CHINESE SLOWDOWN: INDIA’S BIG BREAK

“India has a happy story to tell” believes Paul Krugman. The ‘Year of the Monkey’, regarded to

be the unluckiest in Chinese astrology is unlikely to affect India as the country is currently in a

different league in terms of macroeconomic stability. People are optimistic as the global finance

guru Mohd El Erian reckons that the 7.5% GDP growth can become a trend in the next 5 years

and describes India as an “Elephant turning into a roaring tiger”.

THE TIGER PUSHING THE THROTTLE

According to the Keynesian theory of economics,

GDP = C + I + G + Xn

C = consumption, I = investment, G = government spending and Xn = net exports.

An increase in any of these gets further magnified due to the multiplier effect. Currently firing on

all four cylinders, India is already the fastest growing economy. It is tipped to grow at 7.5% in

2016 by the World Bank. India is a services and consumption-based economy. Private

consumption expenditure is expected to rise to $2.4 trillion in 2018-19 from $1 trillion in 2013-

14. The IIP (Index of Industrial Production) boomed from 3% to 9.8% from April to November

in 2015. The overall composite PMI (Purchasing Managers’ Index) attaining its 11 month high at

53.3 indicates expansion. On the expenditure front, both the investment and consumption have

boomed. At the India Investment Summit, Finance Minister Jaitley pleased the optimists by

announcing that the government has eased processes.

Time Period Oil imports (billion $) Oil related exports

(billion $) 𝐗𝐧 (billion $)

First 8 months of FY2015 107 44 -63

First 8 months of FY2016 61 21 -40

The decrease in net exports Xn paints a positive picture. China had been the driver of oil markets

for many years. Its appetite for crude has reduced owing to slowdown. According to brokerage

CLSA, India can add at least 3%, that is, $60 billion to the GDP if the oil prices stay at current

levels as crude constitutes 79% of India’s imports. Goldman Sachs is betting that the prices will

plunge to $20 per barrel so India has every reason to be optimistic. India has the potential to

gallop amid global economic turmoil.

A skilled English speaking workforce has led to India’s emergence as a global outsourcing hub.

The IT sector earning $146 billion during FY2015, clocking a growth rate of 23.72%, is a clear

comparative advantage. Jack Welch (CEO, GE) rightly observed that India’s real treasure is its

intellectual capital. An expanding talent pool can boost innovation and R&D. The talent pool

has grown at a CAGR of 9.4% from 2008-2015 and India’s advantage in the high-tech sector is

sustainable. China, on the other hand, has always been accused of resorting to reverse

engineering or being ineffective in enforcing intellectual property rights. In fact, one leukemia

drug costing $9000 in US sells for $70 in India, which must be ascribed to the latter’s patent law.

Actually, many Indian drugs cost a modest fraction of that of US drugs. Thus, not only is the

economy healthy, but even maintaining health is economical in India.

India’s consumption is propelled by its impressive purchasing power parity in which it ranks

third in the world. Its market for medium and heavy commercial vehicles, a barometer of

economic activity, increased by 36% in 2015 while sales of passenger cars rose by 11.4%.

Having already trounced Europe in production and retail sales of automobiles, India is set to

overtake Japan in entry level car production in 4 years. Hardcore frugal engineering is the name

of the game here. The Renault Kwid topped the charts owing to affordability. India is expected to

emerge as the third largest automobile market by 2020. The highly underserved subcompact

SUV segment is another gold mine. India surpassed the US as world’s second largest smartphone

market. Apple’s sales in India expanded by 76% in the last quarter of 2015 making them turn

their focus to India from China.

As staunch advocates of equality, Indians aim to serve all markets alike. Besides aggressively

acquiring gigantic firms in US, they are also eyeing Japan’s expanding market as the age and

vulnerability of the Japanese population grows. While the global pharmaceuticals sector will

grow at 5%, the Indian sector promises an incredible CAGR of 15.92%. The Indian

pharmaceuticals market, already third in the world in terms of volume, is set to reach $100

billion by 2025. The sector is blessed by backing from the government which has launched a

$150 million venture capital fund to aid startups. It aims to reduce the reliance on imports of

active pharmaceutical ingredients, 85% of which come from China.

Indian Company Acquired US companies Total Valuation

(in million US $)

Lupin Gavis Pharmaceuticals LLC,

880 Novel Laboratories Inc.

Cipla InvaGen Pharmaceuticals Inc.,

550 Exelan Pharmaceuticals Inc.

Medical tourism, a budding sector, is expected to boom to $8 billion by FY2020 from a decent

$3 billion in FY2015. India has an array of world-class doctors making it the favorite against

nemesis Thailand and other counterparts like Singapore and Malaysia.

OVERTAKING THE DRAGON

Employing economies of scale worked wonders for China. External economies of scale resulted

in cost reduction as particular areas manufactured similar products. For instance, most of the

world’s cigarette lighters are produced in a single town in China. This led to the development of

specialized skills along with a dense network of suppliers. Thus, Chinese were approaching

productive efficiency. Indian cities are following suit as Gurgaon and Chennai continue to chase

the ‘Detroit of India’-Pune where Tata Motors is the largest automotive company followed by

Bajaj Auto, Force Motors, Mahindra Two-Wheelers, Mercedes-Benz, GM, JCB construction

equipment, Volkswagen, M&M, Premier Motors and Fiat. In the IT industry, Bangalore and

Pune are the cities exhibiting external economies of scale. There were 202 operational SEZs in

India on 31/03/2015. Indian government understands that SEZs are a means of promoting

industrialization and economic growth through sustainable development. Thus, the commerce

ministry has supported the measures that boost SEZs.

China’s success story was based on mammoth public infrastructural investments. The Indian

tiger has its task cut out. The National Infrastructure Investment Fund, which has an initial

corpus of Rs 40,000 crores, shall be a highly active investor in infrastructure in 2016. India’s

railway budget mentioned that 917 road bridges (both over-bridges and under-bridges) are to be

constructed for replacing 3438 railway crossings. Prime Minister Modi has launched multiple

projects —Atal Mission for Rejuvenation and Urban Transformation (Amrut), Smart Cities

Mission, and ‘Housing for All’ Mission in Urban Areas.

China has consistently invested in its port facilities to enhance its geographic advantages. Indian

Transport minister Gadkari plans to do precisely the same thing- develop the ports, through the

Sagarmala project. India certainly wants to leave no stone unturned in infrastructural

development. Besides, building low-cost airports, rebuilding of roadways is underway for

domestic commuters. Also, the government aims to award projects worth Rs 300,000 crores

through hybrid projects or public private partnerships. India being a capitalist economy, the

private sector has jumped into the contest. A Credit Suisse report claimed that Reliance alone has

built 28,000-30,000 towers comprising a mix of ground based towers and poles for 4G.

Project / Investment Allocated Investment amount (Rs in crores)

Ports 70,000

Rebuild Roadways 12,000

Railways 6,581

Housing for All 4,000

Non-metro airports 1,500

*1 crore = 100 Lakh = 10,000 thousand

Incidentally, the year of the monkey marks the commencement of the ‘metal cycle’ according to

Chinese astrology and has turned the tide in India’s favor as metals are available abundantly.

Prime Minister Modi’s belief “India's progress is our destiny” seems plausible. China is the

biggest consumer of copper and aluminum and among the largest for most other commodities.

Barring coal, China is below the world’s per capita average in all critical resources. The purchase

of resources was funded by their substantial export earnings till now. China’s exports dropped by

6.8% and imports declined by 8.7% in November 2015. This had negative multiplier effects on

the economy. The investments in infrastructure have become even more lucrative as commodity

prices will thus continue to plummet.

An overcapacity of 550 million tonnes of steel globally meant that the prices slumped to a 12

year low. They have plunged from the 2008-09 high of $744 to below $300 in 2015.

China has a vast excess capacity of 250-300 million tonnes. India, being the only nation among

the 10 major steel consumers to have posted growth in 2015, is the destination to park

inventories. Actually, India is in a highly enviable position currently as it continues to literally

dictate the terms of trade. For circumventing the free trade agreements with Korea and Japan, a

safeguard duty of 20% was imposed on the steel products imported from Korea, Japan and China

for 200 days. Proposing a minimum import price for steel after imposing the above mentioned

20% import duty in order to protect the domestic industry was bureaucratic genius.

India’s infrastructure deficit amounts to $1 trillion. Thus, the National Infrastructure Investment

Fund (NIIF) intends to leverage Rs 20,000 crores to Rs 400,000 crores (20 times). They realize

that the Indian infrastructure sector warrants an increase in equity investments. The government

needs to provide some flexibility in the pricing of infrastructure projects. Those proposing the

theory that this would lead to a monopoly thus increasing the prices of many other commodities

and thus inflation are perhaps being a tad naive. Regulating monopoly is second nature to us

democratic Indians.

China’s aces were labor, productivity and capital. After peaking in 2012, age became a deterrent

as the one child policy woefully backfired. Also, the rising wages mean that India is likely to

displace China in terms of wage competitiveness. The rise in productivity has become sluggish.

Capital investment peaked in 2012 and the investment overshooting thereafter has led to the

decline. The fact that these investments were funded through unregulated finance from shadow

banks worsened matters. With wizard Raghuram Rajan cleaning up the NPAs currently and

introducing gold monetization schemes to curtail the imports of gold, India’s banking sector

looks incredible in comparison. The RBI kept the Indian ship steady when most economies

drowned during the 2008 crisis.

A key advantage is the descending debt to GDP ratio of India, when the same is on the rise in

China. No wonder Krugman says that India shows greater resilience than China and that China

“scares” him.

Household debt accounts for a towering 65% of China’s GDP. Excess capacity and low demand

has resulted in the bursting of the real estate bubble. Meanwhile, Indian construction sector grew

by 4% in the first half of 2015. The housing sector will reach the $1.2 trillion mark by 2020. It is

certainly lucrative as investments and acquisitions suggest. Birla acquired RInfra Cement

recently.

CRUISING AHEAD

Democracy is India’s biggest asset. Social unrest has increased in China due to rising

expectations of citizens. China’s budget for maintaining domestic peace rivals its military

budget. Meanwhile, socially sensitive India proactively ordained that 2% of corporate profits be

allocated to CSR projects. Moreover, the entire world wants to be in India’s clout as India is

redefining foreign relations. India entering into strategic partnerships with US, Russia and

Germany at the same time reiterates this fact. India increased their bonhomie with oil partners

such as Iran and UAE, while civil nuclear cooperation agreements with Australia and Japan

elevated India’s profile.

Initiatives like Make in India and Digital India will enrich India by generating enormous

employment and breaking even domestically itself. With an aim to increase the contribution of

manufacturing to the GDP from 16% to 25%, Make in India is also poised to generate 100

million jobs by 2022. The government receiving proposals worth Rs 110,000 crores from a range

of sectors reaffirm that the initiative is a sensation. After Huawei and Xiaomi, IPad and IPhone

manufacturer Foxconn will open manufacturing units in India.

Meanwhile, Digital India’s share in India’s GDP will reach $1 trillion in 2025. It is expected to

provide jobs to 17 million by 2025. An overwhelming response was on the cards given that India

is world’s second largest internet market. Microsoft will provide low cost technology to 500,000

Indian villages while Google has agreed to provide free Wi-Fi at 500 railway stations.

A $1.5 billion fund has been launched to aid startups. They have also been exempted from tax on

profit for the first 3 years. As many as 114 startups filed series A rounds in 2015 with an

aggregate funding of $542 million. The surge in the number of startups in India should be

ascribed to the business friendly climate and role models like Flipkart ($15 billion) and Snapdeal

($6.5 billion). Thus, the factor of production ‘Entrepreneurial ability’ is increasing in India.

India’s average age will be 29 years by 2020. US and China will be distant seconds with 37. An

increase by a million every year will make India’s workforce peak at 653 million in 2031. IMF

observes that by harnessing this demographic advantage, India can increment their per capita

GDP by 2% till 2033. Meanwhile, India is set to have the largest student population by 2025

according to British Council Research. China’s resource endowment comprises a huge

population of unskilled and semiskilled labor with a relative paucity of engineering talent. No

wonder, their products are more standardized than sophisticated. Among China’s top 10 exports

to US, 6 are simple goods. The dragon reaped the benefit of scales till now.

With green companies such as Enel Green Power investing in India, its growth will be

sustainable. India aims to develop 175 GW of renewable energy by 2022 to reduce its

dependence on coal besides protecting the environment.

CONCLUSION

Angus Maddison in his book ‘The World Economy: A Millennial Perspective’, remarked that the

polities of India constituted the biggest economy in the world from ca. 1 CE to 1000 CE. During

the period when China was the leading economy in the world, India donned the second position.

In ‘The Tempest’ by William Shakespeare, Act II, scene I, the character of Antonio utters the

phrase “what's past is prologue”. With the dragon slowing down, the tiger would exclaim “Very

apt Antonio!”

REFERENCES

http://www.ibef.org/industry

http://www.dnaindia.com/money/

http://data.worldbank.org/indicator/

http://www.theguardian.com/business/2015/

http://articles.economictimes.indiatimes.com

http://www.hindustantimes.com/business/

http://www.thehindu.com/business/Economy/

http://www.rediff.com/business/

http://oilprice.com/Energy/Crude-Oil/

http://gadgets.ndtv.com/apps/features/

http://www.thepharmaletter.com/listing/mergers-acquisitions/

https://www.timeshighereducation.com/news/

http://www.sezindia.nic.in/

Magazines: Frontline, Business Today, Forbes

‘International Economics’ Sixth Edition by James Gerber

By,

Amogh Sathye

NMIMS Mumbai

MBA 2015-17