India has a growing population of educated young professionals, rich natural resources and close contact with the world leading nations. At the 2015 Wharton India Economic Forum in Philadelphia, experts and observers from around the world discussed how the nation can fulfill its enormous potential and evolve into a global economic power.
Optimism has grown in some circles since the new government under Prime Minister Narendra Modi came to power last May. Indeed, Finance Minister Arun Jaitley recently forecast that India’s economy will accelerate from 7.4% GDP in fiscal year 2014-2015 to 8%-8.5% in 2015-2016. Based on the government’s new method for calculating economic growth, officials boast that India is now the fastest-growing large economy in the world. According to Jaitley, India needs sustained GDP growth of 9%-10% to achieve its longer-term development goals.
At a panel focused on investing in India, experts discussed which sectors are expected to shape the Indian growth story in the future, the likelihood of sustainable reforms to match the high expectations for the Modi administration, and what factors and strategies will be used to determine whether government initiatives such as ‘Make in India’ — intended to stimulate manufacturing — have been successful.
Ramnath Balasubramanian, panel moderator and a partner at McKinsey & Company, started the discussion by stressing the importance of demographic changes in the country. He pointed out that there are currently around 425 million Indians in the consumer sector of the country and 20% of the population is urbanized. It is estimated that by 2025, as much as 50% of all Indians will be urbanized. “While as many as 35 million people will be holding government jobs [by 2025], India’s spirit of entrepreneurship will drive the creation of an unprecedented number of small businesses,” said Balasubramanian.
Asked to identify other positive trends, Jay Shah, chief executive of Hersha Hospitality Trust, which owns interests in 65 hotels in gateway markets such as Boston, Philadelphia and New York, said that foreign private equity firms such as KKR & Co. find India very attractive.
KKR recently set up a non-banking financial company (NBFC) in India in partnership with GIC, Singapore’s sovereign wealth fund, for lending to the real estate sector. This is KKR’s second NBFC in India. KKR has been active in the country since 2006, with total equity investments exceeding $1.5 billion.
According to Shah, the driver for such investments is the widespread perception that India has “more upside going forward” than in the past. “The new administration is expected to back new ideas,” said Shah, adding that the inflation rate has dropped to around 5%, down from an average of 8.87% from 2011 until 2015.
“India’s spirit of entrepreneurship will drive the creation of an unprecedented number of small businesses.” –Ramnath Balasubramanian
The real estate sector has been further encouraged by the implementation of recent regulations for real estate investment trusts (REITs), which provide them with viable exit paths. India’s new government is laying the groundwork to make REITs tax-exempt and to allow them to trade on public exchanges. Assets that may qualify to be included in REITs may reach $20 billion by 2020, according to an estimate by property broker Cushman & Wakefield. In the first three to five years of the implementation process, as much as $12 billion could be raised. Already, noted Shah, about $10 billion in investments have been made. “This is a great start for priming the pump of the real estate sector,” Shah added.
Munish Dayal, partner at Baring Private Equity Partners India, said that he hopes to see major changes in the way the Indian government functions under Prime Minister Modi. Pointing out that “the first step is to revitalize the bureaucracy,” Dayal said that he is encouraged by the fact that many Indian bureaucrats now work through the day and during weekends also. “This has been a big change. It’s a start to ending the policy paralysis that has been common in the past.”
Observing that this is the first time that the Indian government is talking about an investment-led growth strategy, Dayal said: “A year ago, we were going downhill. Now, the plot has changed, and there is a lot more hope in the markets. Apart from the energy generated by the new prime minister, the fall in crude oil prices has given us a lever to invest in infrastructure.” Commenting on the government’s new ‘Make in India’ initiative, he said: “We can expect a lot of investors in defense and in railways.”
Dayal also emphasized another aspect: the responsibility of the state governments. “We tend to forget about the role of state governments. But a fair amount must be done at the state level in such activities as education, roads and sanitation.”
A major reform announced by Jaitley during this year’s Budget was the Goods and Services Tax (GST). A value added tax to be implemented beginning in April 2016, the GST is expected to replace all indirect taxes levied on goods and services by the Indian central and state governments.
Akshay Mansukhani, partner at Malabar Investments, which invests in small and midsize businesses in India, said that “the basic assumption [that investors have regarding India’s economic prospects] is that the financial system is stable.” He noted that the rupee has been stable, and the decline in oil prices has helped moderate inflation and interest rates. Pointing out that the independence of the country’s central bank, the Reserve Bank of India, is of critical importance, Mansukhani added that the long-term goal of the Reserve Bank is to establish a freely moving currency. “The Bank’s goal should be managing the volatility of the rupee, not to set the exchange rate of the rupee at any particular value.”
“A year ago, we were going downhill. Now, the plot has changed, and there is a lot more hope in the markets.” –Munish Dayal
But Shah also added a note of caution. India currently ranks 142nd out of 189 countries in the World Bank’s “Ease of Doing Business” listings, he said, which is “problematic” not just for developers in real estate, but in all sectors. For example, it could take up to 200 days to get all the approvals required for opening a commercial warehouse in India. When it comes to operating a hotel, typically around 70 to 110 permits are required, compared with only six in highly-ranked Singapore.
India’s inadequate infrastructure also presents multiple hurdles, imposing costly delays. As much as 30% of all fresh produce spoils in transit because of inadequacies in the cold chain. The lack of modernization of intellectual property regulations is also a persistent problem for many foreign investors. “The slower [the government] is in tackling these issues, the further they will fall behind,” said Shah.
Patrick Foulis, former India business editor of the British weekly The Economist, also pointed to some areas of concern. He noted that that despite optimism about India’s future, “the inputs of production” such as land and labor have not been reformed. “There are not enough good jobs being created [in India], and the reputational barrier of India is huge.”
Foulis, who is currently The Economist’s New York bureau chief and U.S. business editor, went on to add that although many people express optimism about India’s prospects in public, they are often skeptical in their private discussions because of the country’s inadequate performance when it comes to creating jobs for poor people. “That worries me,” said Foulis.
According to Dayal, India needs to urgently “rebuild investor confidence” and attract foreign capital. “The growth won’t happen if enough capital is not here…. The government has thrown a lot of balls up in the air. Now we will see which ones it can keep going.” Added Balasubramanian: “It is very clear that there are no short-term fixes.”