Elephant on the move: India’s economy gathers momentum

Global investors are stepping up their expansion into India, confident of the strong potential for growth in the world’s second-most populous nation. Economic pundits say the coronavirus pandemic that continues to ravage the world is accelerating this trend. The factors seen powering this push include trade frictions such as that between the U.S. and China, India’s huge domestic market, and New Delhi cozying up to foreign investment.

The COVID-19 lockdowns hit the Indian economy hard, with GDP shrinking by 7.3% in the financial year ended March 31, 2021. Despite the crisis, foreign direct investment (FDI) in India jumped 27% to $64 billion in 2020, as data compiled by the U.N. Conference on Trade and Development (UNCTAD) shows. This contrasts with a steep decline in FDI in most countries. 

FDI inflows in the first four months of financial year 2021-22 jumped to $27.37 billion – up 62% from the same period a year earlier, commerce ministry data indicates. More than a fifth of the investment went into the automotive sector, followed by computer software and hardware, and the services sector.

Commerce and Industry Minister Piyush Goyal believes India could become the epicenter for FDIs, drawing in annual inflows of up to $160 billion by 2025.

“We’ve seen record FDI inflows, breaking the previous year’s record each year, seven times in a row,” he told an industry conference in November 2021. “I hope to see this continue, triggered by major structural reforms.”

Business activity in India picked up strongly after restrictions were eased. Economic growth in April-June 2021 rebounded by 20.1%, led by manufacturing and construction. GDP had contracted by 24% in the same period a year earlier. Growth for the fiscal year 2021-22 is, at time of writing, forecast at 9% by the International Monetary Fund. For the fiscal year 2022-23, the IMF predicts growth of 7.1%, substantially more than the 4.4% expected in global economic growth. 

The pace of expansion is likely to exceed expectations. The economy grew 8.4% in July-September, beating the central bank’s 7.9% forecast and lifting GDP fractionally above its pre-pandemic level. “The recovery was driven by a revival in services, full recovery in manufacturing and sustained growth in agriculture sectors,” the finance ministry said in its monthly economic review of November 2021.

“India is among the few countries that recorded four consecutive quarters of growth amid COVID-19 … reflecting the resilience of the Indian economy,” it said, adding that economic recovery is expected to gain further strength in the remaining quarters of the financial year.

So, will the growth hit double digits? “It’s not unlikely,” says Niki Frank, CEO South Asia, DHL Global Forwarding. “We’re seeing very strong momentum which goes beyond the pure recovery from the COVID-19 shock in 2020 and earlier in 2021.”

Citing a social media image of a pachyderm lumbering over a high railing, Anand Mahindra, head of the Mahindra industrial conglomerate, recently tweeted: “The Indian economy is often referred to as an elephant. More recently it was termed a tiger as its growth sped up. Well, even if it’s an elephant, this shows that you should never count us out. We always find a way – no matter how awkward – to get over hurdles in our way!”

An expanding middle class and massive government-led investment in infrastructure – such as highways, metro rail lines, airports, water transport, logistics hubs and energy – are seen as bolstering the potential. But bureaucratic red tape and divisive politics in the country’s boisterous democracy are often bottlenecks in the implementation of policies.

Incentives to woo world manufacturing are making progress, helped by a move by global companies to cut back their heavy reliance on China. Apple and Samsung have been assembling their smartphones in India. Over time they may start making higher-value products. Swiss bank UBS expects India’s share of Apple’s global supply chain to jump from almost zero to as much as 30% within two to three years. These are building blocks for Indian industry to develop work skills for its future workforce. 

India is home to 1.4 billion people, more than half of whom are below the age of 25. By 2030, the total working-age population is projected to reach 1.03 billion, overtaking China’s 987 million and dwarfing the 218 million in the U.S., according to a World Economic Forum and Kearney paper, “Shifting Global Value Chains: The India Opportunity,” released in July 2021.

The report says that the COVID-19 disruption has sped up three pre-pandemic trends in shifting global value chains: emerging technologies, climate change and the imperative of environmental sustainability, and the reconfiguration of globalization.

Multinational companies are keen to build more resilient and diversified manufacturing and supply systems, also urged on by fluctuating global trade patterns. This has opened a new window of opportunity for emerging nations.

“India is a prime candidate to capitalize on this opportunity,” the report states. “In its favor are the potential for significant domestic demand, its government’s drive to encourage manufacturing and a distinct demographic edge.”

Frank sees this already happening, with DHL’s large multinational customers increasing their investments in the country. “They continue to look at India as a future growth engine,” he says.

Surging global demand for products manufactured in India is underpinning business confidence to expand capacity. “The Indian export sector is extremely buoyant at the moment, so we’re really seeing a huge production output,” Frank says. “We hear from several of our customers that their order books are full.” 

India’s exports in December hit $37.3 billion, up 37% from a year earlier, government data shows, and Commerce Minister Goyal said the country is on track to reach its 2021-22 target of $400 billion.

Pharmaceuticals, engineering, machine parts and equipment, home furnishing and decorative were some of the sectors riding the export surge, Frank explains. Imports of items such as computers, laptops, smartphones and other devices are buoyant on the back of work-from-home norms, but the government is pushing to attract investments and build clusters around the technology sector.

“In the future we would see more and more local manufacturing. And, you know, not all of that will be for the domestic demand,” he says.

The upbeat outlook for the Indian economy is based on the giant strides anticipated in consumer spending in the coming years. By 2030, India is expected to become the world’s most populous nation and its third-largest economy. The country’s consumer market is projected to expand by 300% on the back of a rising middle class that will include almost 80% of India’s households, growing from $1.5 trillion in 2019 to about $6 trillion by 2030, according to the World Economic Forum paper. 

Improving prosperity could trigger demand for high-value, discretionary items such as cars, personal computers, smartphones and beauty products, in addition to essentials like food and apparel.

“For multinational corporations, India promises a large domestic market that could be the next horizon of growth. And with it comes the potential to expand manufacturing in India – for India, and for the rest of the world,” the paper reported.

A survey of 1,200 global business leaders conducted by the consultancy Deloitte found that about 44% were planning additional or first-time investments in India. Nearly two-thirds of the respondents aimed to pump in the money within the next two years. The survey, done during the peak of the second wave of the COVID-19 outbreak in India earlier in 2021, showed a large proportion of world business leaders were upbeat about India’s prospects.

The sectors favored include information and communication technology, pharmaceuticals, agrochemicals, specialty chemicals and renewable energy. Startups riding on digital technology are also hotly tipped. The success of the tech industry in India has spawned legions of young entrepreneurs to acquire future work skills. 

After its latest round of fundraising, fintech startup Slice became the 41st in 2021 to become a unicorn – a startup with a market value of $1 billion or more.

Despite poor health facilities in the rural regions where many Indians live, New Delhi managed to contain the spread of COVID-19. Thanks to a vibrant pharmaceutical industry in India, the country produced vaccines in large quantities. As of early January 2022, India had administered more than 1.5 billion doses of vaccinations – second only to China. About 70% of adults are double vaccinated.

In November 2021, Prime Minister Narendra Modi laid the foundation stone for a new international airport on the outskirts of New Delhi. Zurich International Airport AG won the bid to design, build and manage the greenfield project for 40 years. It will be the second airport in the National Capital Region. The first phase is scheduled to start operations in 2024 and will initially cater to 12 million passengers a year.

Airlines in India suffered heavily from disruptions caused by the COVID-19 pandemic. Aviation consultancy CAPA India estimates airlines’ collective losses at between $3.2 billion and $3.7 billion in the year ending March 2022. It forecasts domestic air traffic of 80-95 million passengers in 2021-22, up from 52.5 million in the previous year but well under the nearly 140 million seen in 2019-20.

Still, the sector is drawing the attention of investors. Billionaire Rakesh Jhunjhunwala, known as India’s Warren Buffett for his ability to identify profitable stocks and shares, co-founded Akasa Air, betting on bullish prospects for ultra low-cost carriers (ULCC). The new airline is scheduled to begin flying in the first half of 2022. In November 2021, the company placed orders to buy 72 Boeing 737 Max planes, valued at nearly $9 billion.

In October 2021, India’s Tata Group acquired debt-ridden national carrier Air India for $2.4 billion from the government in a global auction.

Constrained by travel restrictions, international traffic is estimated at 16-21 million passengers in 2021-22. By 2030, this is projected to reach 115-125 million, and then double to 240 million by 2040, according to CAPA.

DHL began investing €500 million in India in the middle of the COVID-19 outbreak to expand warehousing capacity by 1.2 million square meters, increase its trucking fleet, upgrade technology and more than double its employees to 25,000 by 2025. By then, it aims to boost its Indian market growth rate to 22% a year from around 11% before the pandemic. It also hopes to more than double its share to 7% in the hugely fragmented market.

“We are certainly on track for this,” says Terry Ryan, CEO Asia Pacific, DHL Supply Chain. “We continue to demonstrate double-digit growth and we have fairly large aspirations.”

A uniform Goods and Services Tax (GST), launched in July 2017, has been a shot in the arm for companies and consumers as it reduces the transit time for goods and services across the country – even though road infrastructure lags behind demand, and point-to-point movement of goods in India is expected to remain among the world’s slowest.

The tax reform paved the way for significant improvement in supply chain management, helping boost efficiency and cash savings. Consolidation of warehouses in large facilities at fewer critical points have replaced separate inventories that manufacturers and distributors were previously compelled to maintain in each of the 29 states to escape multiple levies.

“Inventory reduction is a huge benefit,” says Ryan, noting the maturing of supply chain management in India and the role of technology and data analytics. “It gives manufacturers much better velocity and control of inventory.”

With the strong influx of investment into the country and the massive progress forecasted by economic experts around the world, prospects are indeed bullish for the “Indian elephant.”

Published: February 2022

Image: iStock