Blog Expectations in India Running High

Expectations in India Running High
GDP is up, inflation is low, and the government is serious about reform.

So can India take the next steps, coaxing foreign investment to support infrastructure projects and high paying manufacturing jobs and finally deliver on its economic promise?

“Expectations outside India are high,” said Dr. Duvvuri Subbarao, former Reserve Bank of India governor. “Expectations inside India are running even higher.”

Investment has yet to rebound from a post-crisis decline, but investors should feel confident that the government is taking the right steps to promote stability and foster a positive business climate. 

That includes a changing federalism, which grants more fiscal autonomy to state level governments, encouraging more efficient spending.

“We have a government that for the first time in 30 years has no coalition pressures,” Subbarao said, noting that the ruling BJP controls states that represent more than 50 percent of India’s GDP.

The World Bank currently ranks India 142 out of 189 countries in terms of ease of doing business. That’s well below the other BRIC countries and its neighbors in South Asia. But the state level reforms could help some of them compete more effectively, Subbarao said.

India is pinning much of its hopes on building a robust manufacturing sector, with potentially “hundreds of millions” of well-paid jobs as a reward.

“And that is key to improving quality of life across the country,” Subbarao said. “We’ve got to focus on the manufacturing sector.”

But manufacturing jobs can’t depend on exports, as evidenced by China’s current transition away from that model. The strong global demand that fed China’s rise over the last two decades has largely run its course. Meanwhile, the labor arbitrage is “thinning out” as wages in rich countries have fallen to preserve jobs.

Like many countries, India is bracing for an economic hit when the Federal Reserve begins raising benchmark interest rates later this year. But with reforms underway, currency reserves replenished, and an improving current account, India’s currency and equities should weather the storm relatively well, Subbarao said.

“Among the BRIC’s, India is the only country with promising fundamentals,” Subbarao said. “When the Fed raises interest rates … there will of course be a knee-jerk reaction” and movement of capital. “But the markets will then be more discriminating in favor of emerging economies that have more long-term promise.”  

But with strong expectations already priced into the Indian markets, is there any reason to hope for more upside?

Subbarao pointed to several factors: labor reforms, rising rural wages - which ease the need for government support, easier rules around land acquisition and investments, and the new Goods and Services Tax, which is expected to provide an economic boost when it takes effect a year from now.

“I believe the GST is going to be a game changer,” Subbarao added.