India's virtuous cycle of evolution

Published on July 18, 2023 by Nitant Kumar Arora

When all economies were recovering from the effects of the pandemic at the start of 2022, Russia’s invasion of Ukraine in February 2022 dealt them another blow. The protracted crisis led to substantial disruptions globally, including a steep increase in oil prices, supply-chain disruptions, gas crises in many strong economies, irregular sell-offs in equity and bond markets, the USD reaching its strongest in 20 years, an increase in interest rates, global inflation shocks, along with a downturn in portfolio flows, currency devaluation and declining reserves due to financial instability in many emerging-market economies including in India. However, the Indian economy was somewhat insulated from the global crisis because its economic fundamentals are stronger than those of other countries. The service sector accounts for more than 50% of the economy, providing further insulation, and exports for less than one-fifth, and with a drop in exports due to the decline in developed economies, India is expected to record significant GDP growth in FY23 (year ended March 2023).

SWOT analysis

Strengths

A large source of manpower: India has a population of 1,419.05m (as of 22 May 2023), a large source of high-quality manpower. The working-age demographic is forecast to grow by approximately 9.7m per annum from 2021 to 2031 and by 4.2m annually from 2031 to 2041, presenting an overwhelming opportunity to mobilise the growing working-age population and increase the participation rate. Nearly 55.6m Indians benefited from the Skill India Mission and other skill development programmes from 2015 to October 2022. India’s GDP is expected to cross the current USD3tn and reach USD9tn by 2030 and USD40tn by 2047 if its working-age population is judiciously placed.

An abundance of diverse natural resources: India has a varied set of natural resources and is home to a diverse ecosystem and climatic conditions. Although it accounts for only 2.4% of the world's land area, 8% of all recorded species, including over 45,000 plant and 91,000 animal species, are found there. It also has the world’s largest herd of buffaloes; planted area for wheat, rice and cotton; and production of milk, pulses and spices. India also boasts the world’s second-largest production of fruit, vegetables, tea, farmed fish, cotton, sugarcane, wheat, rice and sugar. The agricultural sector has the second-largest extent of agricultural land in the world; this sector employs about half of the country’s population. It is forecast to be worth USD24bn by 2025. The country’s food and grocery market is the sixth largest in the world.

Global hub: India offers accessibility and choice and is open to opportunities. The government is proactively inviting global businesses to capitalise on the investment opportunities, making India “the place to be”. The country will be focusing on the following six areas: trade agreements, investments, India’s strengths as a supply-chain alternative, ease of doing business, innovation and sustainability. The government has launched a number of initiatives such as the National Infrastructure Pipeline, GatiShakti and the National Monetisation Plan to boost infrastructure.

A strong political climate and positive changes in government regulations: Since the advent of the National Democratic Alliance in 2013, India’s political climate has been stable, further promoting India's initiatives to promote investment. It is strengthening its position by reviewing existing free trade agreements with ASEAN (Southeast Asia), Japan and Korea and forming trade alliances with strong nations including the UAE, the EU, the UK, Israel, Australia, Canada, Russia, Oman and the Gulf Cooperation Council.

Weaknesses

Uneducated/unskilled population: Most of India’s human resources are either unlettered or educated only up to the secondary level, indicating a poor level of competence. Over 90% of the country’s unskilled and semi-skilled workforce faces the daily difficulty of finding a job with a contractor. The Indian government has been focusing strongly on the policy agenda to provide vocational skills and improved qualifications via the launch of the Skill India Mission.
External dependence after independence: Even after 75 years of independence, India still relies on Russia for military assets. More than 50% of India’s arsenal is from Russia and requires regular maintenance, upgrade and spares. Despite all this Russian support, India is still not in a position to develop fifth-generation arsenal. All the sanctions on Russia and its growing ties with Beijing also increase the need for India to develop independent military capabilities. This would pave the way for India’s complete independence.

Opportunities

Global dependence shifting away from China: China’s neighbours are capturing its manufacturing and export market share after its Zero-COVID policy further eroded its position as a long-time dominant force in global trade. There has been a sharp decline in exports of vital consumer products, such as garments and retrofit clothing, footwear, furnishings and furniture and travel accessories, as well as in exports from minerals to office technology. Apple has expressed its intention to move most of its manufacturing away from China, and India could capitalise on this shift.
Becoming a self-sustaining economy: The “Make in India” programme launched by Prime Minister Narendra Modi focuses on reviving the economy, progressing towards producing domestically, generating employment independently, supporting start-ups and strengthening supply chains. The government has launched a special economic package worth USD244bn under the Aatmanirbhar Bharat Abhiyan scheme to promote a self-sustaining economy.
Strengthening foreign ties: India has shaped up its diplomatic relations and has positioned itself strongly on the world map. It helped more than 150 countries amid the pandemic, injecting confidence for the world to fight the worst pandemic of the century. Following the pandemic, India’s voice has been heard on all global forums, ranging from the G-20 to BRICS, from ASEAN to the Eastern Economic Forum and from the Quadrilateral Security Dialogue (Quad) to the SCO Summit and COP-26. India proved its ability to shoulder global responsibility after it was assigned the UN Security Council presidency in August 2021. Neighbouring countries Sri Lanka, Taiwan and Russia have agreed to settle foreign transactions in INR instead of USD, reducing dependence on the USD.
Digitisation: The launch of the “Digital India” programme led to significant improvements in technology infrastructure. India’s digitisation is built on the Aadhaar number, a biometric identity programme under which over 1bn are registered. UPI is India’s largest real-time payments market. India’s official digital currency is in the works and is expected to be launched by 2023.

Threats

Protracted tensions between Russia and Ukraine: The Russia-Ukraine conflict has worsened the growth-inflation mix for India. India’s crude oil basket price rose rapidly, from USD80 in 2022-23 to USD110 in the six months after the war broke out in February 2022. Although Russian crude was available at a discount, India’s oil import bill rose 76% in the first six months of FY23 to USD90.3bn. A rising import bill and supply-side disruptions have meant that Indian consumer price inflation, which in FY22 averaged between 4.5% and 5.5%, is likely to end FY23 at 6.7%.
A potential global depression: India’s economy is not immune to the US and global recession. The US’s share of India’s merchandise exports increased to 18.1% in FY22 from 10.1% in FY21. This increase has heightened India’s vulnerability to a recession in the US market. The US accounted for up to 54.8% of India’s software exports in FY21; therefore, such exports, margins and the service sector could be vulnerable to a US recession.
Rising interest rate environment: A rising interest rate environment has started impacting the Indian economy, and the Reserve Bank of India (RBI) has started moving in tandem with about 90 central banks, increasing interest rates. It announced a surprise 40bps interest rate hike in May 2022 and another 50bps hike in June 2022, taking the repo rate to 4.90% and reducing the liquidity surplus to USD40bn from USD52bn. CPI inflation was at 6.07% in February, breaching the RBI’s comfort level, and WPI was stuck at a high 13.11%.

Carbon border tax: The EU has proposed a Carbon Border Adjustment Mechanism, a plan to tax carbon-intensive products from 2026; this is expected to lead to higher prices of products manufactured in India for the EU. With EU being India's third-largest trade partner, this would make Indian goods less attractive for buyers in the EU. This tax is expected to create challenges for companies that have large greenhouse gas footprints.

Conclusion

India has put itself on a very high global pedestal. Its large domestic demand and rapidly growing infrastructure are safeguarding it from recession. The government’s efforts to enhance the ease of doing business in the country have borne fruit, with the country improving to rank #63 in 2022 from #142 in 2014. It recorded 23% growth in FDI inflows after the pandemic versus before the pandemic, and the country is on track to attract FDI equity inflow to prominent sectors such as the information technology, manufacturing, and service sectors. India has emerged as a top investment destination, currently unscathed by the recessionary environment. The move to promote the INR as an international transactional currency and encourage more countries to use the INR to settle accounts would make the INR stronger against the USD. India could also start printing currency, backed by gold. This would increase the value of the INR and reduce the dangers of inflation, as currency would be printable only if backed by gold, restricting India from overprinting currency, as in the case of Zimbabwe and Venezuela. India is also focusing on green hydrogen, instead of the grey hydrogen it currently uses. This would insulate India from the crisis surrounding carbon border tax. If India becomes the front runner in green hydrogen production and export, it will strengthen its position in the global economy.

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About the Author

Nitant Kumar Arora

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Nitant has over ten years of extensive work experience in the Investment Banking Division. He previously worked with EvalueServe. Currently he is a Delivery Lead, attached to the Financial Institutions Group (FIG) for a leading client based out of USA. He is responsible for carrying out company analysis, valuation analysis, industry analysis, and benchmarking. Nitant holds Executive MBA from ITM Ghaziabad and has completed his B.Com from University of Delhi.

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