The Indian Economy:
The Past, the Present and towards the Future
By Dipesh Ratna Tuladhar

India has always held great promise—its foreign reserve in 1947 was one of the largest at US$ 2.1 billion (1950-51), accounting for 2.1 percent of global trade. However, the economic growth model, which mirrors the Soviet model of self-sufficiency, brought the country on the verge of bankruptcy. Domestic savings failed to keep pace with the investment needed to contain unemployment. Unbridled population growth over the years has significantly increased the working-age population, outpacing development efforts. Since the liberalization of the Indian markets in 1991 by the Finance Minister at the time and the current Prime Minister, Dr. Man Mohan Singh, India is on track to achieve its unfulfilled promise.

Though growth of India pales in comparison with that of China, India has achieved enviable growth in the last 14 years. Over the years, India’s foreign reserves have crossed $200 billion with a GDP growth rate of eight to 10 percent (9.4 percent in fiscal year 06, ending in March) have helped the country sever ties from its tumultuous past. FDI increased by over 90 percent, with FDI in 2006 at US$ 46 billion.

The Automotive and Airlines industries are references of the type of growth possible when competition and foreign investment are allowed freely. Both sectors were liberalized, which opened for new domestic players like Tata Motors to capture 15 percent of the market. The airlines industry witnessed an addition of 7 more service providers that has not only increased the service level but also a decrease in the cost of flying. Opening of both the sectors has witnessed increase in the number of employed in these sectors. India has also built up world-class capabilities in the Information Technology and Pharmaceuticals as well.

Wholesale reform to retail reforms such as liberalizing of the capital market, introduction of regulatory bodies that oversee industries, tax reforms, judicial reforms have created conducive environment to improve corruption, human rights violation, environmental degradation that ensures a long-term sustainable growth for the country.

A distinct characteristic of India has been its compatibility to adopt global best practices without necessarily compromising on its core values and culture. Indians have generally internalized the values of hard work very well while still adaptive to new ideas, technology, and practices. The same adaptability translates to an Indian’s willingness to locate to new geographies and in working with people of diverse background.

Efficient and uncorrupt regulatory institutions, better infrastructure development, and quality education are the factors that will improve India’s competitiveness going into the future.

Through these restructurings and liberalizing policies, India has largely moved from an agrarian, underdeveloped economy to a country that holds a considerable promise in the global trade making it an attractive opportunity for foreign investment and opportunities in services and industries.

Opportunity:

Economic experts agree that India needs to grow at a rate of 8 to 10 percent a year or risk higher unemployment. A major source to boost growth is by infusion of domestic savings into the market. But Indian house-hold savings of 20 to 25 percent of GDP is far too less than other emerging markets (44 percent of China) to be a significant source of fund. Therefore a deep need is felt by the government to boost FDI. China enjoys an FDI of ten times that of India. The lower FDI being routed to India is particularly due to the perception that India is a source of low-cost skilled labor, particularly in IT and not a major market for products and services.

While the net capital inflows increased by over 90% over the last fiscal year ($46 Bio in ’06-‘07 compared with $24 Bio in ’05-’06), more efforts needs to be put in by the government, building infrastructure and developing a thriving labor market, to sustain and achieve much higher growth.
Weakness:

Government budge deficit of 8 to 9 percent puts pressure on the interest rates and also leads to increased government  borrowing, capital that could have been used to fund investment in growing sectors of the economy. While the primary focus of the current Indian government was to reduce this deficit, the Prime minister himself has given low marks to his government for not being able to achieve the basic minimum targeted .

Investment in infrastructure such as: power, water and sewage, railways, airports. Political collaboration between various states would vastly improve the water sharing issues on the state level while being able to provide electricity through hydro-power. Power sector liberalization needs to be boosted by central government initiative to orchestrate co-ordination between various states and laying out a clear power sector policy that is currently mired in duplicity.

Improved efficiency/productivity of the bureaucratic wheels of state level governments would result in higher tax collection that could provide funds for governments to invest in state infrastructure that would boost growth. There is need to improve investment in R&D, supported by strong enforcement of intellectual property rights.

Low interest rates have also provided lift for the economy. Further growth can be expected by focusing on increasing demand and competition. Given the low domestic savings, government realizes the need to improve various factors that would entice increase in FDI, a critical source to improve GDP growth to 8 to 10 percent. A growth rate needed to keep a tab on the increasing unemployment of the working-age population.

With one fifth of the world’s population of less than 24, India is the world’s youngest country. This presents itself as an opportunity to tap in the potential and a challenge for all stakeholders (government, private sector and communities) to create new job opportunities for the working-age population joining the main stream economy. Building the infrastructure necessary, ensuring the skill level of the population meets the needs of the market is a concern for all the stakeholders.

The government’s role is decisive in being able to provide quality education to all (from the current literacy rate of 60 percent), availability of qualified teachers, and opening new institutes for higher education. Introducing educational reform policies that create a favorable environment for investment from the private sector is of equal importance.

Biggest problem vis-à-vis HR consulting is the strict law that forbids layoffs in the face of a down-turn. Equally unattractive is the law that requires companies with a workforce base of greater than 100 to obtain state approval before cutting jobs. Simplifying labor laws could unleash unprecedented levels of foreign direct investment and foster growth in light-manufacturing industries such as toys, leather, shoes, textile, and apparel in which India possesses cost advantage and skilled labor force.

India is also exposed to an anemic bureaucratic system afflicted by red-tapism. In a McKinsey survey done, Indian executives spent about 14% of their time dealing with regulatory issues compared with 8% time being spent by their Chinese counterparts. Starting a business in India takes eighty-nine days while closing one can take up to ten years; a far cry from most rapidly developing economies.

India’s executives – confident and competent. A booming economy and eager to hire

Despite several factors mentioned above that would propel growth of the Indian economy, Executives of India have been consistently more confident of the future in India compared to executives around the world. Over 75% of the country’s executives have expected their country’s economy to improve each time they were surveyed (past two years) – almost twice as many in the rest of the world. Along with this, the executives were equally confident (about 60%) that the inflation rate will either stay the same or decrease over the next 6 months. Of the Indian executives who were not confident of growth in the economy, the major concerns were: fluctuation in the level of demand for goods and services and exchange rates.
 
McKinsey Quarterly survey results of 14,000 executives from around the world. Of those surveyed, 40% are at C-level and represent different sizes and industries around the world. # of Indian executives surveyed: 147, representing various industries and sizes. June 2007.

India is now home to world class companies not only in IT services but also in the automotive, steel, and telecommunication industries. Indian execs are equally optimistic of the outlook of their own industries. This is reflected in about 50 percent of the Indian executives expecting the size of their companies to increase over the next 6 months.  While about 78% of the executives opined that the majority of the new employees would be located in the same country as the corporate headquarters, 15% expected the new hires to be located in a different country than the corporate headquarters.

In the survey conducted, also 33 percent of the Indian executives hinted their intention to hire abroad to be able to cater to new market opportunities that would be created. Such hiring plans needs to be understood as a reflection of the increasing complexity and global expansion ambitions of Indian companies.

A case in point is the recent second-round recruitment spree that Infosys went through in the United Kingdom . Infosys recruited 25 British students from Kings College London, University College London, and Warwick University. While Infosys’ global recruiting campaign was impacted by the lack of skilled professionals at home, the willingness was candidates to work with Infosys were influenced by the company’s international reputation, exposure and the opportunity to work in a different job market.