Right since 2014, NDA has worked hard to make India one of the most investor friendly nations. Though at present Indian economy is seeing one of its slowest growth periods but that is transitionary, and there are strong reasons for a structural economic revival.
It is not at all difficult to understand the reasons behind this expectation. The economy of a developing country like India grows if the investments (in industries) start rising.
And this government has done a historical and path breaking work to improve the business environment in India. Simply look at the following factors which attract investments –
| FACTOR | INDIA’S STATUS |
| Political stability | Yes |
| Predictable policy framework | Yes |
| Large market size | Yes |
| Legal and regulatory environment | Improving |
| Ease of doing business | Improving sharply |
| Controlled inflation | Yes |
| Low wage rates | Yes |
| Availability of skilled manpower | Low |
| Low tax rates | Yes |
| Good physical infrastructure | Improving |
Except one negative point, India scores high on all these factors.
Right now India is facing some big headwinds which has caused a serious slowdown (see previous post – Budget 2020 for causes of slowdown) in its growth. But these headwinds have bottomed out and India is now all set to witness a renewed growth phase which will be based on its structural overhaul done by NDA during last six years. Domestic as well as foreign investors are noticing the improvements in these factors and a revival is not far.
Factors Attracting Investments:
Political stability
The biggest economic risk of political instability is that changes in government may abruptly change policies, or if there is a coalition government, it will find it difficult to make policies.
India currently has government with strong majority which has enabled it to undertake several reforms. This government is expected to stay in power for a long time, especially in absence of any significant national level opposition. Its policies have been favorable for businesses (as can be seen by the improvement in almost every parameter mentioned below in this article).
Predictable policy framework
There is an index ‘Economic Policy Uncertainty Index’ used world over by economists and businesses to assess the level of predictability in a government’s policy decisions.
India has sharply improved its position from near 250 in 2011, to 47 in Jan, 2020. During the NDA ruling, this index has stayed low. And it is much better compared to 225 of the global average for 2019.
Source: www.policyuncertainty.com
Large market size
India is poised to become the third-largest consumer market behind only the US and China; and consumer spending in India is expected to grow from USD 1.5 trillion at present to nearly USD 6 trillion by 2030, according to a World Economic Forum report.
“If realised, this would make India’s consumer market the third-largest in the world, behind the US and China,” the report said.
The report titled ‘Future of Consumption in Fast-Growth Consumer Market – India’ noted that growth of the middle class will lift nearly 25 million households out of poverty.
As per the report, growth in income will transform India from a “bottom of the pyramid economy” to a middle class-led one.
Future consumption growth will mainly come from rich and densely populated cities and the thousands of developed rural towns.
“India’s top 40 cities will form a USD 1.5 trillion opportunity by 2030, many thousands of small urban towns will also drive an equally large spend in aggregate. In parallel, there will be an opportunity to unlock nearly USD 1.2 trillion of spend in developed rural areas by improving infrastructure and providing access to organised and online retail,” WEF noted.
Below is a list of the largest consumer markets of the world, according to data from the World Bank. The countries are sorted by their Household final consumption expenditure (HFCE) which represents consumer spending in nominal terms.
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Legal and regulatory environment
There is an international index ‘Regulatory Quality Index’ by World Bank that captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.
India’s score has steadily improved from -0.47 in 2012 to -0.18 in 2018.
India’s rank on it has improved from 126 in 2012 to 101 in 2018, out of 193 countries. Honk Kong was first and North Korea was last.
Ease of doing business
In six years of the Narendra Modi government, India’s ranking for EODB improved 79 places from 142nd in 2014 to 63th in 2019, a record for a major economy.
India climbed 14 rungs in the World Bank’s Ease of Doing Business 2020 survey to stand at 63, among 190 countries, making it the one of world’s top 10 most improved countries for the third consecutive time.
The sharp rise in the ranking underscores the reformist credentials of the Narendra Modi-led National Democratic Alliance (NDA) government and may help the country lure multinational companies, looking at alternatives to China for investment amid Beijing’s trade war with the US.
India saw the biggest jump in ranking in “resolving insolvency” category, to 52nd rank from 108th, on the back of implementation of the Insolvency and Bankruptcy Code, while its ranking improved substantially in Dealing with Construction Permits (to 27th from 52nd) and “Trading across Borders” (to 68th from 80th).
Controlled inflation
India’s CPI has been in a downward trend since 2011, and is now at reasonably low level near 5% (chart below).
Low wage rates
India offers one of the lowest wages in emerging markets.
Availability of skilled manpower
This is the only major drawback for India. Skill shortages are becoming a growing problem for employers in India.
According to an OECD report, the problem is most pronounced in Asia and in Japan and India in particular.
Low tax rates
Though India’s corporate taxes are not at the global lowest levels, but they are competitive enough, after the recent tax rate cuts.
Good physical infrastructure
The World Bank’s Index for Overall Quality of Infrastructure assess general infrastructure (e.g., transport, telephony, and energy) in a country.
India’ rank has improved from 90 in 2014 to 46 in 2017.
