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The India Story

Shivendu is an ECLP, Class of 2013, GE Capital, India, currently in his 3rd Rotation as an Origination Associate with Energy Financial Services. He has worked with the Strategic Marketing Team in his first Rotation and as a Risk Underwriter for the Corporate Lending Group in his second Rotation. Prior to joining GE, he has more than 7 years of experience in Corporate Banking and was a Senior Relationship Manager with HSBC where he managed assets worth more than USD 150MM across industries for global and domestic clients in the mid-market space.  Below Shivendu shares insights into the India economy, its challenges and future developments.

 After almost 2 decades of rapid economic growth, the Indian economy is staring at what many might call the most challenging of times in recent history. Anand Mahindra, Chairman of the Mahindra Group puts it sadly as, “I can’t remember any year worse than this”.

The economy is worth almost $2 trillion, making it the world’s tenth-biggest. It is young, big and fast-growing and by the mid-2020s, will be more populous than any other country in the world. Income per person is rising and rural poverty is coming down. According to a new report by PricewaterhouseCoopers in 2010, some 470MM Indians had incomes between $1,000 and $4,000 a year. The consultancy estimates that this figure will rise to 570MM within a decade, creating a market worth $1 trillion.

However, growth is languishing near a three-year low of 5.5% in 2nd quarter of this year from a peak of 10% some years ago, while inflation remains stubbornly high. The local environment does not encourage investing both by multinational corporations (MNCs) or by local Indian companies. Foreign direct investment, which was $47 billion in 2011, has decreased by 67% so far in the current year. India’s factory output (index of industrial production - IIP) grew a modest 1.1% annually in August after being flat in July, indicating weak domestic and global demand.  A rising fiscal deficit may result in a rating downgrade and lead to a financial crisis. Consequently, the Indian rupee has devalued by more than 20% in last year. So, what ails the Indian Economy? Why does it seem to be losing steam at this point in time?

Policy Paralysis

Despite the government’s inclination to blame weak global growth and high oil prices (India imports 80% of its oil), the injuries seem more self-inflicted.  At a meeting in April, Raghuram Rajan an academic and former chief economist at the IMF, who has just taken over as the government’s chief economic advisor, condemned the “paralysis in growth-enhancing reforms” and an “unholy” alliance of some businessmen and politicians that is blocking change.  Although economists subscribe to the overwhelming need for reforming the policy paralysis, there seems to be great resistance from politicians ruling the country to institute reform. And hence, the government has failed to carry out groundbreaking reforms since being re-elected in 2009.

The Fiscal Deficit

Both ratings agencies S&P and Fitch issued statements earlier in the year indicating that they may be ‘constrained’ to downgrade India’s rating due to slowing growth, policy paralysis and high fiscal deficit.  India has a high current account deficit and hence, a rating downgrade may not improve the country’s focus on attracting foreign capital for building infrastructure. The fiscal deficit, including central and state governments, is about 9% of GDP and gross debt stands at almost 70% of the GDP. India is in worse shape than other big emerging economies with similar ratings. During the high growth years, high debt could be overlooked because the debt-to-GDP ratio was falling, but that is no longer the case. The IMF has forecasted that the ratio will hardly fall in the next 5 years.

The Manufacturing Sector

The service sector makes up 59% of India’s GDP and is growing at a fast clip, in particular, IT and outsourcing sectors. Agriculture, which makes up 26% of the Indian GDP, employs roughly half of all working Indians, many of which are suffering from low productivity. However, India’s problems lie in the middle, the manufacturing sector. Manufacturing makes up only 15% of the GDP, and ironically has remained at that level since the 1960s. With more than 13 million people joining the workforce each year, it is absolutely imperative to expand the sector. The government came up with an ambitious National Manufacturing Policy (NMP) in 2011, which seeks to set up mega industrial zones, create 100 million jobs by 2022 and put India at par with manufacturing powers like China and Japan. The results of the NMP will take time to come to the fore; however, it has been welcomed by the Industry for its sheer intent.

But all is not lost…

Mr. Kaushik Basu, former Chief Economic Advisor to the Government of India and current Chief Economist of the World Bank, remains an optimist on the Indian economy. He points to the persistent high national savings and investment which he thinks can be sustained despite some recent slippage. He feels that India will return to a high growth rate, near 9%, once the current uncertainty and urgent fiscal issues are dealt with. And, he puts weight behind the expanding young, urban and literate population and, new technology. 

To ease the immediate problems and raise the country’s growth rate, reforms are necessary, particularly of labor laws, foreign-investment rules and state control of certain industries. There is no doubt the government in recent times has shown that it is prepared to bite the political bullet by announcing the opening of the Indian retail and airline sector and by decreasing the subsidy on diesel and cooking gas. In C. Rangarajan’s words, who is the PM’s Economic Advisory Council Chairman, “It (diesel price hike) is also clearly indicated that the government is prepared to take strong policy action even though or even if some of these actions are treated as being apolitical and unpopular…so it has sent out a message of that particular type which is what the investment community, business community and people in general were looking forward to”.

Latest trends show that India’s business climate appears to be improving And demand for goods and services indicate early signs of revival.  However, it is too early to think of this as good news. The government must show the world  that it actually means business and is committed, both in terms of policy and execution.

GE in India

The way the Indian story has unfolded over the last 24 months, GE has had to steer itself through the country’s developments by checking its strategy and staying focused on key businesses in the region. And, as GE executes its “In-Country-For-Country” strategy in the India, it certainly seems better prepared to play a longer and more relevant role in the country.  GE continues to invest in and build technology that improves lives and creates growth opportunities within India.  For more information, check out the GE India website.

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