Maintaining pole position

As economic downturns go, India's has been rather modest, especially by international standards. The country's burgeoning reputation as a land of enviable newfound momentum and opportunity has been kept on track.

GDP growth of 7.9 per cent in the quarter to September 2009 was the steepest rise in 18 months, and well above expectations of 6.3 per cent. It prompted the finance ministry to revise its forecast for 2009-2010 (to end-March) to around 8 per cent, from the 6.5 per cent previously nominated. With discernible improvement under way in the world economy and global trade, a return to the pre-crisis level of 9 per cent is predicted for 2011-2012, a number to attract businesses and investors alike.

Strong growth

Behind the sharp recovery was strong growth in both manufacturing and services (9.2 and 9.3 per cent respectively), together with the fact that the figure for agricultural production did not yet include the effects of a poor monsoon season. But the key driver was government infrastructure expenditure, fiscal leverage aimed at negating the worst impacts of the financial crisis.

The factors that had unleashed such growth potential in India, now the fourth-largest economy in the world, but for so long a quiet giant slow to be roused, remain in place.

Firstly, India has been insulated to some extent from the global crisis by strong demand from an increasingly affluent and expanding domestic market, which has benefited from a deliberate policy of low interest rates. While only 15 per cent of the Indian economy is export-oriented, other ‘tigerish' Asian economies (most notably China) by contrast have been heavily exposed to global trade trends.

Secondly, while Indian banks have experienced some deterioration in the quality of their loan portfolios, from the export-driven sectors particularly, the financial services sector in general has been relatively free of contamination by the‘toxic' assets that have so dramatically holed many institutionsin more developed markets.

A global player

A third source of strength has been India's emergence asa global player in a number of high-growth sectors, notably information technology, telecommunications, business process outsourcing and pharmaceuticals. It is these areas that have attracted substantial inward investment, tapping partly into the country's increasingly well-educated and substantially English-speaking labour force. For example, two out of five of America's Fortune 500 companies outsource their software in India. Withthe country's rising wealth, the telecoms sector has grownby about 20 per cent per annum in recent years.

Underpinning these positives is the fourth element of political stability, brought about by the re-election of Prime Minister Manmohan Singh last year, whose conspicuous commitment to economic restructuring can be expected to reinforce India's appeal in investment terms.

The progress made over a number of years in creating an open trade regime is acknowledged by the Organisation for Economic Co-operation and Development (OECD), "India has made impressive strides in building a policy environment to encourage both domestic and foreign investment… an integral part ofthe market-oriented reforms which have since 1991 set the scenefor a shift to a consistently higher rate of growth."

Supporting credit growth

More is to come. Only recently India's premier spoke of the need for deep financial reform to support credit growth and finance badly needed infrastructure across the Indian economy (see box).

The reform agenda includes developing long-term debt markets, a corporate bond market, strong insurance and pension sectors and futures markets. Government disinvestments in state-owned companies are to be accelerated. Since August last year, the government has raised $1.8 billion (about Dh6.6 billion) through the sale of shares in the power company NHPC and Oil India.

But there is a cost involved and while the scale of the government's interventionist efforts are reflected in the latest GDP growth figure, it is also apparent in the growing fiscal deficit, which is forecast to surge to a 16-year high this year. With India borrowing a record Rs4.51 trillion (about Dh364 billion) this year to fund stimulus, the budget deficit is forecast to increaseto 6.8 per cent of GDP in the 12 months through March 2010.

Finance Minister Pranab Mukherjee recently said that it will be important "to strike a balance between the requirements ofthe economy and the capacity of the economy to bear this level of fiscal deficit," a conundrum not confined to the subcontinent. > Immediate withdrawal of fiscal stimulus may not be the "correct approach". In this regard, rating agency Moody's raised the country's local-currency rating outlook to positive from stable last month, "prompted by increasing evidence [of] resilience to the global crisis", the economy "expected to resume a highgrowth path with its underlying credit metrics relatively intact".

In contrast with other countries bent on monetary easing measures to quell deflation concerns, Indian inflation has corresponded with the growth pick-up, with the benchmark wholesale price index at 4.8 per cent (November), and the central bank forecasting a rise to 6.5 per cent by the March year-end. Interest rates have remained at 4.75 per cent since July 2009, but the next move may actually be upward.

Confidence in the India economy has been demonstratedin the remarkable performance of the stock market, up 81 per cent in 2009 (the biggest annual gain since 1991) having been driven by an influx of foreign funds that is expected to continue.

Confidence was also reflected in India's purchase of 200 tonnes of gold from the International Monetary Fund. The finance minister said at the time of the $6.7 billion transaction that it reflected the power of the economy that it was backed by the fifth largest foreign reserves in the world.

It was a sign of an economic powerhouse laying claim to increasing conviction in its own future, one which othersare steadily embracing as India's sustained performanceand prospect become better known.

Infrastructure's key to growth

The OECD's Investment Policy Review: India 2009 highlighted India's tremendous progress in its policy environment towards encouraging investment but emphasised that more is needed.

An uncontroversial fact is that the pace of India's economic growth places huge demands on all elements of its infrastructure. The upgrading of roads, railways, ports and power supply is imperative to advance its competitiveness.

The International Finance Corporation (IFC), the World Bank's private sector arm, has increased its exposure to India, to $3.5 billion, 10 per cent of its global portfolio. Envisaging a total lending programme of $14 billion for the next three years, the Bank makes clear that its strategy is closely aligned with the country's own development agenda as articulated in its 11th Five Year Plan.

According to a comprehensive report published by Goldman Sachs in September last year, India will require $1.7 trillion in the next decade to meet its infrastructure needs, significantly higher than the government's earlier estimate of $500 billion.

The report highlights the country's infrastructure requirements as follows:

(i) power -- a 16 per cent shortfall at peak demand; per capita usage at 10 per cent of global average.

(ii) ports -- the major facilities operating at 95 per cent capacity, with demand growing annually by 10 per cent

(iii) roads -- national and state highways stretched beyond capacities, with average truck usage of 200km per day (25 per cent of the global average)

(iv) rail -- both coverage and efficiency lacking, track length of 35km/1,000 square kilometres versus a global average of 125 kilometres, and average train speed of 25km/hr versus China's 150km/hr

(v) airports -- penetration low (25 per cent of Brazil's, 20 per cent of China's, 2 per cent of the US's), efficiency beginning to improve through new metro airports (peak aircraft movements at 35/hr versus a global average of 40)

Yet while the challenge is undoubtedly substantial, the report nevertheless argued that funding can actually be managed from internal resources -- even if overseas finance is sought -- owing to India's rising domestic savings rate, favourable demographics and robust balance sheets.