India’s economy is fundamental part of the global recovery. The country contains more than a sixth of the world’s population and is responsible for 7% of global economic output. Moreover, we have seen the importance of India in an overall global recovery, with India being a powerhouse in pharmaceutical production, supplying and gifting many countries with Covid-19 vaccine supplies.
Pre-2020, India’s economy had witnessed a slowdown, however the government has taken several decisive actions which have resulted in global forecasting firm Oxford Economics to revise India's economic growth projection for 2021 to 10.2% from the earlier 8.8%, citing receding Covid-19 risks and the shift in the monetary policy outlook. It further said the Budget 2021-22 will create positive externalities for the private sector.
Pandemic has taken its toll but has paved the way for reform.
Whilst the pandemic has exacerbated already tested vulnerabilities relating to poverty, environmental degradation, employment opportunities and issues with high informality of the economy. The Indian Government has responded with multiple stimulus packages. 2020 showed a 9% fall in the GDP growth rate, an expected result of the pandemic. The question is now whether India can look to achieve higher annual GDP growth through reforms and restructuring for India to achieve its potential.
Initially, much like the rest of the world, the Indian economy struggled to return to pre Covid-19 levels as activity levels cooled with states limiting social interactions and workplace engagement as part of lockdown measures. Resultingly, the Indian government had to stabilise the economy with both fiscal and monetary measures, which has countered effects of lockdown and of incomes shocks. The initial fiscal stimulus amounted to 6.9% of GDP, most of which used to support business and shore up credit. There were two separate follow up packages to support household consumption, a 0.2% GDP injection ahead of Diwali and a 1.4% GDP injection spanning several fiscal years. Tax revenue losses grew in 2020, adding to the fiscal deficit of around 16% of GDP.
The 2021-22 budget has been cautionary to curb the fiscal deficit, whilst continuing to support stressed sectors and the creation of infrastructure. This included a 137% increase in spending to INR 2.2 trillion on health & wellbeing services, used to develop healthcare capacity, Covid-19 response, air pollution and waste management. A vast expansionary infrastructure plan including the creation of seven mega textile parks, a further extension of the National Infrastructure Pipeline, INR 1.1 trillion of railway financing and 8,500km of roads. This has been coupled with the much-needed agricultural reform and extended efforts to strengthen India’s human capital throughout the education and research spectrum.
The Reserve Bank of India implemented several policy changes from cutting the repo rate from 5.25% to 4%, introduced mandatory credit repayment moratoria and one-off debt restructuring with upfront provisioning. The Government has positively looked to make the most of the crisis by focusing on the opportunities it brings to implement reforms to structurally transform India’s economy and set India on a long-term trajectory for sustainable growth.
Outlook and a turning point for growth
There has been a substantial effort to reform notable areas of the economy, such as agriculture and employment. One of the key topics has been the agricultural reform acts, which have been set out to modernise the agricultural sector through changes to trade & commerce, price assurance and stock holding limits on essential commodities. The reforms are an attempt to steer the economy looking to transition into higher productive growth sectors and increase productivity in the agricultural sector through free market mechanisms.
India’s agricultural sector as with many emerging markets has been operating inefficiently based on various metrics including yields, mono-culture farming which has a significant negative impact on soil quality and biodiversity and access to markets. The government hopes that the reforms will make markets more efficient whilst protecting farmers’ rights and will reduce over-reliance on middlemen who act as aggregators are often benefit disproportionally due to opacity in the markets when market prices may be significantly higher compared to the price’s farmers are able to get in local markets. India’s agricultural reforms should establish a parallel opportunity for farmers to access markets nationally and internationally whilst the longstanding Minimum Support Price (MSP) will also remain in place.
As India’s economy develops and education levels improve, it is estimated 90 million workers will seek gainful non-agricultural opportunities between now and 2030, In addition to this, 55 million women could enter the workforce by 2030, if there is only a slight correction in underrepresentation in the workforce. These workers will likely be working in jobs that offer a higher economic output, becoming the driving force behind the Indian economy. Typically for developing countries, manufacturing and construction are two sectors that can be amplified in the medium term, these sectors being able to add 11 million and 24 million jobs, as well as 9.6% and 8.5% to annual GDP growth respectively between 2023 to 2030.
There are numerous opportunities for the for India to achieve high rates of growth post pandemic. Manufacturing and construction offer a competitive foundation for economic prosperity. India’s businesses will need to be the forefront of this growth, supported by the Government adopting a pro-growth reform agenda to allow the scaling of sectors such as agriculture, retail, manufacturing and construction. There must also be sufficient access to economic inputs such capital, labour, land and power to allow the growth to occur, thus financial reform will be needed to create access to an estimated $2.4 trillion capital requirement by 2030.
The Indian tech industry also has a lot going for it and will benefit from this developing workforce and talent pool. The resiliency shown by both large technology firms and start-ups have made India one of the strongest digital markets despite the disruption caused by the Covid-19 pandemic. According to a recent Nasscom report, Indian IT services revenue is set to touch $194 billion by end of FY 20-21, a 2.3% increase from the previous year.
For instance, Infosys raised its revenue guidance to 4.5-5% in constant currency terms from the earlier estimated number of 2-3%. When it comes to start-ups, Nasscom has earlier reported that more start-ups are raised their first round of funding in 2020 (nearly 42%) as compared to 2019 (around 29%). The first-time funded start-ups were in BFSI, ed-tech, agri-tech and gaming. In 2020, despite the disruption caused by the pandemic, over 12 unicorns were added to India Inc.
The main driver behind this is the need for digital transformation. While the large IT services brands continue to bag large deals abroad, start-ups in India have opportunities within the country as well by working closely with large companies and by offering services/ products to MSMEs. For instance, the demand for deep-tech start-ups and their services is increasing. In the last five years, 2,100 deep-tech start-ups have come up focused on specific technologies.
Fintech and health tech start-ups saw a surge in the demand for their services such as digital contactless payments and telemedicine. Similarly, retail tech start-ups benefited from the demand for e-commerce, digital payments from the small businesses and kirana stores. According to Paynearby, since the lockdowns in 2020, around 30,000-40,000 kirana stores are being added every month onto its platform. It expects this trend to grow in the period ahead.
New-age digital skills will be priority for talent in large IT firms as well as growing start-ups, especially in the areas of blockchain, AI, IoT, security, AR/VR and data analytics. Nasscom predicts that digital skills demand will outstrip supply by FY24.
Additionally, India’s swift actions have been positively welcomed by domestic and international enterprises in various sectors, highlighted by companies such as Amazon, Apple and Tesla all looking to establish and increase their activities in India across manufacturing and office-based activities.
Building Better and Cleaner
As India progresses on this growth journey, the country’s energy demands will increase. The Government has been very cognisant of this and has accordingly been promoting India’s transition to renewable energy.
In 2019, India was ranked as the fourth most attractive renewable energy market in the world. India will be the largest contributor to the renewables upswing in 2021, with the country’s annual additions almost doubling from 2020, as many auctioned wind and solar PV projects are expected to become operational.
Wind energy capacity in India has increased by 1.7 times in the last 4 years. Further to this, record 100 bn+ units of renewable electricity generating last year. Additionally, solar power capacity has increased by more than 11 times in the last five years from 2.6 GW to 28.18 GW in March 2019.
The country has set an ambitious target of 450 GW of renewable power by 2030. This is the world's largest expansion plan is in renewable energy.
A recognition from the international community of these achievements and plans will see Prime Minister Narendra Modi receive the CERAWeek global energy and environment leadership award during an annual international energy conference this week.
India has been able to deliver poverty alleviation, productivity increases and rapid economic growth over the past 25 years. The country’s innovation and increasingly educated workforce have also helped the creation of pioneering businesses and growth of its service sector, allowing it to achieve higher economic aspirations.
If India makes the right structural shifts and creates incentives for transition and modernisation, it can be expected to be able to sustain rapid GDP expansion of 8% to 8.5% annually through higher productivity growth and gainful employment opportunities, leading to structurally higher standards of living and inclusion.
Overall, India’s economic outlook looks optimistic and is taking strides in a positive direction.
Summary of Major Investment Schemes (Figures in INR Bn)