With favourable demographics and an investment boom, India is surging toward fast-paced economic prosperity
Overcoming macroeconomic shocks accelerated due to Covid-19
India has been one of the world’s most resilient economies throughout the Covid-19 pandemic. Towards the end of the pandemic’s third wave, the GDP growth rate started to pick up dramatically to approximately 9.5% in 2021-22. The steps taken by the Reserve Bank of India towards quantitative easing and fiscal expenditure by the Government of India on healthcare and infrastructure, aided this recovery. India’s service sector (which accounts for roughly 50% of the country’s GDP), rebounded strongly owing to ease of lockdowns and rising demand for e-commerce platforms. Moreover, the demand for Indian exports in other countries rose significantly in 2021-22, mainly due to depreciation of the Indian rupee to almost 82 to a dollar. There have been challenges like higher inflation and a negative real GDP growth rate during the pandemic. However, prompt decisions of interest rate hikes to 6.5% have contributed to controlling inflation and a positive real GDP growth rate in 2023. These factors signal towards the fact that the Indian economy has already shown signs of strength and has started to outperform other major economies of the world, including the US.
Leveraging a promising demographic dividend
A key strength of India’s economy is its young and growing population with a median age of 28. This demographic dividend creates a large consumer base, generating demand for Indian goods and services. However, this strength is also a major challenge since it increases the dependency ratio of the economy. As of 2022, the dependency ratio of India is 47.5%, which indicates that for every 100 working adults in India, there are 47.5 dependents (children under the age of 15 and adults above the age of 64). With a younger population, the burden of dependents on the working age population is higher. That being said, India’s dependency ratio has been declining drastically over the past few years, from 65% in 2011 to 47.5% in 2022, which is a positive trend for the Indian economy. The Indian government has undertaken some measures such as investing in education and healthcare of the elderly and poor, to reduce its dependency ratio in the coming years.
Business-friendly climate, encouraging international investment
India’s investment climate has been favourable and the financial services industry continues to be one of the fastest growing sectors. India has maintained an elevated growth trajectory for over a decade now. Developed economies have faced severe challenges over the past 3-4 years owing to macroeconomic shocks globally, geo-political tensions around Russia’s war on Ukraine and the pandemic which left the global economy in a slump. While major developed economies are still recovering from the aftermath of Covid-19 and battling higher-than-normal inflation, India remains strong with its fast-paced growth and moderated inflation.
India now offers an expanding consumer base, with increased purchasing power amongst the middle class, upper middle class and the rich. Simultaneously, it offers price-competitive talent with the requisite expertise. This significantly reduces company costs while setting up in India. These factors have resulted in making India an attractive destination for investors from across the globe.
A growing middle class that aspires for the best
India’s consumer base is highly favourable, since it is estimated that India’s middle class will grow from 400 million to 500 million in the next few years. India’s middle class has exposure and access to global consumer trends. India’s middle class aspires for the best in terms of consumer behaviour and quality of lifestyle. This offers great opportunities for consumer oriented enterprises to set up in India.
A positive shift towards easing of regulatory frameworks
India’s regulatory frameworks are slowly easing up, owing to decisions taken by the government to attract foreign investment. The objective is to ensure smoother trade routes and seamless flow of goods and services to and from the country. To boost investor confidence, taxation policies have been streamlined after the introduction of Goods and Services Tax in India. 100% Foreign Direct Investment has been enabled in numerous industries and business conduct in India has been liberalised (e.g. for sectors such as but not limited to pharmaceuticals, petroleum natural gas and mining, defence manufacturing, telecommunications). Sectors such as Information Technology, healthcare, infrastructure and manufacturing across industries are being given a boost. India is a global leader in the IT and manufacturing space, and has a rapidly growing market in infrastructure and healthcare.
Dissecting India’s growth story through facts, figures and trends
Global supply chain disruptions, trade tensions and reduced demand owing to an economic slump, have created major barriers to business growth. In this complex global economic scenario, India has presented itself as a credible destination for investors to diversify capital from other countries. Some key facts, figures and trends bring this point to life:
Figure 1: Growth trajectory of India v/s other countries
Figure 1 shows that India is likely to become the world’s fastest-growing economy in 2022-23. This immense growth can be attributed to pent-up demand over the past months. The stable growth rate is evident from the higher-than-ever taxation collections, a gradual decrease in unemployment rates and steady control over inflation in India.
Figure 2: Positive FPI flows post-pandemic
Figure 2 suggests that there were huge Foreign Portfolio Investment (FPI) outflows since Central Banks across the world hiked rates and inflation rates increased. However, FPI inflows have rebounded and stood at a whopping INR 600 billion in mid-2022.
Figure 3: Debt levels of India v/s other countries
Figure 3 shows that India has lower debt compared to other nations in the world. India surprisingly has lower debt levels compared to the start of the global financial crisis in 2008 and therefore stands out when compared to the rest of the world.
Figure 4: Working age population dynamics in India
Figure 4 puts India at a competitive advantage over other economies owing to its higher share of young population v/s the ‘ageing’ trend in countries globally. India has surpassed China’s population. However, this increase will not come at the expense of the working age population which makes India’s prospects even brighter.
India’s window of opportunity in a ‘China plus one’ growth strategy for multinationals
In 2013, the ‘China plus one’ strategy was introduced. This strategy enabled diversification of investments in another country while still benefiting from China in order to mitigate risks. The ‘China Plus One’ strategy offers India a significant opportunity to improve its capacity utilisation and attract more foreign investment. Rising labour costs in China and geo-political tensions arising from Russia’s war on Ukraine are driving multinationals to reduce their dependence on China. Ultimately, the aim is to diversify investments and supply chains to boost global growth and mitigate risk. India has a significant advantage in terms of cost of manufacturing, compared to developed nations. With affordable wages and an abundant skilled workforce, India could be an attractive alternative to China for multinationals that aspire to reduce talent costs. The government’s Production Linked Incentives (PLI) initiative, encourages local manufacturing and technology localisation, thereby boosting India’s own manufacturing capacity.
So what’s next for the Indian economy?
Currently, India is the world’s fifth-largest economy, behind Germany, Japan, China and the US. S&P Global and Morgan Stanley have predicted that India is on course to become the third-largest economy by 2030. Goldman Sachs has reported that India is set to become the world’s second-largest economy by 2075, leaving not just Japan and Germany but also the US behind.
The International Monetary Fund has estimated India’s growth rate at 6% in the medium term. Balance sheets of banking and non-banking companies along with corporates have been improving. Banking sector credit in India has started to show double digit growth of close to 15%.
In conclusion, India is emerging as one of the most promising nations in terms of deep financial development, a higher share of younger population, attractive investment opportunities, diversification of sectors and easing of regulatory requirements. Moreover, India has already made positive strides in improving accessibility for businesses. This has made it easier for, firstly, companies to do business in the country and secondly, for India to rise up the global negotiation table as one of the world’s largest and most promising economies.