India is now more ‘emerged‘ than ‘emerging‘

Since economic liberalization in the early 1990s, the Indian economy has transformed into a vibrant and resilient one. India moved from the slow Hindu growth rate of 3-3.5 percent to record an average of 7.6 percent in the last decade despite the adverse impact of the global financial crisis and domestic macroeconomic and socio-political pressures.

Turnaround transformations
While India’s economic transformation was triggered by judicious and clairvoyant policy choices, the inherent structure of the economy helped in reaping the benefits. The demographic composition played an important role in this transformation-while India has the second largest population, the workforce is also one of the youngest, with the average age still under 30. The working age population is expected to peak only after 2035-with opening up of the economy and availability of employment opportunities, this further provides an opportunity for India to establish a larger footprint in the global economic map. The demographic dividend, higher growth, and policy focus helped India increase its savings ratio from 22.9 percent of GDP in 1991 to 32.3 percent of GDP in 2011. This helped in funding the higher investment formation required for sustaining higher economic growth. As a result, India is now more ‘emerged’ than ‘emerging’: >Trade in goods and services as a proportion of the GDP has risen from below 20 percent in 1991 to more than 55 percent today
>Foreign investment has risen from negligible levels to more than $60 billion per year
>Indian companies have gone on to acquire multi-billion dollar companies in the rest of the world
>India now is the 2nd largest telecom market and 6th largest automobile market in the world The enablers of opportunities
While India continues to be a services-driven economy, going forward, policy focus is expected to lean towards creating gainful employment opportunities with maximum multiplier impact. In this context, the National Manufacturing Policy (NMP) and Foreign Trade Policy (FTP) (2009-’14) would play a vital role. The NMP envisages increasing the sectoral share of manufacturing in GDP to 25 percent by 2022 from 16 percent currently, while generating 100 million additional jobs. This will truly help transform India into a global manufacturing hub, expanding beyond automotive and pharmaceutical sectors. The FTP (2009-’14) aims to double India’s share of global trade from 1.6 percent in 2008 to 3.2 percent by 2020. The MSME sector being the major base of manufacturing sector in India, with its contribution of about 45 percent to manufacturing output and about 40 percent to total exports, will be a key growth driver in this space. The NMP offers special concessions to the SMEs by establishing National Investment and Manufacturing Zones, and also includes select SME lending by banks into the ‘priority sector’ criteria. This will undoubtedly contribute immensely in employment generation, inclusive growth and ease SMEs access to finance. Similarly, the requirement for 30 percent SME sourcing for FDIs in retail also highlights government’s commitment to this sector. Financial system to play a pivotal role
With demand side drivers largely in place, policy focus on supply side drivers (through NMP and FTP) and structural fiscal policy changes will create immense opportunities for the Indian banking and financial system. The Indian banking system will have to expand itself so as to respond to these new demands for both consumption and production purposes. This is particularly important since banking penetration is still low in India-there are only about 11 commercial bank branches per lakh of adult population in India compared to 36 commercial bank branches per lakh of adult population in the US. Over the next few years, the key challenge facing the Indian banking industry would be to increase its financial outreach. Firstly, it will be required to expand its branch networks in rural areas. Secondly, efforts will be needed to propagate the usage of technology as an enabler to improve reach for client acquisition and servicing-potentially through internet, mobile banking, call centers and alternate channels. Mobile banking can play an increasingly important role, given the simplicity and efficiency of this medium. The systems are in place but adoption is still at a nascent stage and this can evolve by banks promoting them as a reliable mode of conducting basic transactions. India has a high savings rate at 32 percent of GDP but only 44 percent of these savings are in the financial system with the rest in physical assets (gold and real estate) which are not productive. Increasing banking intermediation in rural areas would help channelize these savings to productive avenues. As the Indian economy experiences a rapid structural transformation, on the back of an increase in formal employment and a greater degree of financial intermediation, saving accounts penetration is poised for a secular rise as a significant portion of household savings in India is still held in the form of cash; attractive interest rates on savings bank deposits will mobilize into the banking system a part of the `9 lakh crore that households keep with themselves as cash. In anticipation of Basel III requirements, the government will have to create a Bank Holding Company which would hold all ownership of nationalized banks and, therefore, will be capable of capitalizing PSU banks with low core tier I ratios. Basel III will strengthen the banking system and improve its ability to bear shocks with a more integrated financial and risk management system. These requirements may also lead to consolidation given capital constraints of some of the smaller regional players and a larger consolidated institution will have a larger play, stronger balance sheet and national footprints and hence help increase the financial outreach. The role of the financial system in supporting India’s supply side infrastructure requirement would be crucial. As compared to the other BRIC nations, the cost of capital in India is the highest. Looking at 10-year government bonds, the cost of borrowing in China roughly averages 3.30 percent as of July 2012, while it is nearly 2.5 times higher in India at 8.15 percent. A well-developed corporate bond market would help supplement the banking system in meeting the requirements of the financial institutions, including NBFCs for capital, especially for infrastructure funds. Decreasing the minimum holding period for infrastructure bonds, issuing bonds with different tenors, and reducing the stamp duty and registration charges will attract investors, as these bonds offer tax breaks. Other improvements could involve broadening the domestic investor base by offering tax breaks on interest income for debt instruments, and encouraging the large SME base in India to issue bonds. Moreover, as 80 percent of corporate bonds are privately placed, according to the Ministry of Finance, a revision of private placement norms in the favor of public placement would be beneficial. © Entrepreneur India September 2012