India’s post-Covid-19 Economic Growth Outlook

The opportunities of India’s economic development and related risks for corporates

India’s growing role in the global economy, supported by a flourishing services industry and a strong industrial base, is increasingly difficult to ignore. But as Peter Born, Chief Representative for Commerzbank in Mumbai, explains, obstacles remain on the subcontinent’s path to prosperity.

India’s economic growth trajectory in recent years has been nothing short of impressive. With a nominal GDP of US$2.8 trillion, the South Asian nation is now the sixth largest economy in the world and the third largest by purchasing power parity.

India’s economic outlook shows strong post-Covid recovery

The human and economic costs of the Covid-19 pandemic were severe, especially following the outbreak of the Delta variant in spring 2021. But India now seems to be turning a corner, with 1.6 billion vaccine doses delivered across the vast and diverse country. Most economic indicators, chief among them stock markets which have hit record highs, suggest that a strong recovery is on the cards. Foreign exchange reserves of a comfortable US$630 billion, the fourth largest worldwide, are also protecting the country from further potential external shocks.

It is this culture that has, in part, attracted corporates in many developed nations to outsource their services to India. India’s IT sector alone accounts for US$191 billion in revenue, employing over four million people across the country.

And it’s not just the services sector that is finding a market beyond India’s borders. The country now ranks globally as the second largest provider of food and agricultural products, coal, cement and steel, as well as occupying the position of the world’s third largest electricity provider.

The pandemic has only served to underscore the important role that India now plays in global markets. Having already occupied the position of the world’s largest manufacturer of generic drugs, India is now also the foremost manufacturer of the Oxford-AstraZeneca and Covaxin Covid-19 vaccines, fulfilling over 50 percent of global demand for vaccines.

Investment opportunities in India not without obstacles

International corporates, aware of India’s potential, continually look to invest and do business in the country. But, surprisingly for a country with so much economic clout, India’s integration into global supply and value chains remains relatively weak. This is no accident – the government’s trade and industrial strategy continues to place the domestic market first, and foreign investment can be somewhat impeded as companies may regard the Indian business environment as complex or hard to navigate.

This approach is not a recent development but the continuation of an established historical trend. Import substitution, state-led industrialisation, and the heavily bureaucratic regulatory regime once known as the Licence Raj all traditionally inhibited India’s meaningful integration into global value chains.

Some of these attitudes persist, and Indian policies around custom duties and taxes often serve as a barrier to the creation of lead firms – which are central to all aspects of a value chain from sourcing supplies to producing the final product. It also limits the ability of the country’s own micro, small and medium-sized enterprises (MSMEs) to compete in such an environment. Smaller companies are hit hardest by steep import duties, forced to purchase materials from abroad at a higher price or alternatively buy more expensive domestic materials. This then renders their end products less competitive at the point of exporting.

The lack of exposure to international competition has further ramifications. The Indian government is keenly aware that most companies need more time to sharpen their competitive edge. This is one of the factors influencing India’s decision not to participate in free trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) with other Asia-Pacific nations. Opening up India’s huge domestic market without gaining enough in return is not an attractive proposition. The process of accepting further global integration must therefore be gradual if India is to grow into its potential as a lynchpin of global trade routes.

But progress is being made. Consistent reform efforts have seen India’s ranking on the World Bank’s Ease of Doing Business scale rise from 142nd (out of 190 countries) in 2014 to 63rd in the 2020 report. Policy seems to be moving in the right direction – the government has established industrial trade corridors, reduced some licensing requirements, and heavily promoted the “Make in India” initiative to encourage foreign investment into India’s manufacturing sector.

India looks to expand its trade horizons

The evolution in India’s policy landscape is also matched by a changing outlook on the country’s trading relationships. Recent tensions with neighbouring China have prompted India to focus on strengthening relations elsewhere.

And India is not short of alternative trade partners. The EU is already the second most popular destination for Indian exports – US$45 billion of Indian exports head to the European bloc, 14.36 percent of the country’s total. And this is only set to increase going forward, as EU-India negotiations around a free trade agreement were reopened at a summit between the two powers in May 2021. Having been stalled since 2013, official talks are set to resume by December with India expressing interest in an Early Harvest Programme – a limited trade agreement to lower tariffs on a small set of services, before moving on to a fully fledged pact.

The UK is also eager to expand its relationship with India, and has identified sectors such as pharmaceuticals, fintech, chemicals, petroleum and food products as providing fertile ground for collaboration.

Furthermore, India has demonstrated its willingness to engage in “vaccine diplomacy” – a strategic exercise employed by China and others – leveraging its strong pharmaceutical sector to strengthen relations with neighbouring countries and establish foundations for future trading relationships. India has donated Covid-19 vaccines to a number of strategic partner nations in the Indian Ocean, as well as others in Latin America and the Caribbean.

While operational hurdles undoubtedly remain for international businesses seeking to trade with and invest in India, the country’s reform-focused economic strategy will facilitate the cultivation of new trading relationships. Buoyed by its robust services sector and burgeoning manufacturing capabilities, India’s economic growth trajectory shows no signs of abating. International corporates looking to share in the country’s prosperity will need to be proficient in navigating India’s unique business environment as it slowly but surely opens up to the rest of the world.

The Banker Podcast with Peter Born - “Banking in transition Episode 70: India’s pandemic economy”

Peter Born, Chief Representative in Mumbai for Commerzbank, speaks to The Banker’s Kimberley Long about how India has supported its SME segment through the pandemic, and the country’s decision to opt out of RCEP.

Listen now