What you need to know about the rise of India

While China has enjoyed the limelight in the global economic media in the last decade, they are not the only emerging economy that has had a spectacular rise to international significance. India is on the way to becoming one of the top three economies in the world on the back of a transformation over the last 25 years.

The image of this massive country in western eyes has perhaps been distorted by stereotypical notions of a largely agrarian society with poor living standards and a dilapidated infrastructure. While there are still many fundamental problems and historical complications in this exotic nation, India is now a sophisticated economy with a remarkable growth story.

Table topping growth
In 2015 India’s economy grew by 7.2 per cent and is now the fastest-growing major economy in the world. This achievement is made more extraordinary in the context of other emerging economies, such as Russia and Brazil, which are both going in the opposite direction and have actually contracted by more than three per cent last year. Even China’s stellar rise was eclipsed by India’s growth rate, as it slipped below seven per cent in 2015.

This year, India is on track to maintain its leading rank in growth with an expectation that it may even increase its growth rate while others falter.

The Indian economy is the 10th largest in the world. Its current trajectory will see it reach third place by the year 2030, behind only the US and China. In terms of Gross Domestic Product (GDP), India is currently ranked seventh in the world, up from 12th just 25 years ago, with sevenfold growth over that period.

The early 90’s kick-start
The roots of India’s economic rise in the last 25 years can be traced back to the debt crisis that many developing nations suffered in the early 1990’s. The Indian government had to call on financial assistance from the International Monetary Fund (IMF). This assistance was offered but the IMF required reforms that resulted in a major shake up to the Indian economy that conflicted with a long tradition of government control, regulation and interference.

Policies of liberalisation, privatisation and the lifting of restrictions on foreign direct investment effectively removed the shackles and enabled market forces to drive growth, development and efficiency gains. An era of sustained growth in India’s GDP had begun. This growth was reflected in rapidly increasing imports and exports, as well as in its foreign exchange reserves.

This revolution lifted millions of Indians out of poverty and created a flourishing middle class. A major driver in this period of growth was India’s expertise in the increasingly significant information technology industry. This industry propelled growth in middle class jobs, which in turn then fuelled domestic consumer demand and encouraged further foreign investment.

Challenges remain
While India’s rapid rise and growing significance in the world economy is impressive, there are still significant challenges to overcome to enable it to reach its full competitive potential. The state still holds an unusual degree of ownership in industry and a bloated bureaucracy has had a stifling effect. Land, labour and capital continue to suffer from tight regulation and India was recently ranked 130th out of 189 countries in the World Bank’s “Ease of doing business” tables.

Infrastructure still leaves much to be desired for a modern nation and corruption still exists, despite some recent improvements in this area initiated by the popularly elected government of Prime Minister Modi.

The challenge for India is to accelerate reforms in the legal, financial and tax systems, as well as accelerating privatisation and infrastructure development.

How Australia benefits
India’s huge consumer market is a growing opportunity for many of Australia’s stronger export industries including food, wine and tourism. Australia also benefits from selling services such as education, agriculture and manufacturing expertise and can also find opportunities by helping India develop its natural mineral resources.

What it means for investors
Emerging markets are an important component in any diversified portfolio and India holds a prominent position among major emerging nations. The wave of positive investor sentiment surrounding India in the wake of the election of the Modi government in 2014 has been tempered by disappointment in the rate of promised reforms. Regardless of this, the sheer weight of numbers as its growing middle class continues to drive consumer demand for goods and services means Australia is well-positioned to benefit.

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