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Analysis Of Macroeconomic Environment In India Economics Essay

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Mon, 5 Dec 2016

India is considered a high potential investment destination around the world despite some challenges such as political, social, cultural complexities. Since the post-independence period and the time after reforms in 1991, India began to open its door to the global markets and started to encourage investors to do business with India.

While making the investment decisions it is crucially important to assess and compare the risks and return on the investment. Some investors find it challenging to enter Indian market, however many resources we used in our report proved that investments in India will have a long-term success.

Based on provided 15 years forecast we identified that India’s GDP will be steadily growing through the years and inflation is estimated to be around 4-5%. All the industries in India will be developing significantly, making bigger contribution to country’s GDP.

In order to attract more foreign investments India has to implement and improve certain areas. For instance, social sector, infrastructure, security and safety and sustainability. These areas are often considered as obstacles on the way to development. On the other hand, these areas are good opportunities for investments.

If India will achieve stability in these areas and meet the forecasted figures, economy of this country will be the second major economy in the world. Already today India is identified is one of the greatest economical reformers.

Market economy is relatively new to India. Nevertheless, the results since the post-reforms period are quite impressive. India has a lot of potential for an economic growth and development. Even though it will need time for improvement of certain areas, in the long-run this economy will definitely have a great success.

Table of contents

Executive summary 2

Table of contents 3

Introduction 4

Macroeconomic background 5

Analysis of the market economy 8

India’s competitive market structure 10

SWOT analysis of India 13

Investment Industry in India 16

Other macroeconomic concerns and factors affecting investment decisions 17

Sustainability issues in India 18

Long-term forecast 20

Conclusion 24

List of references 25

Appendix 28

Introduction

The purpose of this report is to provide a reader with analysis of macroeconomic situation in India, investment environment and factors that affect decision making. In addition, the attempted forecast for a long-term period will be provided in order to see possible development of the economy of the country.

The Republic of India is located in South Asia. It is the seventh largest country by size and second most populous country in the world. Indian economy is ranked 11th place in the world based on its nominal GDP. Economic reforms that took place after 1991 have had a crucial impact on country’s development. Nowadays India is one of the fastest growing economies in the world. Nevertheless, there are certain issues and problems remaining, such as poverty, diseases, corruption and illiteracy. India is a nuclear weapon state and has the third-largest standing army in the world (Wikipedia, 2010).

Macroeconomic background

India is developing into an open-market economy. One of the reforms in 1990 that accelerated economic growth of the country was economic liberalization with reduced controls on foreign trade and investments (CIA. The World Factbook, 2010). India’s varied economy includes traditional farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services.

India exports petroleum products, precious stones, machinery, iron and steel, chemicals, vehicles, apparel for the total amount of $165 bln. The main export partners are UAE (12.3%), US (11.7%), China (5.4%), Singapore (4.5%).

Products that are imported in India are crude oil, precious stones, machinery, fertilizer, iron and steel, chemicals for the total amount of $254 bln. Import partners are China (10.8%), Saudi Arabia (6.9%), US (6.7%), UAE (6.7%), Iran (4.2%) (CIA. The World Factbook, 2010).

During recent years, India’s economy has grown quite quickly. “Since 1991 it has been among the top 10% of the world’s countries in terms of economic growth” (The World Bank, 2010).

Household and international demand for India’s services stays strong what makes service sector the biggest in India’s GDP for a very long time (see app.1). Interesting that this sector, being a major source of economic growth, has only one-third of the total work force. “India has capitalized on its large educated English-speaking population to become a major exporter of information technology services and software workers” (CIA. The World Factbook, 2010).

Financial crisis in the world caused industrial slowdown in the beginning of 2008, which reflected on lower percentage of economic growth in comparison to previous years (see app.1). Nevertheless, financial crisis did not affect India that much because of careful banking system and quite low dependence on exports for growth. Therefore, India has still second highest growth amongst world’s major economies.

One of the current challenges for India is to sustain this growth and use the benefits of this growth in the most efficient way. In order to maintain economic growth India has to make certain reforms, such as improving infrastructure, financial sector and dealing with some limiting labor regulations and big monetary deficit (The World Bank, 2010).

Infrastructure in India is one of the leading limitations for a growth, or growth only in the certain areas. The infrastructure of services sector that employs higher educated people is developed more, while the one for other sectors remains less developed. In order to speed up development of export-oriented sectors and to take place in a global supply chain, India needs investments in infrastructure (around 3-4% of its GDP to sustain 8% growth (The World Bank, 2010)). Certain amount of investments can be attracted from the private sector and through private public partnership. It is also important to maintain the condition of already existing infrastructure.

One of the reasons of underdeveloped infrastructure as well as other social projects is continuing financial deficit. Deficit is a big challenge for India, throughout previous years it was reduced; however, in 2008 due to the world’s financial crisis it began to grow again (see app.1).

The situation on India’s labor market is very complex. Majority of all the reforms and regulations are oriented on already employed people. However, there are much more of unemployed Indians than the ones with a job. Therefore, one of the challenges that India has to overcome in order to sustain and improve economic growth is to create better labor conditions to reduce unemployment.

In India, large enterprises have grown faster than medium and small companies due to the reforms in financial sector. In contrary, other companies are not able to get new loans for banking sector. This situation affects negatively economic growth of the country since small and medium enterprises are very important components of productivity and overall growth.

Over the past decade, Indian government has really realized the value of tourism industry toward the overall development. India as a touristic destination has a great potential since it attract various types of tourists from all over the world. Tourism in India is the largest service sector that contributes 6,23% to the national GDP and 8,78 of the total employment (Wikipedia, 2010). The future expansion of this sector is expected and it will be explained later on in the long-term forecast.

Another sector that is developing quite successfully is medical tourism. Today India leaves the countries that were known to be preferred destinations for medical purposes, such as Malaysia, Singapore and Thailand, behind. India is negotiating with US the possibility of development and it seems to be very appealing for Americans especially since the costs for medical services became higher in US (The Economic Times, 2010).

Analysis of the market economy

Market economy is relatively new for India. Country can benefit from it by development of human capital, increasing investments in human resources that will reduce such problems as poverty, inequity and unemployment. In addition, the situation of the infrastructure mentioned earlier can be improved, it is easier to create entrepreneurial environment in the country through established market economy. Therefore, good economic liberalization will benefit India in economic growth and development of society.

However, there are some critics of market economy in India. Some argue that due to economic liberalization the wealth will be concentrated in the hands of few people out of the whole society that will increase inequality and social differences. In addition, social security will be worst since before it was managed and controlled somehow by government. As it was mentioned earlier, India now is just developing into market economy and it definitely takes times to see the results.

In the modern world of globalization, market of the third world countries like India, has an opportunity to grow. Therefore, it is important to understand that government is no longer a dominant in this situation like it was before. However, state can play a crucial role in these changes, it needs to control how the market operates and that the outcomes of this economy are directed in a right way. Therefore, established market economy does not necessarily mean complete elimination of government that was always visible in India in economic, social and cultural sectors.

Since the reforms of 1991, India has shown much better results than during pre-reform period. GDP, overall export and foreign exchange reserves grew significantly. India became an attractive destination for foreign investments. Reforms played big role in development of certain industries in India. For instance, information technology sector grew extensively, export and domestic sales of software increased noticeably.

Therefore, it was proved that protectionism was not the way to success. On the contrary, introduction of multinational companies increased competition on the national market and forced Indian enterprises to adopt world-class infrastructure, quality processes, human resources practices, and so forth (Murthy, 2004).

Apart from the positive economic results, market economy benefited Indian society as well. It was noticed that poverty decreased, literacy levels went up and people became more motivated to receive education. Therefore, economic reforms in India resulted in economic growth and social development.

India’s competitive market structure

In 1947 when India regained its independence, they could start controlling their own political, social and economic situation, which had been impossible for more than 90 years. They established their own democracy and a representative government, which had to conduct a good and prosper economic plan for their growing population that would have a beneficial and sustainable effect for the society. More than five decades later, India has become the 12th largest economy, third largest growing economy in Asia, behind Japan and China. Comparing to other countries around the world, India have during the inflation kept their interest rates manageable and their foreign exchange reserves at a record level, which are more than $120 billion. An important aspect of India’s market is that the export have increased in the past two years, which is always beneficial for the country, as you should have more export then import, otherwise the country could experience a deficit. One of the reasons for the increase in export is that information technology service sector having been very successful and has become the benchmark for the economic development around the world. This is one of the most significant reasons how India have done a tremendous progress and starting to create a competitive position in the global economy, but India has still a long way to go to have a sustainable global position with its competitive advantages. This is featured in what India has heredity from socialism, which affects India’s capacity to become pioneers in the global market. To be able to compete India has to address these barriers to growth, or else they will miss their opportunity to enter the modern world (McKern, 2005).

There are several reasons for their competitive market structure to occur. The demographics of India is having a huge impact on the market structure. Japan is one of the examples of a country who is having an ageing population, which will make it difficult for them to grow in the future. On the other hand, in India, 35 % of its population is under 15 and this means that in the soon future they will be in the workforce, which means they will be components of the producing and consuming. This had a huge impact on the perception of India for many multi international companies and this explains the boom in BPO and the IT industry. BPO stands for business process outsourcing, which is a broad term referring to outsourcing in all the different technology fields (Sharma, 2004).

India is being part of the BRIC countries and therefore it is important to have a certain government intervention, when it comes to keep a firm and sustainable economy in the country and the educational and political sectors are very important to keep improving and stable. This is based on having an open and fair trade with foreign investment in the country. The government must intervene to be able to make progress in the society with education and developing jobs, if that will be implemented in India they will be the leader in growth over the next 50 years. Another reason for the competitive advantage is the local entrepreneurship that is being highly popular and have generated in a lot of revenue and jobs for the country. Another reason why India is one of the most competitive markets comparing to the other BRIC countries are that India have used less of its capital and that is also a reason why they haven’t had the same growth as China has. However, China has experienced a very different story, where countries have been investing in China. Many of these local entrepreneurs in India could compete globally, which have been proven that they have been thriving on the market, like Infosys, Wipro and Biocom. Another big industry next to the It industry is the entertainment and media industry, which has the biggest growth amongst the BRIC countries, with its annual growth of 16.7 % and by 2011 it will be reaching $27 billion (The Picky, n.d.).

Back to IT industry, more foreign companies are investing in India or are planning to invest in India in the future. A German software company called SAP, has announced that they will invest $ 1 billion in India by 2010, as they see India of one of the future long-term markets. This will create more money in circulation in the market for India as SAP has already a team of 4600 employees in Bangalore, which makes it the largest research and development center outside Germany (The Picky, n.d.).

This relates to that the economy of India for the moment is booming and if they will improve the privatization and the infrastructure in the country further, they will be able to reach their target of a 10% GDP. A good prove of that the market in India is becoming more competitive is that, per capita income has almost doubled to $800 since 2000, this is indicated in the middle-class where households have an income between $4400 to $22000, this is about 13 million households. With this expanding middle class, a high demand for durable goods have been noticed on the market, this has been proven significantly in the mobile market, where more foreign companies like Vodafone wants to be part of. The IT industry in India is the reason for the competitive market structure and this could be improved with more government intervention, by improving the infrastructure and supporting privatization of companies, which will create more entrepreneurs and thriving ideas that will be able to compete with the rest of the global market (David, 2007).

SWOT analysis of India

This section analysis the internal and external environment of Indian economy. Based on our research of key factors of Indian business environment (bizworldinfo, n.d.) and SWOT matrix (Ajayniranjan, n.d.) we identified the main points for our analysis.

Strengths

India has a huge group of labor force

A big part of the human resources is highly capable, young and dynamic and well educated and skilled

Huge English speaking population, with the availability of skilled management

Broad higher education system, third largest reservoir of engineers

Fairly stabled economy, that doesn’t get affected by external changes

High growth rate of the economy

The fast growth of BPO and IT sector, which are bringing valuable foreign exchange in to the country

Great quantity of natural resources

Geographical location, the worlds market is turning more to Asia

Varied nature of the economy

Fastest growing economy in the world (Manpreet, n.d.)

Weakness

It is a quarter of the population that is under poverty line

Poor infrastructural facilities

The huge population could lead to scarcity of resources

Unequal distribution of wealth

High unemployment rate

Very high number of the population are involved in the agriculture, which only contributes to 23 % of the GDP

Low output

Low level of mechanization

Low literacy rate

Opportunities

High demand for foreign investment in many sectors

The prospect is high for foreign exchange rates in the IT business

High possibility for private firms to enter in various sectors for business

India has a huge domestic market

It has been found in India huge deposits with natural gas

The country has huge agricultural resources

High demand for improved infrastructure

Area of biotechnology

India has many valuable resources, like coal, iron ore, water, limestone, granite and diamonds (Manpreet, n.d.)

The emergence of a powerful middle-class, will keep India’s economy in a upswing

Threats

The rate of growth population is still high

The Global recession

High fiscal deficit

The growing import invoice

India’s government gives the impression of being unstable

High marketing forces and competition

China is a big competitor on the market (Hameed, n.d.)

Investment Industry in India

The financial sector in India shows relatively good results. The banks in India are quite stable and have a potential to grow. The IT industry showed very good results and it is often suggested to invest in this industry or other industries that produce quality goods and have good records of profit. Other industries that are considered for the good investments are agriculture-related sectors, consumer goods stocks and auto industry.

There are several challenges that India faces in the investment industry. As it was mentioned earlier, the infrastructure is a big obstacle in country’s development. However, at the same time this sector has many opportunities. Foreign investments will boost the improvement of infrastructure. Another barrier for attracting investors is continuous fiscal deficit. Potential investors must always balance the risks of investments and possible long-term return.

The list below shows the best investment ideas in India based on the direct profit making sectors.

Real estate

Gold

Commodity futures

Stock market

Forex trading

Mutual funds

Derivatives

Short-term deposits

Direct investments

In order for Indian economy to become open for global markets, the investment industry must be developed in a way that aims to achieve a maximum positive return on investment. Therefore, this industry must be carefully analyzed for its potential and complexity.

Other macroeconomic concerns and factors affecting investment decisions

India is considered a good destination for foreign investments, since it is expected to be one of the three major economies in the world. Nowadays India is open for foreign investments and has a great potential to succeed in this area.

However, there are several concerns that potential investors consider when deciding if to invest. Political uncertainty, bureaucracy, infrastructure limitations, deficit etc. In addition, investors tend to look at the policies and regulations in this sector, any limitations, overall economic performance, industry’s results, how stable is the exchange rate and banking system in the country.

The regulations concerning investments are very simplified because India is encouraging a lot of possible investments.

Sustainability issues in India

Environmental problems in India

The main Sustainability issue in India will be the environmental problem since India is one of the diverse countries. Sustainability improvement in environment of India is inevitably important. Also, it is necessary to preserve the fundamental environment resources for the next generation. Although a recycling policy exist, it is not being practiced. Additionally, the significant environmental problems to be solved are air, noise, water pollution, deforestation, soil erosion, land degradation, waste management, increasing energy consumption, and greenhouse gas emissions. The biggest challenge for India would be increasing the environmental awareness in the society. Even though more companies in India today are becoming more concern about the environment and they are changing some of their profits into social development.

According to the BBC News on 11 May 2010, India was confirmed as one of the world’s biggest emitters and the emission increased from 1.2bn tones in 1994 to 1.9bn tones in 2007. India and China being both part of the developing countries, are both suffering from these issues and it has been proved that India’s annual greenhouse gas emissions increased 60% between 1994 to 2007.

Another major environmental concern in India is the handling of the water management in terms of India’s agriculture segment (BBC News, 2010).

Unbalanced gap between the wealthy and poor.

There is an uneven income gap between the wealthy and the poor. According to the statistics, only 15% of the population is having the benefits of India’s economic growth and nearly 20% out of the population is living under the poverty line. The huge difference between two classes has been caused by different consumption behavior. India’s economic growth has created wellness to the wealthy people in the cities but not in the poor environments. This inequality of income between the wealthy and poor affects badly on India’s economy. Therefore, the emphasis should be made on the improvement of the overall consumption in the society.

Long-term forecast

Based on the fact we found out during the research we have attempted to create a forecast for future of Indian economy and the investment sector particularly.

First of all, the overall forecast for India is a continuous growth. It is expected to be a 8-9% growth every year until 2030. The table below provides information on the growth of GDP in the future. The figures include the inflation of average 4-5% every year. After increase in inflation in 2008, the latest figures are 5,5% in March 2010, which shows a good decrease (see app.1). The forecast for the future is to keep inflation stable around 4%. Therefore, the figures of GDP are calculated with consideration of inflation.

Year

GDP (trillions rupees)

GDP (USD, bln)

Growth

2010

63,3

1376

9%

2011

71,5

1555

9%

2012

80,8

1757

9%

2013

91,4

1986

9%

2014

100,2

2244

9%

2015

116,7

2536

9%

2016

131,8

2866

9%

2017

149

3238

9%

2018

168,3

3740

9%

2019

190,2

4323

9%

2020

214,9

49998

9%

2021

242,9

5782

9%

2022

274,4

6693

9%

2023

310,1

7753

9%

2024

350,4

8985

9%

2025

396

10420

9%

Fig.1. Economic forecast, (Next Big Future, 2010)

If the forecast is correct and India will manage and maintain 8-9% growth, it will become the second largest economy in the world after China. Moreover, the World Bank has described India as one of the top economic reformers globally (Business Maps of India, n.d.).

The industries in India are expected to grow significantly, especially manufacturing, construction, and service industry. Tourism industry will have a big increase and most probably, India will become one of the most popular destinations in the period 2010-2018. Tourism in India has a great potential to grow, however a lot of effort must be put on the improvement of infrastructure, increasing number of hotel rooms and improving the safety and security in the country.

But still India’s economy is really bright, this is because a lot factors which we have mentioned earlier, like they have a huge human resources, a growing service sector, the availability of large number competent professionals, the increasing trend of consumerism, the new absence of controls and licenses, the increasing interest of foreign entrepreneurs and the growing existence of four hundred million middle class people. The success of India can also be measured by that they have the largest number of billionaires in a year and that the Rupee is becoming stronger and stronger comparing to the Dollar. Still India will have to deal with the issues like the huge segment that suffers of poverty, unemployment, illiteracy, conservatism and the economic and social disparities (Khandela, 2007).

The majority of the BRIC countries are facing these issues, but comparing to them it is forecasted that India will be the third largest economy in the world by 2035. India’s GDP will have by then exceeded Japan’s; this is due to mainly the higher population growth, where the young workforce will drive the economy (Edenberg, n.d.).

In regards to the young growing population, the education system is amongst one of the largest in the world and will keep on growing. This is also because of the growing middle class in India, who will the ability to afford to pay for private education. This gives the reasons for investments an opportunity in the future in this sector as it is expected to become a US$ 70 billion market by 2012, according to CLSA report from 2008 (Overseas Indian Facilitation Center, 2010). CLSA are leading independent brokerage and investment group (CLSA Asia-Pacific markets, n.d.).

Another professional firm that conducts tax audit and advisory services called KPMG, stated that the country’s fast-growing education sector holds a potential to attract approximately US$ 100 billion investment over the five years, this will be driven by the high demand for skilled professionals needed in the market and the need for the improvement of the infrastructure.

The medical education segment will have a huge growth in the coming years, which is relating to the healthcare industry, which requires several million doctors, to increase the doctors to patient ratio to the global average of 15 (Overseas Indian Facilitation Center, 2010).

Furthermore, the healthcare industry is projected to grow 23% by year and will reach a US$ 77 billion by 2012 and this is a growth from its current estimated size of US$ 35 billion. Another related industry is the Indian wellness services market, which is expected to grow at 30-35 % over the next five years. The healthcare industry offers massive investment opportunities, as the country has witnessed privatisation of healthcare services. This is all connected to the huge demand supply gap in the healthcare delivery business in India, as there are few organized hospital chains. Other business where efficiency can be brought in are in the medical infrastructure, medical equipment and diagnostics, health insurance and the medical tourism segment will contribute US$ 2.2 billion by 2012 (Overseas Indian Facilitation Center, 2010).

The healthcare industry is associated with the infrastructure in India. According to the investment banking company Goldman Sachs, the infrastructure will require US$ 1.7 trillion investment in the coming 10-years. This is in association with (PPP), which means most of the projects will be processed for public private partnership. This indicates that private sector is increasingly playing a major role in investment in the infrastructure industry. This opens up many opportunities for foreign investment to enter the infrastructure market (Overseas Indian Facilitation Center, 2010).

This openings have been possible because the government has implemented new policies about the privatization for different industries, which is also the case in the software development, it-enabled services and telecommunications have been able to emerge as niche opportunity with the assistance of the Government. This has increased the competition amongst states in attracting new investment in the information and communication technology industry. Which have been reflected with a 15 % increase in the market from US$ 22.7billion to a US$ to a 26.2 billion in 2010. Another part of the IT industry is the internet and broadband, which is expected to rise US$40 million and US$ 20 million respectively, by 2010 (Overseas Indian Facilitation Venter, 2010).

The table below shows the forecast for the exchange rate of USD to Indian Rupee. Indian Rupee is not pegged to any foreign currency at the fixed exchange rate. The forecast of exchange rates depends on market conditions. In order to maintain effective exchange rates Reserve Bank of India trades a lot in the USD/INR currency market (Economy Watch, n.d.).

Fig.2. Exchange rate forecast

Based on these figures below, it is obvious that until 2017 the rate will be maintained on the same level of 46 Rupees for one USD. Later on the stable decrease is expected and in 2025, it is estimated to be 38 Rupees for one USD. This trend is relatively positive for India because the Indian Rupee will start to regain its value. The projected results for 2024-2025 are compatible with the results of 2008, when “the rupee appreciated to a ten-year high of US$39.29” (Economy Watch, n.d.). The stability of this time increased the investments opportunities.

Sustainability development in India can be described as a balance between environmental protection and economic improvement. The main factor of environmental sustainability in near future in India is going to be the climate change which is also a global issue around the world. Since Indian cit


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