Download India - Ample Opportunities But Obstacles Must Be Overcome

MAY 10, 2012
India — Ample Opportunities, But Obstacles
Must Be Overcome
By Sharada Prahladrao and Rajabahadur V. Arcot
Keywords
GDP, Global, Economy, India, National Manufacturing Policy, State
Overview
India's economy is not completely insulated from the global turbulence: the
country's trade deficit and rising external debt, high inflation, and the fluctuating value of the rupee create dents in industrial growth. According to
This Insight tracks the current
trends in India's economic growth
— the gaps, the challenges, and
the State's initiatives.
the recent trade figures during the period 2011-2012 (India's fiscal year is from April to March), deficit soared to
$185 billion as a 32.1 percent jump in imports outpaced a
21 percent growth in exports.
Petroleum imports
touched close to 47 percent year-over-year growth to
over $155 billion; imports of capital goods such as industrial machinery increased 27.7 percent to $35.4 billion; imports of coal rose 80.3 percent to
$17.6 billion; and fertilizer imports rose 59 percent to $11 billion.
Domestic demand remains buoyant, but the manufacturing sector is
plagued due to inadequate availability of coal and other energy resources.
India is the world's fourth-largest oil consumer; but production averages
close to 762,000 barrels per day, which is the same as it was over two decades ago. During the same period, consumption has more than tripled, so
the country depends on imports to the tune of 70 percent. Coal India Limited (CIL), the largest producer of coal in India, has fixed a production
target of 468.74 MT for the current fiscal. However, the power crisis in the
12th Five-Year Plan (2012-2017) is likely to increase due to overall shortfall
of production (about 260 MT) by the end of the Plan period. This will impact the manufacturing sector acutely and coal imports will increase.
Due to prevailing global negative sentiments, the country may witness
slowdown in the GDP growth rate, but probably only for a few quarters as
has happened in the fiscal year 2008-09. The International Monetary Fund
VISION, EXPERIENCE, ANSWERS FOR INDUSTRY
ARC Insights, Page 2
(IMF) has reduced the GDP growth forecast to 6.9 percent in 2012 from 7
percent projected in January — a marginal decrease. What is important to
note is that according to the recent Regus Business Confidence Index
(which is based on revenue, profit trends, and projected growth) in terms of
stability and confidence, India ranks second with 143 points.
However, India's fundamentals are strong; the sails just need to be set in the
direction of the blowing wind. And for this to happen, the objectives of the
State, the Reserve Bank of India (RBI) and industry leaders must be wellsynchronized.
Domestic Challenges
The IMF said that "governance concerns have weakened investment sentiments." The State is taking initiatives to enhance investor confidence, but
many challenges need to be addressed, such as removal of infrastructure
bottlenecks and trade barriers. In the 2012-13 budget, financial reforms and
measures were announced to encourage public-private partnerships; but
In the 2012-13 budget, financial
reforms and measures were
announced to encourage public-private
partnerships; but the implementation
of reforms related to infrastructure is
likely to move at a slower pace.
the implementation of reforms related to infrastructure is likely to move at a slower pace.
Other factors crippling India's economy are high
inflation due to supply-side constraints, trade deficit
resulting from imports exceeding exports, fiscal deficit climbing to 5.9 percent of the country's GDP
(end March 2012) due to heavy subsidies on food, fuel, and fertilizers.
However, high inflation due to supply chain-side constraints and trade deficit indicate excess demand. This is in sharp contrast to other countries in
which demand has declined, making it evident that India faces a different
set of challenges. However, to bring the trade balance under control over
the long term, it will be necessary for the manufacturing sector to grow to
be able to meet the country's demand. Currently, India's largest import bill
is from the oil & gas sector; making it imperative for the country to scale up
production capacities. If that does not happen, global companies with excess production capacities will fill that void.
Current Scenario
India's manufacturing sector receives encouragement from the State to produce goods indigenously.
The recent National Manufacturing Policy
represents a laudable effort in this direction. With ever-increasing domestic
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ARC Insights, Page 3
consumer demand, expertise, and the required talent pool, India is wellpositioned to emerge as a strong manufacturing base. Global companies,
spotting the immense potential that the India market offers, have set up
manufacturing hubs here. Paradoxically, Indian manufacturers depend on
imports in many industrial sectors.
For example, China's power equipment suppliers won 34 percent of new
equipment orders for additional capacity in India's power plants; this segment could have easily been captured by companies in India, such as BHEL
and L&T. To protect local interests, the Union Power Ministry has endorsed a plan to almost triple the import duties and policies are being reset
to address the liquidity crisis. This should be a clarion call for industrial
companies to maximize all available resources, reduce imports, and revive
investor confidence.
Inflation in India, which is driven
largely by rising food and global
commodity prices, is the highest
among major economies in Asia.
Inflation in India, which is driven largely by rising food
and global commodity prices, is the highest among major economies in Asia. Food inflation is attributable to
rising incomes and changing dietary habits and lifestyles.
The landmark National Food Security Bill
received Cabinet approval at the end of 2011 and will be implemented this
year. This will provide monthly supplies of subsidized wheat, rice, and millet to millions. The goal seems altruistic, but clearly will strain the State's
finances. This Bill has enormous political significance for the coalition party,
which was re-elected due to its “pro-poor” stance. But tracing India's sociopolitical history shows that food subsidy programs in India encounter widespread corruption and rarely reach the intended populace.
External Commercial Borrowing
India's foreign exchange reserve, stood at $293.14 billion in mid April 2012.
This can be released in the market to purchase dollars and consequently
raise the rupee value. However, if the RBI intervenes, it also requires support from other quarters or its impact will be negated. Apart from direct
intervention in the currency market, the RBI is relaxing its external commercial borrowing (ECB) policy to encourage inflow of foreign currency.
For greenfield projects, plus projects in the infrastructure and telecom sectors, 50 percent funding via ECBs are permitted. The State has increased
the limit on RBI to $30 billion and allowed borrowing in China's currency
— remnimbi.
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Foreign retailers have India on their radar — the Global Retail Development Index ranks India fourth globally. At present, the industry is worth
Foreign retailers have India on
their radar — the Global Retail
Development Index ranks India
fourth globally.
over $410 billion and expected to cross $800 billion by
2015. Recently, the State decided to allow 100 percent
foreign direct investment in single-brand retail outlets.
Industry observers see this as a precursor to allow the
entry of multi-brand international chains.
Recommendations
Global economic rumblings bruise India's economy, but do not cause major
trauma. The State and the RBI can only initiate industry-friendly policies; it
is up to the industrial companies to increase their investments to expand
production capacities to benefit from robust domestic demand. ARC believes that the State should introduce initiatives and reforms that bolster
confidence in the economy. With the appropriate policies and inflation under control, industrial growth will remain on track. Global companies are
entering the India market and providing stiff competition to domestic companies. Demand-driven growth is evident and the market potential is huge
— but to realize this there has to be coordination between the State, industry and other stakeholders.
ARC Advisory Group recommends the following actions:
•
Industrial companies in India should reduce dependence on imports
and scale up production capacities
•
The State must implement appropriate initiatives and measures in an
efficient manner
ARC's tenth India forum in Hyderabad from July 5-7, 2012, “Transforming
Industry and Infrastructure through New Processes and Technologies,”
will discuss the challenges faced in India's manufacturing sector and the
measures being taken to combat them.
For further information or to provide feedback on this Insight, please contact your
account manager or the authors: [email protected] or [email protected]. ARC
Insights are published and copyrighted by ARC Advisory Group. The information
is proprietary to ARC and no part may be reproduced without prior permission
from ARC.
©2012 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com