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Globalization - Snapshot of India - Jain & Bhattacharya

RELATED EXPERTISEGlobalization, Growth

A Snapshot of India

November 26, 2014 By Rahul Jain , and Arindam Bhattacharya

The framework of a two-speed economy is becoming antiquated in a world of accelerating change and increasing complexity. But thinking in terms of a multispeed economy is not especially helpful, either. Instead, it is better to view the economy as a mosaic, with hot spots of opportunity and cool spots of slow growth. This commentary is part of our From Emerging to Diverging Markets series, which tracks hot spots and the changes under way in the world’s rapidly developing economies.

Business confidence has been rising markedly in India after several years of subpar growth and market volatility. The Bombay Stock Exchange Sensex index, for example, has surged by more than 30 percent since the end of 2013 to reach all-time highs.

One source for this optimism has been evidence that economic growth, which was below 5 percent last year, is enjoying a cyclical rebound. The more powerful driver, however, has been the election of a new government, led by Prime Minister Narendra Modi.

Since taking office in May, the new government has unveiled a progrowth budget and a raft of reforms that could spur a significant rise in investment and job creation. Among other measures, the Modi government has launched a “red carpet, not red tape” initiative to attract foreign direct investment in manufacturing; has put greater focus on building infrastructure; and has indicated that it is willing to privatize some publicly owned companies. The government has also deregulated diesel fuel prices and launched a program called Jan Dhan Yojana, which—in just two months—enabled 65 million people to open bank accounts. In addition, the Modi government has prioritized building stronger relationships with China, Japan, and the U.S. to draw more investment.

More fundamentally, the government is focusing on overhauling India’s bureaucracy. To advance his goal of “minimal government, maximum governance,” Modi has downsized the cabinet and abolished a slew of cabinet committees.

In light of these reforms, many industrialists believe that India could restore waning investor confidence in the government. The previous political leadership had implemented a system to track some 152 stalled infrastructure projects, such as power plants, highways, and seaports, for example. But it had been unable to remove obstacles such as environmental clearances and difficulties in acquiring land. Investor confidence was also hurt by a scandal involving the allocation of wireless spectrum, which drove the nation’s Supreme Court to cancel more than 100 licenses for Indian telecom operators.

Such actions, combined with the slowing economy, caused foreign direct investment to stagnate. Investment was particularly weak in manufacturing, despite the fact that India has some of the world’s lowest manufacturing wages and biggest pools of young workers. Modi has said that a fair and stable tax regime is critical to attracting greater investment.

Although companies have responded enthusiastically to the new government’s ambitious agenda, for now they have adopted a wait-and-see approach. As usual, given India’s difficult politics, the government’s ability to continue implementing its policies remains to be seen. The next six months to a year will therefore be critical for India’s long-term outlook. If the Modi government is able to carry out its reforms and stimulate a surge in investment, the stage could be set for many years of strong, sustainable growth.

A Snapshot of India
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