At a glance
- The pandemic has fast-tracked India’s digital economy, and a series of digital innovations is prevalent in sectors such as education, healthcare and supply chain management.
- The International Monetary Fund expects India to have the world’s fastest growing this year with estimated growth of 8.2 per cent outstripping global growth of 4.9 per cent.
- However, the country still faces uncertainty in terms of the impact of inflation and future outbreaks of COVID-19.
COVID-19 may turn out to be a double-edged sword for the Indian economy and investors.
While devastating outbreaks of the virus led to debilitating lockdowns in 2020 and 2021, the pandemic has fast tracked the country’s digital economy and platform-based delivery services such as fintech.
In areas such as education, healthcare and supply-chain management, digital innovations have come to the fore. The fast pace of digitalisation is also maximising the impact of labour and capital as e-commerce, telecommuting and hybrid workplaces reshape consumer behaviours and create new business opportunities.
In effect, these advances have added new weapons to India’s economic armoury and complement traditional strengths in manufacturing, agriculture and automobiles.
“The pandemic has accelerated the adoption of digital platforms and digital payments and driven a surge in online retail in India,” says Munish Sharma, Austrade’s trade commissioner in Chennai.
“This has also opened the way for more exporters to reach the vast Indian consumer market via e-commerce.”
However, uncertainties remain. Any new COVID-19 outbreaks could stall growth in India.
Rising inflation presents another possible danger to the economy if pent-up demand leads to supply shortages resulting in higher production costs.
The International Monetary Fund (IMF) expects India to have the world’s fastest-growing economy in 2022, rising by 8.2 per cent and outstripping global growth of 4.9 per cent.
In an annual review, the IMF comments that India’s “broad range of fiscal, monetary and health responses to the crisis [have] supported its recovery and, along with economic reforms, are helping to mitigate a longer-lasting adverse impact of the crisis”.
Deloitte India is also upbeat about the economy, projecting it will grow between 8.7 per cent and 9.4 per cent in the 2021-2022 financial year, before expanding 9 per cent in 2022-2023 and 7.5 per cent the year after.
The caveat could be if significant COVID-19 outbreaks occur.
“While we expect limited downside risks, we will be watchful of any increase in infection cases or variants that reduce vaccine effectiveness in the near term,” says Dr Rumki Majumdar, economist and associate director at Deloitte India.
On the back of accelerated rates of vaccination and the Indian Government’s well-calibrated regional mobility restrictions, she expects rising consumer and business confidence to result in higher spending.
Strong demand for agricultural products has buoyed rural communities, while positive data for e-way goods consignments, industrial production within key industries, GST collections and electricity consumption suggest the recovery is broad-based, according to Majumdar.
Research consultancy Capital Economics is even more optimistic than the IMF about India’s economy, tipping it to grow in excess of 10 per cent in 2022. The group’s Asia economist Darren Aw says better-than-expected tax revenues have contributed to India’s improving fiscal position.
However, Aw also notes that there is an inevitability to the sharpness of India’s economic rebound, given that it comes off such a low base.
“The national lockdown in 2020 resulted in India having the sharpest contraction in the world,” he says.
As international investors and exporters weigh up their options in a pandemic-stricken world, Austrade believes there are many positive signs emanating from India, including the competitiveness of the services, manufacturing and export sectors.
Sharma says these markets are “an important litmus test” for the overall economic health of the country.
The real question for Australian companies and others with global ambitions is whether they can afford to ignore the fastest-growing large economy in the world.
“India’s scale is extraordinary,” Sharma says. “By 2025, one-fifth of the world’s working-age population will be Indian. By 2035, India’s five largest cities will have economies comparable to middle-income countries today.
"In short, there is no market which offers more opportunities for Australian business over the next 20 years than India.”
Sharma also expects emerging prospects in clean energy, critical minerals, grains management and logistics, as well as medical devices and vocational education and training.
Deloitte has identified seven industries that should attract strong foreign direct investment (FDI) – electronic goods, pharmaceuticals, textiles and apparel, food processing, automotive and auto parts, chemicals for active pharmaceutical ingredients, and capital goods.
Deloitte’s research suggests India can target an additional US$1 trillion (A$1.4 trillion) of merchandise exports in the next five years if it attracts higher FDI into these sectors.
Majumdar adds that Indian exports have performed “exceedingly well” and will continue to do so as global economic activity picks up pace. She expects rising consumer confidence to feed into a rebound in which demand outpaces supply.
“This will compel businesses to increase investment and increase capacity to produce more. In short, we expect a virtuous cycle to kick in.”
Strengths and weakness
Capital Economics will be keeping a close watch on the banking sector in 2022, with Aw noting that banks entered the pandemic crisis with “very weak balance sheets and weak profits”. He expects debt on non-performing loans to increase, especially when extraordinary government stimulus and support measures are wound back.
“If the banking sector just doesn’t have the appetite to lend money, investment will be held back,” he says
On a positive note, stock markets in India have been performing well, with the NIFTY 50 benchmark index up 24 per cent and the BSE Sensex 30 up 22 per cent in 2021. Aw says Indian equities also have less exposure to regional forces.
“For that reason, we think the stock markets in India could do a bit better than elsewhere in the emerging world.”
Majumdar says rising inflation, deteriorating household balance sheets, a weak labour market and the possibility of a financial contagion due to a global liquidity squeeze are potential risks that could hurt consumer demand. She notes that India is a consumer-driven economy, with consumption spending accounting for about 60 per cent of GDP.
“Policymakers must recognise and address the risks looming over pent-up demand and take quick actions to prevent these factors from spinning out of control,” she says.
Possible steps, according to Majumdar, could include creating jobs, income and demand in the economy for sustainable growth.
With an eye to India’s future prospects, Sharma says the country’s economy is too complex for its growth story to be linear.
“Its economic progress will be uneven and at times incremental, constrained by the political compromises demanded of a diverse democratic federation,” he says.
“To succeed, India will need to sustain long-term growth to enable job creation over time for its young population and identify the economic fundamentals behind sustainable growth.”
To create the right institutional framework for investors in the years to come, Majumdar calls on the Indian Government to reinforce its roles as a creator of infrastructure programs, a negotiator of free trade agreements and preferential tax deals, a facilitator of incentives, rebates and policy reforms, and an enforcer of industrial and intellectual property rights.
She adds that policymakers should focus resources on capital investment – for example, on physical infrastructure, skill building, and improving public health and other social infrastructure – as the country learns to live with the pandemic.
Sustained efforts towards reforms and their effective implementation will bode well for the economy, according to Majumdar.
“India is coming out of the pandemic’s shadow and, if there are no other severe infection waves, the nation’s recovery will take off at a rapid pace and will likely result in the world’s fastest-growing economy.”
Food for thought
As lockdowns in India inspired families to do more home cooking in 2020, the timing was just right for famous Australian food brand Leggo's to enter the market.
Known for its brand of Italian-themed sauces, pestos and pastes, Leggo’s is owned by Simplot Australia. The company took Austrade’s advice to target India via e-commerce platform Amazon India and build on its exports to other regional strongholds such as China, South Korea and South East Asia.
Now, sales in India are growing on multiple platforms and in physical stores.
“We’re really new to the market in India, however there has been strong acceptance from major customers to the product range, and early indications are the products are selling well in stores and online,” says David Malone, international sales and marketing manager at Simplot Australia.
Austrade sees Leggo’s success as a natural result of a surge in online retail in India, which has presented opportunities for Australian suppliers in areas such as premium food through to health and beauty products.
The trade group has been helping Australian businesses expand into India through the Australia India Business Exchange (AIBX) program. One avenue is through virtual meet-a-buyer sessions.
“Australian companies looking to succeed [in India] should narrow their attention to key regions based on their sector focus, and recognise the importance of working with a qualified local partner,” says Munish Sharma, Austrade’s trade commissioner in Chennai.
“This could be appointing in-market agents and distributors, setting up liaison offices, or entering into joint ventures with local subsidiaries.”
In addition to Amazon India, Leggo’s is now selling via two other Indian e-commerce platforms, Food Hall and Nature’s Basket.
Malone agrees that having a good partner with a well-established distribution network has been the key to gaining sales momentum in India.
It is not easy, though, with high tariffs resulting in a premium retail price for its sauces and other products.
Malone hopes some relief will come on the tariff front from a mooted free-trade agreement between Australia and India in 2022.
“India is a long-term focus for us,” he says. “We want to continue to build our business there.”
Women at work
An often under-utilised resource could be a possible new source of growth for India - women.
Ministry of Statistics findings indicate that the female labour participation rate in India fell to 16.1 per cent during the July-September 2020 quarter, the lowest among the major economies, while World Bank estimates put the figure at about 20 per cent.
“Over the next 10 years we wouldn’t be surprised if that doubles,” says Darren Aw, Asia economist at research consultancy Capital Economics.
“We’re upbeat on that because right now the percentage is very low when you compare it to other emerging markets.”
Damage to labour markets during lockdowns has been severe in India, but unemployment rates have dropped quickly upon resumption of ‘normal’ life and business across the country.
Aw says limitations with social safety nets and a high rate of informally employed people mean that labour markets are probably not as big a concern as in other developed markets. However, he believes rising female labour participation could be one factor that helps drive economic growth.
The Centre for Economics and Business Research predicts the Indian economy will become the world’s third largest by the year 2031, after China and the United States.
The OECD says inflation has remained close to the upper band of the Reserve Bank of India, but it should ease as supply chain disruptions are overcome.
IHS Markit forecasts India’s nominal GDP will rise to US$8.4 trillion by 2030 from $2.7 trillion in 2021.