Behind the BRICs: India | Commercial awareness on The Gateway

Behind the BRICs: India

Lu-Hai Liang looks at India's rapid economic growth – and its reform agenda

India has a long history, with its people known to the Ancient Greeks as the Indoi. Its most widely spoken language, Hindi, has many words that we would faintly recognise, pointing to its shared origin with European languages. A historically important trading region, India is once again the focus of the western world with the tenth largest economy in terms of GDP.

India's economic liberalisation started in 1991 with reforms that eventually led to GDP growth of 9 per cent in 2007. This made it the world's second-fastest growing economy, behind only China. The rapid growth of emerging economies, with their potential to eclipse the economies of the G7, was spotted by Goldman Sachs economist Jim O'Neill in his landmark publication, Building Better Global Economic BRICs, in 2001.

Since then, the acronym BRIC - standing for Brazil, Russia, India and China - has become well-known. India's economy is predicted to surpass the eurozone's in value in about 20 years, according to a paper published in November 2012 by the OECD. But whether it can live up to that prediction is another question.

"We always say that the four BRIC countries have the potential to become large over the next several decades," says Anna Stupnytska, an executive director and macroeconomist at Goldman Sachs. She explains that this potential depends on various factors, including political conditions, human capital, technology and macroeconomic framework. "It's a bit subtle, but there's a big distinction between the BRICs' potential, and their ability to realise this potential."

Consumer culture

India is often noted for its capacity to become an economic giant. The country has a population of over one billion, and one of its main strengths is its growing middle class with increasing consumer spending power. "We've had about half a billion new entrants joining the global middle class just from the BRICs over the past ten years. And this expansion is not yet over - particularly in India, it's just accelerating," says Anna.

Adam Pollard of the UK-India Business Council agrees: "The Indian economy is largely driven by domestic consumption. In fact, AT Kearney's Global Retail Index 2012 ranks India as the fifth most attractive retail investment destination because of its high level of consumption, a growing urban population, and its middle class becoming stronger."

This culture of spending is something Trushit Vyas, 29, has noticed. An architect who has worked in New York and New Delhi, he says: "Before there were scooters, now [there are] more cars. The lifestyle has changed. Whereas people were saving more before, now everyone is ready to spend. Perhaps say, you get 50,000 rupees (£601) a month, you spend 30,000."

The Indian retail sector in particular is expanding at an incredible pace. Worth around $450 billion (£286 billion), and one of the five largest in the world, recent reforms in foreign direct investment (FDI) have allowed supermarket giants such as Wal-Mart, Carrefour and Tesco to move in. What's more, a 2012 UN World Investment Report ranked India as the third most preferred economy in the world for FDI.

"As retail FDI relaxes, there will be massive infrastructure and construction opportunities for investors in building shopping centres. There will also be huge opportunities for logistics firms to move all these new retail goods, and arguably even bigger opportunities for advertising and marketing companies with all the new foreign retailers looking to position their brands. All out of retail being (one of the) current items on the reform agenda," explains Adam.

International relations

The diversity of the country and the rise of its businesses cannot be overemphasised. Its range of cultures, ethnicities, languages, religion and geography is unparalleled. Himanshu Kumar, 29, a journalism student studying in Beijing, who comes from the western Indian state of Rajasthan, guides us through the major cities. "Delhi is the media, administrative and education capital of the country. It has the best universities and a lot of students relocate here. Mumbai is home to Bollywood and the financial centre. Bangalore is the IT hub - it has a transoceanic link to Silicon Valley. Kolkata was the capital when the British ruled."

The link between the UK and India still exists, with English the main business language. In 2011, UK exports to India increased by 29 per cent, making India the UK's largest non-EU market. The UK is by far the most popular business destination in Europe for Indian companies and, of the 1,200 Indian companies in the EU, 700 are in the UK, according to Adam.

However, trade between the two countries is still low in real terms. India's exports are relatively weak, with the country continually running a trade deficit. Causes include weak demand in key markets such as the US and Europe, and a reliance on imports of coal and oil for its energy needs. Furthermore, the government recently lowered its economic growth forecast for 2013 to 5 per cent, which has been put down to a sharp slowdown in manufacturing and the services sector.

Reform agenda

Despite the growth of the retail sector, problems in infrastructure and bureaucracy are still stifling development and business. "Corruption is still relatively high," says Anna. "The level of bureaucracy, corruption and [weak] rule of law is hampering India's growth."

Transparency International's Index, which measures the perception of corruption, ranks India's business environment 94th in the world. Furthermore, the country's multi-party political system, with power often shared among coalitions, means new laws are slow to pass. The momentum of reform is encouraging, but social problems are another obstacle in India's ambitions.

With 50 per cent of its people under the age of 25, the number of people of working age who will be entering the labour force over the next few years is an advantage. "Based on demographics, it [the economy] could grow very fast, faster than China at some point," says Anna. But she says education is one of the most important areas to focus on, including the country's relatively low literacy rates, particularly among women.

Unequal distribution

Gunjeet Sra, 26, a writer based in Delhi, feels encouraged by an increasingly liberal youth, who care about social issues such as female rights and inequality. But a growing concern in India is the divide between incomes, and she's keenly aware of the contrasts. "The people who live on the edges of the city have access to technology - mobile phones, the internet - but they struggle for education; sometimes even something basic like a toilet. There is a huge divide between the haves and the have-nots."

Nowhere is this more apparent than in India's numerous slums. Dharavi slum is one of the largest in the world. It has a population of over a million, and is located centrally in Mumbai, the commercial and financial hub of India. It featured prominently in the 2008 film Slumdog Millionaire.

"It has its own economy," says Trushit, of the slum. "It is very independent, with its own small-scale industries like leather goods factories, recycling businesses. There are numerous industries in there." He calls India a "never-ending economy", with industries that run parallel to government-approved businesses.

Poverty is a major problem, and agriculture employs much of India's 856 million rural inhabitants. "Some of the main drivers for growth in these [BRIC] countries and particularly India will be benefitting from urbanisation, though urbanisation in India is still low," says Anna. Currently about 30 per cent of the population reside in urban areas - the average for the developed world is around 75 per cent.

Looking ahead

The persistence of these problems underline Anna's distinction between India's potential and its ability to realise it. Economies the world over are trying to overcome sluggish growth, and India's current challenges could be predicated on numerous factors linked to the global economy. What's definitive is that reforms are needed in India's education, infrastructure and bureaucracy. But whether the necessary actions are taken is dependent on the government's ability to enact, create and pass policies.

But India's youth are increasingly excited at their country's rise, and the development they have seen has been substantial. Jennifer Chang, 23, who is half Chinese, talks about the changes she's seen in her hometown of Kolkata. "When I was a kid, there were no high rises in the city. Roads were non-existent in the state. Now there are new complexes, high rise buildings. Kolkata is one of the slower-paced developing cities. My state [West Bengal] was communist for decades. Recently it became more democratic and the rate of change is now quicker."

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