Currency risk management. Headquarters of subsidiaries operating in India weren’t allowed to directly participate in onshore foreign exchange markets to hedge their exposures in the past. This had to be done through the non-deliverable forward (NDF) market, or the subsidiary would run its hedge program independently in India. Now, the Reserve Bank of India (RBI) allows headquarters or regional treasury centers to hedge on behalf of the Indian subsidiary directly in the onshore market. This simplifies documentation and allows the treasuries to access an onshore market with more depth than the NDF market.
Goods and services tax. The tax structure overhaul last year consolidated all indirect and state taxes into a single goods and services tax (GST) that simplified operations for businesses and opened a national market for goods. This massive reform not only streamlined filing and process management, but the system enforces compliance by only providing input credits to traders or manufacturers if the GST is paid by their supplier. This has increased the number of indirect taxpayers by 50 percent, and could have a significant bearing on the country’s overall growth over the next few years.
Monetary committee formation. The RBI recently formed a monetary committee to keep a close watch on inflation, with the goal of keeping it at a manageable level. In the early 2000s, inflation in India reached upward of 9 percent; recently, however, it’s hovered closer to 4 percent.
Aadhaar. As perhaps the largest identification program in the world, Aadhaar is a major reform with widespread effects. The program provides a unique identification number to each individual backed by demographic and biometric details, which links to bank accounts, mobile phone numbers and financial investments. More than 80 percent of the Indian population is part of the program. Since a partial rollout of using Aadhaar for Direct Benefit Transfer (DBT) over a year ago, the Indian government has seen savings of more than $6 billion (USD) thanks to a reduction in fraud.
Digitization. Especially when it comes to banking transactions, India is still fairly document-heavy; however, the RBI has implemented a system that allows access to the import and export transactions of the customer through a link to the customs database. This has reduced documentation and improved overall controls and efficiency. Following growing pains from demonetization in 2016, the country has seen a dramatic increase in digital payments.
These reforms are helping build a strong future of growth as India integrates further into the broader global economy. Many of these structural reforms, including the GST, Aadhaar and relaxing retail norms, should start showing sustainable results through the rest of the year and into 2019. The momentum of global growth should further add to these promising tailwinds.
As policymakers reform the regulatory environment, several doors are opening for companies looking to do business in India. Some of the key areas of opportunity in the country include:
Infrastructure. Although the Indian Railways is the fourth-largest network in the world, carrying nearly 24 million people daily, the rail infrastructure is in urgent need of modernization. Planned government investments and initiatives like the Mumbai-Ahmedabad bullet train reflect significant opportunity in the infrastructure space.
Pharmaceuticals and healthcare. India is the largest supplier of generic medicines globally and is a major supplier to Asia, Africa and Russia. It has one of the lowest manufacturing costs in the world at roughly 35-40 percent of that in the US.
Automobiles. India ranks sixth in global automobile manufacturing—yet it ranks among the lowest in vehicles per capita. Domestic sales of private and commercial vehicles have seen an uptick thanks to rising incomes and falling costs of ownership, a trend that can be expected to continue as the middle class expands.
Luxury. As Indian citizens see growing incomes, more consumption is being focused in the luxury market. The country’s luxury spend is on par with the United Arab Emirates, and far ahead of Turkey, Thailand and Argentina. Currently, most luxury spending occurs during foreign travel; companies willing to take advantage of relaxing retail norms can move to open single-brand retail stores in India.
Renewable energy. By 2030, India is expected to generate 40 percent of its total annual power from renewable sources. Opportunities are plentiful in solar power and wind energy thanks to tax holidays and targeted increases in these areas.
Doing Business in India
Companies seeking to capitalize on these opportunities should recognize that India is still heavily regulated, and doing business there brings certain challenges. India relies heavily on paper documentation, information is largely decentralized and, prior to 2016, a large portion of transactions were made in cash.
There is still progress to be made in the areas of government approvals, land acquisition, labor regulations and the legal system. But overall, the reforms being made and the promising demographics of the country are making it a more attractive place for investments than ever before.
The companies that are successful in moving into this market need to take a long-term view of the opportunities here, and work with a global bank that has deep local expertise and understands how to navigate the complexities of doing business in this rapidly changing economy.