Investment Outlook , Published Feb 18, 2020
India’s journey to becoming a $5 trillion economy is an ambitious aspiration which is spoken about quite often. But the question is how can India overcome the current challeges and grow at a rapid pace to achieve this goal?
What would it look like?
If we were to achieve this, the Indian economy would rank number three in the world replacing the Japanese economy. India’s population is 10x than that of Japan which only reinforces the potential upside this would have in the coming decades.
How could it happen?
The Indian authorities will have to accelerate several initiatives to achieve its goals. Such changes will need to be transformational. With regard to economic development, the government can only achieve so much with short term fixes such as tax cuts and short bursts of spending on growth.
Empower and unleash the consumer*
Unfreeze the financial sector
An economy can only be at its best when you oil the wheels. Access to loans and development capital is credit which needs to be extended for the smooth running of the economy. Private investment in the third calendar quarter of 2019 was down 59 percent year-on-year indicating that the Reserve Bank of India has to increase the availability of credit to companies. The increased availability of capital is the pathway to India’s future.
To its credit, the government has had a reform agenda from the moment it took office. However, such reforms need urgent acceleration. The reform of land and labour regulations and further efforts to encourage financial inclusion will attract more foreign direct investment (FDI) across the economy. Currently, the FDI is 1.5 percent of GDP and India needs to increase it back to 3 percent of GDP to achieve its goal of a $5 trillion economy. Additionally, domestic companies need to be empowered to lead the country’s growth.
What would it mean?
Domestically it would lead to a more modern, inclusive India. Economic growth would fund a greater pace of positive change for the population. Further, investing in infrastructure, education, and healthcare along with the support of a robust financial system would accelerate this.
One would hope that a generally non-aligned geopolitically independent India can act as a bridge between the historic axis of G8 and the new economies of the east.
The friction between the US and China, the US and Russia needs a counterweight and India has a role to play as an influential voice in the global multilateral discussion.
India is already an important consumer market which is ranked as the world’s sixth-largest, the 10th largest importer and 19th largest exporter.
Analysts believe that there are over $150 billion stressed assets which could provide significant opportunities to investors. Such assets include opportunities in the Steel, Power, Textiles, Engineering and Telecom industries.
As the country develops, we expect the corporate culture of the Indian economy to change with less emphasis on family-owned businesses in the longer run. Today, the free market capitalisation of India’s equity is only around 50 percent as families typically own a controlling stake in their companies. While quite natural at this stage of India’s emergence as an economic powerhouse, in the longer run that ratio can only rise as companies become modern-day corporates with a diversity of shareholders and more efficient balance sheets.
About Gary Dugan
Gary Dugan is the Chief Executive Officer at The Global CIO Office. He has over 37 years of experience in leadership roles at some of the leading global financial services businesses like JPMorgan, Barclays and Merill Lynch.
Investment Outlook 2020