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Last updated: Jul, 2018
Introduction
India has emerged as the fastest growing major economy in the world as
per the Central Statistics Organisation (CSO) and International Monetary
Fund (IMF) and it is expected to be one of the top three economic powers
of the world over the next 10-15 years, backed by its strong democracy and
partnerships. India’s GDP is estimated to have increased 6.6 per cent in
2017-18 and is expected to grow 7.3 per cent in 2018-19.
Market size
India's gross domestic product (GDP) at constant prices grew by 7.2 per
cent in September-December 2017 quarter as per the Central Statistics
Organisation (CSO). Corporate earnings in India are expected to grow by
15-20 per cent in FY 2018-19 supported by recovery in capital expenditure,
according to JM Financial.
The tax collection figures between April 2017- February 2018 show an
increase in net direct taxes by 19.5 per cent year-on-year and an increase
in net direct taxes by 22.2 per cent year-on-year.
India has retained its position as the third largest startup base in the world
with over 4,750 technology startups, with about 1,400 new start-ups being
founded in 2016, according to a report by NASSCOM.
India's labour force is expected to touch 160-170 million by 2020, based on
rate of population growth, increased labour force participation, and higher
education enrolment, among other factors, according to a study by
ASSOCHAM and Thought Arbitrage Research Institute.
India's foreign exchange reserves were US$ 422.53 billion in the week up
to March 23, 2018, according to data from the RBI.
Recent Developments
With the improvement in the economic scenario, there have been various
investments in various sectors of the economy. The M&A activity in India
increased 53.3 per cent to US$ 77.6 billion in 2017 while private equity
(PE) deals reached US$ 24.4 billion. Some of the important recent
developments in Indian economy are as follows:
India's merchandise exports and imports grew 11.02 per cent and
21.04 per cent on a y-o-y basis to US$ 273.73 billion and US$
416.87 billion, respectively, during April-February 2017-18.
India's Foreign Direct Investment (FDI) inflows reached US$ 208.99
billion during April 2014 - December 2017, with maximum
contribution from services, computer software and hardware,
telecommunications, construction, trading and automobiles.
India's Index of Industrial Production (IIP) rose 7.5 per cent year-on-
year in January 2018 while retail inflation reached a four month low
of 4.4 per cent in February 2018.
Employment on net basis in eight key sectors in India including
manufacturing, IT and transport increased by 136,000 in July-
September quarter of 2017-18.
The average salary hike of Indian employees is estimated to be 9.4
per cent and that of key talents is estimated to be nearly 15.4 per
cent in 2018, backed by increased focus on performance by
companies, according to Aon Hewitt.
Indian merchandise exports in dollar terms registered a growth of
4.48 per cent year-on-year in February 2018 at US$ 25.83 billion,
according to the data from Ministry of Commerce & Industry.
Indian companies raised Rs 1.6 trillion (US$ 24.96 billion) through
primary market in 2017.
Moody’s upgraded India’s sovereign rating after 14 years to Baa2
with a stable economic outlook.
The top 100 companies in India are leading in the world in terms of
disclosing their spending on corporate social responsibility (CSR),
according to a 49-country study by global consultancy giant, KPMG.
The bank recapitalisation plan by Government of India is expected to
push credit growth in the country to 15 per cent, according to a report
by Ambit Capital.
India has improve
d its ranking in the World Bank's Doing Business Report by 30 spots
over its 2017 ranking and is ranked 100 among 190 countries in 2018
edition of the report.
India's ranking in the world has improved to 126 in terms of its per
capita GDP, based on purchasing power parity (PPP) as it increased
to US$ 7,170 in 2017, as per data from the International Monetary
Fund (IMF).
India is expected to have 100,000 startups by 2025, which will create
employment for 3.25 million people and US$ 500 billion in value, as
per Mr T V Mohan Das Pai, Chairman, Manipal Global Education.
The World Bank has stated that private investments in India is
expected to grow by 8.8 per cent in FY 2018-19 to overtake private
consumption growth of 7.4 per cent, and thereby drive the growth in
India's gross domestic product (GDP) in FY 2018-19.
The Niti Aayog has predicted that rapid adoption of green mobility
solutions like public transport, electric vehicles and car-pooling could
likely help India save around Rs 3.9 trillion (US$ 60 billion) in 2030.
Indian impact investments may grow 25 per cent annually to US$ 40
billion from US$ 4 billion by 2025, as per Mr Anil Sinha, Global
Impact Investing Network's (GIIN’s) advisor for South Asia.
The Union Cabinet, Government of India, has approved the Central
Goods and Services Tax (CGST), Integrated GST (IGST), Union
Territory GST (UTGST), and Compensation Bill.
The Nikkei India manufacturing Purchasing Managers’ Index
increased at the fastest pace in December 2017 to reach 54.7,
signaling a recovery in the economy.
Government Initiatives
The Union Budget for 2018-19 was announced by Mr Arun Jaitley, Union
Minister for Finance, Government of India, in Parliament on February 1,
2018. This year’s budget will focus on uplifting the rural economy and
strengthening of the agriculture sector, healthcare for the economically less
privileged, infrastructure creation and improvement in the quality of
education of the country. As per the budget, the government is committed
towards doubling the farmers’ income by 2022. A total of Rs 14.34 lakh
crore (US$ 225.43 billion) will be spent for creation of livelihood and
infrastructure in rural areas. Budgetary allocation for infrastructure is set at
Rs 5.97 lakh crore (US$ 93.85 billion) for 2018-19. All-time high allocations
have been made to the rail and road sectors.
India's unemployment rate is expected to be 3.5 per cent in 2018,
according to the International Labour Organisation (ILO).
Numerous foreign companies are setting up their facilities in India on
account of various government initiatives like Make in India and Digital
India. Mr. Narendra Modi, Prime Minister of India, has launched the Make
in India initiative with an aim to boost the manufacturing sector of Indian
economy, to increase the purchasing power of an average Indian
consumer, which would further boost demand, and hence spur
development, in addition to benefiting investors. The Government of India,
under the Make in India initiative, is trying to give boost to the contribution
made by the manufacturing sector and aims to take it up to 25 per cent of
the GDP from the current 17 per cent. Besides, the Government has also
come up with Digital India initiative, which focuses on three core
components: creation of digital infrastructure, delivering services digitally
and to increase the digital literacy.
Some of the recent initiatives and developments undertaken by the
government are listed below:
Road Ahead
India's gross domestic product (GDP) is expected to reach US$ 6 trillion by
FY27 and achieve upper-middle income status on the back of digitisation,
globalisation, favourable demographics, and reforms.
India is also focusing on renewable sources to generate energy. It is
planning to achieve 40 per cent of its energy from non-fossil sources by
2030 which is currently 30 per cent and also have plans to increase its
renewable energy capacity from 57 GW to 175 GW by 2022.
India is expected to be the third largest consumer economy as its
consumption may triple to US$ 4 trillion by 2025, owing to shift in consumer
behaviour and expenditure pattern, according to a Boston Consulting
Group (BCG) report; and is estimated to surpass USA to become the
second largest economy in terms of purchasing power parity (PPP) by the
year 2040, according to a report by PricewaterhouseCoopers.
While growing up, we were told that for every step India took forward, it
took two steps back. That indeed seemed to be the case for decades after
Independence. The first big step forward was the liberalisation in 1991
– we haven’t looked back ever since.The second leap forward could be the
2014 general elections, because that was the first time someone became
Prime Minister not on the basis of caste, religion or socialism, but on
matters related to development and, governance and most importantly,
hope.
It’s why we finally have a Union government with a long-term vision that is
moving full steam ahead.Once you push forward far enough on a certain
path, it becomes quite difficult to turn back (just like with liberalisation in
1991). The results of implementing such a vision are already visible in
many sectors (though perhaps not talked about in mainstream media) and
by the year 2020, India may finally transform itself and shed its old sluggish
image.
Image credits: shutterstock
While the first NDA government began pushing for this during 1998-2004,
the initiative was put on the backburner under the UPA from 2004 to 2014.
It’s now back, front and centre. Union Transport Minister Nitin Gadkari
declared that road-making had come down to 2 km/day when the second
NDA government took over (a number which has been hotly disputed).
Since that controversial remark, the number snaked up to 18 km/day in FY
2014-15 and further to 21 km/dayin 2015-16. The target for the next year is
41 km/day and the government is reportedly exploring how the number can
reach 100 km/day!
To put that in perspective, consider this: In 1988, India unveiled its fastest
train, the Shatabdi Express, which travels at 150 kmph. Till 2014,there was
no attempt made to better that benchmark.Now, the Gatimaan Express is
our fastest train (160 kmph) and India’s “bullet trains” will more than double
the Shatabdi’s speed.
Then there are innovations like the Jaldoot Express which,via dozens of
trips,carried more than 7 crore litres of water from Miraj to drought-hit Latur
(a distance of close to 350 km) in Maharashtra. It is such innovations that
will make India a superpower.
However, this is the first government that has targeted 100% electrification
(it aims to achieve this by the year 2022, on the 75th anniversary of India’s
Independence.)We are moving fast onthat front too.The common citizen
can check the status of rural electrification by the Garv Grameen
Vidyutikaran App.)
For the first time in independent India’s history, we have a surplus of power
(not in every state, but overall, as a country, we do). According to the
Central Electricity Authority, there will be a surplus of 3.1% for peak hours
and 1.1% for non-peak hours during FY 2016-17.
Coal reserves are finally in excess (the UPA ended its second term with a
shortfall) and we are on course for doubling our total capacity. The ailing
Dabhol Power Plant was revived by bringing in Indian Railways as an
anchor client. Power capacity is being optimised at every level.
The almost-dead nuclear deal with the US has also been revived. That was
after whirlwind negotiations between the governments of both countries.
Unconventional sources like wind energy are also being pushed in a big
way.We are on course to becoming a much larger consumer of solar power
(we currently rank seventh in the world in terms of installed capacity):The
international airport at Kochi, Kerala, became the world’s first fully solar
energy powered airport.
4. Oil: India is also signing key oil deals with several countries. The
recent deal with Iran,together with an earlier one where the UAE will
store oil in India and offer two-thirds of it for free, is a
masterstroke.India is also in talks for an oil-for-drugs (medicines) deal
with Venezuela, which has the world’s largest proven oil reserves.
Venezuela, already short on supplies of medicines, owes millions of
dollars to Indian pharmaceutical companies and the idea is to swap
this debt for oil.
5. Subsidies: While India has been hauled over the coals for its
sluggish pace of economic reforms, there have been some
encouraging steps too. Over 1 crore people in India have given up
their LPG subsidy in a scheme that was first voluntary and then
mandatory for households earning over Rs 10 lakh/year.Those
savings will now be used to provide subsidised LPG connections to
poorer households. Getting rid of the subsidy culture is a huge step
forward for any developing economy.
6. Cash transfers: The Unique Identification Authority of India
(UIDAI),or Aadhar, has crossed a global record of 1 billion enrolments
and apart from serving as an identity card, is powering cash transfers,
thereby cutting out middlemen and bringing down opportunities for
corruption. The Pradhan Mantri Jan Dhan Yojana has already seen
more than 20 crore bank accounts opened in a major step towards
financial inclusion.
7. Swachh Bharat Abhiyan: India has been known as a country with
serious public cleanliness problems. The government came out with a
Cleanliness Ranking for cities and towns in February and is looking at
multiple ways to clean up our public spaces.But more importantly,
when a government targets building millions of toilets with a
vengeance to put an end to the endemic problem of defecating in
public, that’s when things begin to look optimistic: maybe, just maybe,
we can finally dream of going from a developing to a developed
country.
8. Bureaucracy: Another often-overlooked fact is the
professionalisation of the Government of India.After 1991, almost
every area in the private sector became professionalised, and we
grew accordingly. But the government babu, for the most part,
remained the same.Not anymore. Ministers are coming on time to
work (and to events) and focusing on both short-term and long-term
goals. Bureaucrats are working round the clock and hundreds of non-
performers have been let go (yes, even in the IAS) – something
unheard of until now. By all accounts, it appears that development-
and governance-based politicsare finally coming of age – that, in my
mind, is the biggest fundamental change we have seen.
9. Foreign policy and economy: We are also getting much more
respect on the foreign policy stage – every country wants to do
business with us. We are finally ahead of China in terms of economic
growth rate. GDP growth was an encouraging 7.9% for the first
quarter of 2016.We are also less corrupt than China according to
many indices. We are also emerging as the FDI capital of the world,
ahead of China!
The infrastructure boost that was pending for ages is finally upon us. The
Indian tiger is finally rising.If not a developed country, we are officially an
NIC (newly industrialised country).All in all, India looks to be finally going to
the next level from 2020 to 2025!
The country could create sustainable economic conditions in five ways, such as
promoting acceptable living standards, improving the urban infrastructure,
and unlocking the potential of women.
Liberalization has created new opportunities. The challenge for policy makers
is to manage growth so that it creates the basis for sustainable economic
performance. Although much work has been done, India’s transformation into
a global economic force has yet to fully benefit all its citizens. There’s a massive
unmet need for basic services, such as water and sanitation, energy, and health
care, for example, while red tape makes it hard to do business. The
government has begun to address many of these challenges, and the pace of
change could accelerate in coming years as some initiatives gain scale.
From our vantage point, India has an exciting future. In the new McKinsey
Global Institute report India’s ascent: Five opportunities for growth and
transformation, we look at game-changing opportunities for the country’s
economy and the implications for domestic businesses, multinational
companies, and the government. The five areas we focus on by no means
provide a comprehensive assessment of India’s prospects, but we believe they
are among the most significant trends. Foreign and Indian businesses would
do well to recognize these opportunities and reflect on how to exploit them.
Would you like to learn more about the McKinsey Global Institute?
Visit our Productivity, Competitiveness & Growth page
The country will need to address these gaps to achieve its potential. The task is
certainly within India’s capacity, but policy makers will have to promote an
agenda emphasizing job creation, growth-oriented investment, farm-sector
productivity, and innovative social programs that help the people who actually
need them. The private sector has a substantial role to play both in creating
and providing effective basic services.
By 2025, MGI estimates, India will have 69 cities with a population of more
than one million each. Economic growth will center on them, and the biggest
infrastructure building will take place there. The output of Indian cities will
come to resemble that of cities in middle-income nations (Exhibit 2). In 2030,
for example, Mumbai’s economy, a mammoth market of $245 billion in
consumption, will be bigger than Malaysia’s today. The next four cities by
market size will each have annual consumption of $80 billion to $175 billion
by 2030.
Exhibit 2
To achieve sustainable growth, these cities will have to become more livable
places, offering clean air and water, reliable utilities, and extensive green
spaces. India’s urban transformation represents a huge opportunity for
domestic and international businesses that can provide capital, technology,
and planning know-how, as well as the goods and services urban consumers
demand.
3. Manufacturing for India, in India
Although India’s manufacturing sector has lagged behind China’s, there will be
substantial opportunities to invest in value-creating businesses and to create
jobs. India’s appeal to potential investors will be more than just its low-cost
labor: manufacturers there are building competitive businesses to tap into the
large and growing local market. Further reforms and public infrastructure
investments could make it easier for all types of manufacturing businesses—
foreign and Indian alike—to achieve scale and efficiency.
Our research suggests that women now contribute only 17 percent of India’s
GDP and make up just 24 percent of the workforce, compared with 40 percent
globally. In the coming decade, they will represent one of the largest potential
economic forces in the country. If it matched the progress toward gender
parity of the region’s fastest-improving country, we estimate that it could add
$700 billion to its GDP in 2025. Movement toward closing the gender gap in
education and in financial and digital inclusion has begun, but there is scope
for further progress.
Public-sector efforts to address the five areas are under way. The government
is attempting to improve the investment climate and accelerate job creation—
India’s ranking on the World Economic Forum’s Global Competitiveness
Report climbed to 55 in 2015–16, from 71 a year earlier. Officials are moving to
make the government more efficient, using technology that can leapfrog
traditional bottlenecks of a weak infrastructure. One billion Indian citizens, for
example, are now registered under Aadhaar, the world’s largest digital-identity
program and a potent platform for delivering benefits directly to the poor.
Realizing India’s promise will require national, state, and local leaders to adopt
new approaches to governance and the provision of services. To meet the
people’s aspirations, these officials will also need new capabilities. The
requirements include private sector–style procurement and supply-chain
expertise, deep technical skills for planning portfolios of infrastructure
investments, and strong project-management capabilities to ensure that large
capital projects finish on time and on budget. Training will be needed to help
staff members use digital technologies to automate and reengineer processes,
manage big data and advanced analytics, and improve interactions among
citizens through digitized touchpoints, online-access platforms, portals, and
messaging and payment platforms. The government could acquire these
capabilities by adopting quality-oriented procurement policies and taking
advantage of secondments from the private sector. For businesses, India
represents a sizable market but will require a granular strategy and a locally
focused operating model.
No single report can capture all the changes taking place in the country, but we
have tried here to identify the most significant trends. Foreign and Indian
businesses should consider how their strategies will be influenced by them.
Policy makers should focus on helping all stakeholders to capitalize on them.
By any measure, the challenge is daunting, but success could give a historic
boost to India’s economy.