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Indian Economy Overview

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Indian Economy Overview

June, 2014


A survey by global consultancy firm Ernst & Young (E&Y) sees India as the world’s most attractive investment destination. With the opening up of foreign direct investment (FDI) in several sectors, India is today an eye-catching destination for overseas investors. The relaxation of norms by the government has created a vast opportunity for foreign players, who are competing for a greater role in the Indian market. Sectors projected to do well in the coming years include automotive, technology, life sciences and consumer products.

India has also become a hotbed for research and development (R&D) and the country is now a preferred destination for automotive R&D, as per a study on the Global Top 500 R&D spenders by globalisation advisory and market expansion firm, Zinnov. The study noted that there was strong potential for growth in areas such as engineering analytics and that significant talent could be found in ‘Deccan Triangle’ region, which encompasses Pune, Bangalore and Hyderabad.

The US$ 1.2 trillion investment planned for the infrastructure sector in the 12th Five-Year Plan will go a long way in improving export performance of Indian companies and the Indian growth story, according to Mr Anand Sharma, Union Minister for Commerce and Industry, Government of India.

Market Size

The World Bank has projected an economic growth rate of 5.7 per cent in FY 15 for India, due to a more competitive exchange rate and several significant investments going forward.

India is the third biggest economy in the world in terms of purchasing power parity (PPP), according to a World Bank report. The country was ranked 10th in the previous survey conducted in 2005.

India will become the third largest economy in the world by 2043, as per Mr P Chidambaram, Union Finance Minister, India. The country has been consistently rated among the world’s top three investment destinations by international bodies such as the World Bank and UNCTAD, supported by its liberal foreign investment policies.

Key Developments/Investments

While digitisation in India continues to grow, the country’s demand for paper is expected to increase by 53 per cent over the next six years, on the back of sustained growth in the number of school-going children in the hinterlands. Improved consumerism; modern retailing; rising literacy, backed by government spending on education; and the growing use of documentation is expected to sustain demand for writing and printing paper.

The US Green Building Council (USGBC) has ranked India third in a list of the top 10 countries (excluding the US) for Leadership in Energy & Environmental Design (LEED) certified buildings. The list reflects the global adaptability of the most widely used and recognised system in the world guiding the design, construction, maintenance and operations of green buildings.

Merchandise exports grew at a five-month high of 5.3 per cent in April 2014 to touch US$ 25.6 billion, against US$ 24.35 billion in April 2013, according to official data. Outbound shipments grew on the back of high-value engineering goods, drugs and pharmaceuticals, and textile products. Engineering exports rose by 21.3 per cent to touch US$ 5.7 billion, while pharma rose 10.4 per cent to touch US$ 1.3 billion.

With European corporations taking a cue from their US counterparts to make outsourcing mainstream, India’s software companies, sensing the opportunity, are hiring and looking for acquisitions to grow in Europe.  Tata Consultancy Services, India's largest information technology (IT) provider, invested in on-site hiring in Europe and also acquired French IT services player Alti for US$ 75 million in 2013. Infosys bought Zurich-based consultancy firm Lodestone for US$ 349 million, in 2012. More acquisitions look likely in future.

The stakes held by foreign institutional investors (FII) in Indian companies touched a record high in the fourth quarter of FY 14. The estimated value of FII holdings in India stands at US$ 279 billion.

The cumulative amount of FDI equity inflow into India stood at at US$ 212,031million in the period April 2000–February 2014, while FDI equity inflow during April 2013–February 2014 was recorded as US$ 20,766 million, as per data published by Department of Industrial Policy and Promotion (DIPP).

Private equity (PE) investments in the Indian real estate sector grew by 13 per cent at Rs 7,000 crore (US$ 1.17 billion) in 2013 as against Rs 6,200 crore (US$ 1.03 billion) in 2012, as per a report by Cushman & Wakefield.

Government Initiatives

In a bid to bring more investments into India’s debt and equity markets, the Reserve Bank of India (RBI) has set up a framework for investments which will enable foreign portfolio investors to take part in open offers, buyback of securities and disinvestment of shares by the Central and State governments.

FIIs and non-resident Indians (NRIs) will now be able to invest in the insurance sector, within the 26 per cent cap on FDI. DIPP confirmed in a press note that the norms would also apply to insurance brokers, third-party administrators (TPAs), loss assessors and surveyors. The investments can be made through the automatic route.

The Government of India along with the industry has been working towards fashioning a more dynamic environment for small and medium enterprises (SMEs) and startups over the last few years. Indian SMEs employ about 40 per cent of the country’s workforce and contribute 45 per cent to the overall manufacturing output. A positive policy framework allied with the growth of angel funds and a vibrant entrepreneurial culture is contributing to the growth of first generation entrepreneurs in the country. 

Road Ahead

In an effort to take bilateral trade relations to another level, the Cabinet has given the green signal to the proposal of the free trade agreement (FTA) on services and investment with the Association of Southeast Asian Nations (ASEAN). The two-way partnership is targeting US $100 billion by 2015, for which an integrated and comprehensive transport network is necessary.

Thus, the emphasis is on a massive road connectivity plan which will tie the region together and subsequently enhance economic objectives. Also, agricultural gross domestic product (GDP) in the country is projected to grow by over five per cent in the current agricultural year (July 2013–June 2014).

Exchange Rate Used: INR 1 = 0.01676 as on May 13, 2014

References: Press Information Bureau (PIB), Media Reports, Department of Industrial Policy and Promotion (DIPP), Securities and Exchange Board of India (SEBI)