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The Indian Economy Is Becoming A Major Global Force

The Story So Far    5 minute read

The Indian Economy Is Becoming A Major Global Force

The Indian economy is one of the handful of economies globally that has consistently achieved growth rates that exceed 8% since the financial crisis, and even at the depths of the recession, their economy was growing strongly at 4% per quarter in 2008. So what has been India’s journey to becoming a major player in the global economy? How can they further seek to cement their position and replicate the success of China since the later half of the 20th century?

Back on Top Again

Almost ten years on from the financial crisis, the World Bank is yet again forecasting economic growth for India that is expected to exceed 8.5% for the 2017-2018 annual year. India has successively been fostering economic growth, and this has largely been fuelled by a rising proportion of private consumption. Perhaps more important to this economic growth is the amount of inward capital investment that then helped to fuel a rising trade balance that has been forming over recent years.

An example of this is the Gujarat International Finance Tec-City, which looks to provide a platform for domestic Indian telecommunications companies to relocate to an area with higher quality physical infrastructure. But, this GIFT city, upon completion, will look to build on the vast amounts of FDI that are already entering India, and lead the economy towards even more economic growth. In the second half of 2016, the volume of FDI inflows was equal to $22 billion alone, and the prospect of evolving regions such as GIFT can only encourage the World Bank in approving such high forecasts of economic growth.

A look at the recent trends in capital formation (Figure 1) shows that there are forecasts of investment becoming an important demand factor in India.

Figure 1: The role of private consumption has consistently increased, but the role of capital investment is becoming even more important.

It remains to be seen that India’s economy has been propelled to success through continual investment into not only infrastructure but also their institutions to chase further the level of development – both social and economic – that has been achieved by advanced industrialised economies.

Inward Investment

Inward investment has become a significant component of the demand in their economy. We are continually seeing the rise of foreign investment that has helped to stabilise their exchange rate, and has consequently only led to a modest increase from 60 Indian rupees to the dollar in 2014 to an all-time high of 68 INR to USD in February of 2016 (Figure 2). The role of inward investment became important as a stabilisation tool for the balance of payments. Despite fluctuations in their export and import markets, having a high amount of inward investment signalled to other economies that India was serious about steadying their economy, and they want to ensure that they will continue to have success.

Indian Rupee

Figure 2: Relatively stable exchange rate, promoted by inward investment steadying the balance of payments.

The Indian government has valiantly attempted to join the industrialised countries over the past few decades, registering almost an average rate of 9% growth since the turn of the current century. Even though the high levels of investment have contributed a lot to India’s economy, it is perhaps the action of the government that has renewed confidence in international FOREX markets and international financial markets.

Demonetisation

In the latter quarters of 2016, the Indian government started a demonetisation programme that was spearheaded by the Prime Minister Narendra Modi. As well as revoking the use of large denominated notes to eliminate corruption and illegal activities in the economy, this denomination fulfilled a larger purpose later through the end of 2016. Consumers in the economy began to fear that demonetisation could happen yet again, and therefore started to save specifically in banking whereas before saving was done outside of major institutions (Figure 3).

In October 2016, at least $6 billion worth of deposits entered the economy in a single month. PM Modi’s aims were perhaps summarised clearly in his speech, emphasising that it was not the corrupt activities in the economy that were keeping the economy afloat during the demonetisation, but rather the banks and financial sectors becoming increasingly liquid, and providing a platform through which the economy could develop.

Figure 3: Demonetisation further helped to increase the deposits that were flowing into the economy and helped to eliminate corruption, but also improved their domestic economy.

Conclusion

The monumental challenge faced by India as a modern economy is becoming synchronised with other economies. They need to become immune to fluctuations in other economies to be truly accounted for as a major economy. It remains to be seen that maybe the stagnating US-China trade talks and the looming cloud of Brexit that seems to have halted all signs of stability in the UK economy, could perhaps give India a chance to rise and become a dominant force in the world economy.

 

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