From being labeled the ‘Fragile Five’(a term coined Morgan Stanley to represent emerging market economies)in 2013 to become one of the most favored investment destination in 2017, it has been an interesting economic journey for India.
A survey by the United Nations Conference on Trade and Development (UNCTAD) showcases India to be among the top three investment destinations globally, till the year 2019. An upgrade for the country in the recent Moody’s ratings and World Bank’s EoDB (Ease of Doing Business ranking) rankings 2018 are other signs showing how India is gaining popularity as an investment destination. This ishe progress that the country has taken from four years ago when Morgan Stanley labeled India along with Brazil, Indonesia, South Africa and Turkey as ‘Fragile Five’ due to weak currency and other slacking economic conditions.
This shift affirms the government’s efforts to stabilize the Indian economy and validates the changes in the economic policies. India’s stock performance and strengthened Rupee over the last six months have added to the renewed confidence in the country’s economic and political stability.
The wave of change
In the last one year, multiple significant and esteemed rankings and reports have indicated improvement in India’s investor climate and economic confidence; UNCTAD’s World Investment report, Moody’s sovereign credit ranking and World Bank’s EoDB rankings to name a few.
World Investment Report 2017: The UNCTAD’s World Investment Report 2017 stated that India will be behind only the U.S. and China in terms of investment attractiveness over the next two years, making it among the top three most attractive investment destinations in the world.The report emphasized that there was global interest in mergers and acquisitions in the Indian market as multinational organizations eye capturing the fast growing Indian market.
Moody’s Ranking upgrade: The global agency Moody’s upgrade of India’s sovereign credit rating by a notch to ‘Baa2’in November 2017 is another reflection of increasing confidence of investors in the Indian economy. The rating is considered a reflection of a country’s investor climate and gives understanding about the level of risks (economic and political) involved in terms of investing in that country. According to the agency, the Baa rating reflects moderate credit risk while the modifier 2 indicates a mid-range ranking. This upgrade in ranking by Moody’sputs India alongside the likes of Italy, Spain, Bulgaria and Philippines in terms of investment climate and makes it the largest economy among Baa2-rated sovereigns.
The upgrade in the Moody’s ratings seems more significant when we look at the ratings upgrade record of the emerging market economies over the last few years. For instance, India and Mexico are the only two countries, out of the 10 emerging market (EM) economies in the G20, to have got a ratings upgrade in the last five years. Moreover, five of these EM economies including - Brazil, South Africa, Russia, Saudi Arabia and China—have actually been downgraded in the ratings by Moody’s in the same time period.
EoDB ranking: Another feather in the hat for India is its improvement in the World Bank’s EoDB ratings. According theDoing Business 2018 report by World Bank, India jumped 30 positions to rank 100th in the EoDB rankings that features 190 countries. The country ranked 130 last year on this ranking and this put it amongst top ten improvers and highest jump in rankings among 190 countries. The report stated that India has shown improvement in eight out of 10 indicators which means the country is closer to global best practices in regulatory framework for doing business. The four parameters on which India performed the best on this report include: paying taxes, resolving insolvency, access to credit and protecting minority investors.
What brought the change
The government’s efforts to stabilize the economy and bring in policy reforms, making doing business easy and smooth has played a key role in increasing investor interests and performance of the country on these rankings.
Government initiatives to lower the twin deficits and control inflation helped the country improve its macro-economic balance sheet. The external debt ratio of India has gone down significantly compared to what it was in 2013. The current account deficit went down from 4.5 in 2012-13 to 0.7 in 2016-17. The foreign exchange reserves improved too: At present they provide more than 10 months of import cover compared to six months in 2012-13.
The improvement in the macro-economic fundamentals of the country coupled with the reformist actions of the government have made attractive to foreign investors and thus the country has witnessed an upward flow in foreign investments.
Bringing faster permits for construction, making application for the Permanent Account Number (PAN) and the Tax Account Number (TAN) into one submission,improvement in terms of access to credit, decreased border compliance cost for export and import, reducing time for completion of the applications for Employee’s Provident Fund Organization (EPFO) and the Employee’s State Insurance Corporation (ESIC) are the key reforms that has simplified the process of doing business and in turn made it a lucrative market to invest.
World Bank in its report on Doing Business also complimented India’s initiatives of bringing structural changes in easing regulation around business and the impact trickled down from national level to the local. The report also highlighted, that going forward there will be relevant initiatives required at the state level too to continue the momentum.
Better stock performance and strengthening currency is another factor of rising confidence of investors in the economic performance of India.
Going ahead, it will be important to bring in more reforms and initiatives to ensure the growth momentum and investor interest continues and at an increasing rate. A very important step in this direction will be structural changes at state level too so the impact percolates deeper at local level.
For now, India’s return to micro-economic stability has kept the funds flowing and the further upgrades in these various rankings is going to be looked at as an undeniable evidence of India’s growth and stability. This prompts companies to expand their business in the market which in turn leads to creation of jobs and that is again a positive sign for investors and reflects in the stock performance triggering more capital inflows.