India Shining


India’s growth looks unstoppable. Evolving as a leading economy among Asian countries and outpacing China, India is the fastest growing economy in the world. Shubhada M Rao, Senior President and Chief Economist at Yes Bank Ltd, speaks to WCRC Leaders Asia’s Tista Sengupta and throws light on India’s journey to the top.

According to the Asian Development Bank, ‘The longawaited emergence of India as a new regional powerhouse and the increasing integration of ASEAN economies are the new drivers of growth in Asia, now that the Chinese economy is beginning to slow down.’ Your views.
With a largely youthful population, a burgeoning middle class market, and by the way of more investment in the field of innovation, healthcare and infrastructure, the Asian region is likely to transform itself and lead the global economic growth in the years to come. Within Asia, even though China is seen to be approaching a ‘new normal’, its 7 per cent growth still remains impressive in my view. Acquiring the pole position, India is surely emerging as a global superpower, but to gain significant strength and to have a positive spillover impact on rest of the region, structural reforms in the country are important. As for Southeast Asia, the ASEAN Economic Community will come into existence in 2015 and the bloc would emerge as the world’s seventh largest economy. Since the ASEAN bloc will be 25 per cent bigger than India, it would have a more important role in the long term.

The ASEAN Economic Community will come
into existence in 2015 and the bloc would
emerge as the world’s seventh largest

Do you think that India is ready to lead the Asian economy?
We are definitely better placed when compared with the rest of the Asian markets. Domestic macros have strengthened and consolidated compared to May 2013, when the Fed taper talk had just begun and the subsequent run on the currency took place. We certainly do not expect such a run on rupee now, as current account balance, fiscal balance, inflation and growth are all relatively comfortable. The sharp reduction in commodity prices has also been helpful. Massive portfolio flows into India and a relatively stable currency are proofs of positive investor sentiment.
On the other hand, China has slowed down and Japan continues to struggle with deflation concerns with massive monetary stimulus required to save both the economies. To be able to sustain and then increase the growth momentum, Indian government will have to work towards improving the quality of infrastructure. They should also make it more amenable to produce as well as export from India. In this regard, latest reforms in the direction of increasing the Foreign Direct Investment (FDI) limits, increasing public spending on infrastructure and launch of initiatives such as ‘Make in India’ or ‘Digital India’, has given me a lot of confidence that India is moving in the right direction to lead the Asian economy.

Reforms that improve the productive capacity of
the manufacturing sector, provide the ease of doing
business, enhance employability and focus on skilling
the labour force are very important

india-shining-2How do you think China, which has grown solely on manufacturing, will react to this development?
Surplus investments with low share of domestic consumption in its GDP was the most important factor behind China’s slowdown. Given that there is a distinct similarity between India’s economy today and China in early 2000; India can draw important lessons from China’s growth model. The most important learning in my view would be to work towards a port-led model of development. However, in entirety, it is unlikely that India’s growth cycle will be similar to the benchmark.
China’s economic growth has been massively aided by its state-owned enterprises. Further, China’s single-party political system has been sweeping economic reforms without facing any serious opposition. Both of these are not true in case of India. In my view, India will have some unique factors to leverage. For example, I believe India’s service sector and the knowledgebased economy will serve as a unique advantage and this would play an equally important role as will the manufacturing sector.

For India to emerge as a leading economy in Asia, what issues need to be taken care of at this juncture and what reforms or policies should be implemented by Indian policymakers?
Currently, the Indian economy is in a sweet spot. The confluence of low commodity prices, low interest rates and decisive political mandate are key enablers that have the potential to propel India into higher growth trajectory. However, in order to realise the same, it is critical that the government undertakes reforms in areas that would enable India to increase its potential growth.
For instance, reforms that improve the productive capacity of the manufacturing sector, provide the ease of doing business, enhance employability and focus on skilling the labour force are very important. Likewise, reforms that help to improve the health of the banking sector and increase access to affordable finance for small enterprises are equally crucial.

India’s dependency ratio is expected to be in its
favour till the year 2040. However, to reap this
demographic dividend, we need to ensure that the
labour pool is skilled through education and training

Politics has fettered India’s economy in the past. It might still remain to be a major hindrance in future. What’s the need of the hour?india-shining-1
Decisive mandate in the Lower House of the Parliament for the first time in 30 years has raised hopes for initiation of long pending structural reforms. However, minority status of the government in the Upper House of the Parliament has proved to be a stumbling block. The government has been trying to overcome the political gridlock though dialogue with the Opposition and other regional parties for Coal and Mines Bill. However, passage of contentious bills like Land Acquisition will require the government to build on the consensus through consultative process by taking on board diverse opinions and viewpoints. Therefore, the need of the hour is a consultative reforms process.

The World Bank’s assessment says that India will witness 6.4 percent growth in 2015. When is India poised to return to a high growth path of 8 yo 9 per cent?
India’s average GDP growth of 8.7 per cent between financial year 2004 – 2008 was an outcome of convergence of enablers like high global growth, low and stable inflation, high investment appetite, and infrastructure push of the government. In order to return to a GDP growth of 8 per cent, a multitude of factors should fall in place.
With global economy continuing to remain on a weaker footing, driver of India’s growth needs to be largely internal. Thus, government’s efforts at undertaking growth stimulating structural reforms, revival of private investment appetite and maintenance of low and stable inflation are decisive factors that will determine India’s potential growth trajectory towards 8 to 9 per cent in the years to come.

What are the steps required to target this high-growth path in India?

With oil prices falling
by nearly 55 per cent
from their peak in 2014,
India has benefitted
immensely in terms of
lower import prices

The Indian economy is fortunate to have 3Ds by its side – Democracy, Demography, and Demand. A vibrant democracy has helped in building critical institutional architecture for governance. However, to enable high and sustained economic growth, the country needs to widen and deepen the scope of its institutional architecture in areas of finance, regulation, taxation and business. India’s dependency ratio is expected to be in its favour till the year 2040. The country has the world’s largest youth population of 572 million under the age of 24 years. However, to reap this demographic dividend, we need to ensure that the labour pool is skilled through education and training and made productive through introducing conducive labour laws and their inclusion in the formal sector.
Indian economy has already crossed $2 trillion in size with private consumption constituting over 57 per cent of GDP. Over the last decade, the country has seen the highest growth in per capita income with the new aspiring middle class expected to touch 267 million over the next five years. This presents tremendous opportunities for realising economies of scale.
However, to realise this, it’s imperative to constantly create supply with emphasis on physical infrastructure and manufacturing.

india-shining-3A number of steps have also been taken to improve the ease of doing business in India. But do you think it’s easy to execute the vision ‘Make In India’ and promote manufacturing sector that only contributes around 16 per cent of India’s GDP, wherein infrastructure needs to be developed and issues related to land, taxes and processes in India should also be tackled simultaneously? Your comments.
Harnessing India’s manufacturing potential is the key to ensure sustainable long-term growth. While it is true that India has defied the conventional development process by metamorphosising from an agrarian economy into a servicedriven one, the desired dynamism in the manufacturing sector has remained more or less elusive. Given its comparative advantage stemming from low-cost and abundant labour resource and its technological capability, India has successfully scripted success stories in sectors such as textiles, leather, pharma, automobile to name a few. However, to evolve into a meaningful link in global supply chains, India must look outwards. Manufacturing success does not imply a single-handed focus on export-orientation. Import substitution and satiation of the growing domestic demand must become the other lever of a manufacturing-led growth strategy.
After coming to power in May last year, this government has unequivocally focussed on improving business climate in the country. It aims to improve India’s global ranking in ‘Ease of Doing Business’ survey to 50 over a span of two years. A modest beginning has been made through labour reforms, progress on goods and services tax, roadmap for lowering corporate tax, rationalising inverted duties and skilling of workforce However, most of these reforms are incremental and would have a gestation period in impacting investment decisions, outcomes and in turn the real economy. Continued progress on these reforms along with support of the states will be critical to actualise the government’s ‘Make in India’ vision over the next few years.

There were several suggestions to raise public expenditure. Does it work for India to lower the fiscal guard at this juncture?
We believe that lower oil prices and improvement in domestic macro indicators provided some space to the government to loosen its fiscal target. More than the 30 basis point (BPS) breach in fiscal deficit target for financial year 2016 to 3.9 per cent of the GDP, we would concentrate on credible math and the qualitative aspects of the underlying budgetary arithmetic. A much required push has been given to capital expenditure, infrastructure and other key reforms such as Make in India, monetisation of gold and announcement of a Monetary Policy Committee. All of these budget reforms are likely to pay large dividends in the long run.

With plunging oil prices, it certainly brings cheer to importers like India. But is there a worry on the global growth front with oil dipping further?
With oil prices falling by nearly 55 per cent from their peak in 2014, India has benefitted immensely in terms of lower import prices. From a peak of $15.8 billion in March 2014, oil imports are now down to $6 billion as per data received in February. Lower oil prices have also weighed on oil exports, but not as sharply as India is a net oil importer.

In terms of impact on trade, oil prices dipping further pose a higher risk if they result from slower global growth, rather than the other way round. Global growth slowing down more than expected, especially if ensuing from the United States, European Union and China, implies a risk to Indian exports. This has an impact on the current account deficit. Hence, a majority of the oil price declines that we are experiencing now is resulting from over supply and less from lack of demand or dipping global growth. So, this situation is more of a tail risk for us.

The Indian rupee is falling against the US dollar. At 63, is there a need to worry?
The rupee has been in a stable range of 60 to 63 over the last one year. With expectation of the beginning of interest rate normalisation in the United States, the dollar has appreciated by approximately 23 per cent, since the beginning of July, 2014.
While this broad based strength in the US dollar manifested in emerging market currencies, the Indian rupee has shown resilience, depreciating by just 3.5 per cent, since the month of June, 2014.
The currency is trading close to its fair value. Going forward, improvement in domestic growth-inflation dynamics, correction in twin deficits, substantial reduction in external vulnerability with record level of foreign exchange reserves and return of political stability with majority government are factors which are expected to be supportive of the Indian rupee. I am confident that these factors will help investors differentiate favorably during times of global risk aversion.

India in the next 10 years – Your views.
Over the next ten years, I expect India to become a $6-7 trillion economy from its current size of $2 trillion. By leveraging the 3Ds of democracy, demographics, and demand, I expect India to become the third largest economic powerhouse in the world by closing gaps in areas of manufacturing, technological skill, standard of living and political hegemony.