The Republic of India with a population at 1.17 billion is a nation presently undergoing a profound change transitioning from a third world economy on its way to superpower status. The pace of change for this impoverished nuclear armed country is rapid as it is transforming from a socialist economy into a powerful free market economy. In 1991, the national currency, the 'rupee' experienced a devaluation reflecting India on the verge of bankruptcy when the Reserve Bank of India at the time only had 3 weeks of reserves available. Political forces within India in 1991 changed directions hereby beginning the process of integrating this mammoth third world nation into the global economy. India began to implement free market reforms and moved away from the protectionist policies of the past. The Indian 'rupee' managed to escape most of the economic fallout from the Asian financial crisis in 1997 as capital account controls and a low ratio of short-term debt to reserves averted India from a repeat currency crisis and any balance of payments difficulties.
The Indian economy is undergoing an economic boom particularly over the last 6 years evolving from developing status making the shift into an industrialized advanced economy in pockets of the country. India is presently the world's 11th largest economy, it now has one of the largest middle class markets in the world at over 300 million people. Just as the last 10 years have witnessed widespread economic growth and progress in India, the next 10 years are going to be just as exciting as this transformation towards superpower status later this 21st century takes place.
POLITICS: Prime Minister M. Singh took power in 2004 representing the Indian National Congress Party. The Congress Party of which inaugurated India's free market policies in 1991. India today is the world's largest democracy since seeking independence in 1947. India is well known for its strong democratic institutions. Internal religious conflicts do exist particularly in the industrial state of Gujarat where differences exist between Muslims and Hindus. Of national political concern is the fact 300 million Indians live on the equivalent of 1 USD per day. Necessary economic reforms are sometimes blocked by political posturing.
ECONOMY: performed well during global economic crisis 2008-2010, it is currently Asia’s third largest economy behind that of Japan, China. Steady consistent economic growth over the years. India has successfully transformed the economy towards policies of pro-globalization, free market, encouragement of foreign investment and international trade. The economy is turning away from the socialist policies of the past including protectionism and subsidies thus advancing and modernizing from a historical agricultural based economy (employing 400 million in India) towards a superior growth skilled high technology economy in the areas of software engineering, Internet cyber-economy and computer hardware & silicon chip components.
Bangalore, India is planning to become the next Silicon Valley and centre for foreign venture capital to exploit the hi-tech wealth potential of India's skilled workers. India is now home to some of the largest silicon chip and software factories in the world, hi-tech industry is booming in sectors of the Indian economy. Many Indian hi-tech companies have successfully obtained public listing status on North American stock exchanges including Infosys. Foreign investment into high technology sectors is still strong including global corporations such as Microsoft investing monies. Other Indian hi-tech success stories include Wipro and Satyam. Software alone represents 12 percent of India's total exports.
The financial capital centre of the country is Mumbai.
At present, India is a good 10 years behind that of China in economic development and overall advancement in many areas, but over time, India will prevail and BankINTRO.com forecasts India like China will achieve superpower status later in the 21st century. The economic attitude in India even since its economic revolution in 1991 is still in many segments a feeling of fear of foreigners, a liking for protectionism & subsidies and a belief in self belonging otherwise known in India as 'swadeshi'. India today is gradually moving away from this socialist ideology of protectionism towards free markets. The difficulty with the budget deficit will most likely stay as India moves ahead with high GDP growth rates, however, they are unsustainable should economic growth stall. Industry privatizations are providing the national treasury with surplus revenues as the economy opens itself thus helping the Indian government to manage the fiscal deficit.
Economic Statistics
Total GDP as measured by purchasing power parity stands at 3.5 trillion USD (2009) with corresponding GDP per capita at 3,100 USD. Market GDP measured at 1.1 trillion USD.
growth projected at a buoyant 9 percent for 2010, year 2011 forecasted at 8.4 percent, 2009 came in at 7.4 percent, year 2007 at 9 percent. Inflation quotes include year 2008 at 8.3 percent, 2009 at 11 percent. Fiscal deficit is high and persistent ranging from 9 to 10 percent of GDP although forecasted to decline to 5.5 percent for 2011 and then 4 percent by 2013. The United States is the largest export market for India's products and services. Public debt to GDP is reasonable at 58 percent (2009) down from 85 percent in 2004. India has a low debt service ratio which is very favorable. The current account deficit stood at 31 billion USD (2009) with the trade component at 104 billion USD, year 2010-2011 current account deficit is projected at 2.1 percent of GDP. India's balance of payments are in a slight surplus position as this is partly attributed to growing USD remittances from Indian workers abroad particularly in the Gulf region valued at 10 billion USD per year which helps to offset oil imports in the capital account. Major trade partners include China, United States, U.A.E., and Saudi Arabia. Official unemployment came in at 10.7 percent (2009). It is estimated that 8 percent GDP growth will be required in order to tackle poverty. Agriculture employs 50 percent of the working population and represents 25 percent of GDP.
Industries
Diversified economy from telecommunications to airlines as well as industries including textiles, software & computers, agriculture, chemical, jewelry, outsourcing, pharmaceuticals & biotechnology, engineering and a successful services industry. Information technology 'IT' and software consist of a high paid and an important segment of the Indian economy. Call centers are an important industry segment growing at 70 percent per year servicing many large global conglomerates including HSBC, American Express to name just a couple. Overall, India currently has a diversified industrial base mixed in with a large financial services sector. Real estate is the fastest growing component.
Energy Sector
A critical component considering the population size of the republic. India is currently holding the world’s fourth largest coal reserves. Electricity is in surplus, oil is balanced. Oil production at 3.7 million bpd (2009), oil reserves at 5.6 billion barrels (2009), natural gas is in a slight deficit position.
Economic Outlook
The implementation of economic reforms over the last 20 years has yielded impressive economic gains for India as it moving towards a large free market economy similar to that of the United States. At present, the middle class in India is a stunning 300 million citizens and projected to reach 600 million by year 2025. India is opening up to foreign ownership along with an active program of privatization taking place.
In 2004, India was rewarded with the beginnings of an ‘investment grade’ ranking from major credit rating agencies. In addition, India will benefit from its high private savings and investment rate that is also high at 20 percent of GDP. In the long term, poverty reduction remains a significant challenge. India must improve in areas of tax collection and drastically change its current minimal trade performance and very low FDI levels. At present, neighboring China with similar population levels have 10 times larger FDI at 38 billion USD. It is in FDI where India has one of the world's lowest levels per capita, it has to make great strides and open up to the global economy. India for the most part is still held back by too much regulation, rigid labor market and poor infrastructure including too many electrical power shortages. Outsourcing to India by Western companies however will likely to remain popular.
Nevertheless, India has the capability of being a powerful world economy in the 21st century with an impressive class of young and driven entrepreneurs amongst a large talent pool of highly skilled engineers and scientists who understand how to build wealth.
**** Key concept is the fact that India percentage of government spending in relation to the size of the economy and overall taxation levels are both low by comparable world standards****
POSITIVE: relative political stability as India is the world's largest democracy; structural reforms are taking place, untapped GDP growth potential, self sufficient in food production, limited foreign currency borrowings, no longer a debtor economy, young demographic profile, well educated middle class.
CONCERN: extreme poverty conditions for a large segment of the population, infrastructure difficulties, and environmental challenges: pollution control & water quality, 25 percent below poverty line - overpopulation, disease risk is high including tuberculosis, inefficient state owned enterprises.
BANKING SYSTEM: Reserve Bank of India, India's central bank has huge official reserves forecasted at 330 billion USD equivalents for year 2010, a significant jump from June 2001 at 43 billion USD. Reserve import coverage at 9.5 months, good short term coverage at a 3:1 ratio. This large reserve cushion will act as a shock absorber to any economic earthquake such as a dramatic rise in the world oil price and is available to help defend the rupee. There is tremendous growth in areas of consumer credit and retail banking. The Bank interest rate was at 6 percent (2010). Remittances from abroad form a large component of capital inflows estimated at 25 billion USD in 2006. Year 2009 broad money supply growth was moderate at 18.7%.
KNOWLEDGE: AIDS dilemma
India’s population explosion is impacting India's infrastructure and resources as India reached a population of 1 billion people in May 2000. The potential for an AIDS time bomb is high as over 4 million people within India are HIV positive. AIDS may indeed lower the population. Ironically similar to South Africa, this may benefit India in the long term financially as many of those infected are impoverished and not net contributors to Indian society. A lower population will result in less pressure on infrastructure and a higher standard of living for the remaining Indian population. Year 2004 AIDS / HIV statistics reveal a rate of 0.9 percent of the population infected. India is now the world’s largest number of new AIDS cases in the world.
REGIONAL: please contact BankINTRO.com for further details.
CURRENCY: ISO Symbol 'INR', Indian rupee. At time of review on June 24, 2010, the Indian rupee had an exchange valuation of 46.49 INR to the US-dollar and/or 57.13 INR to the Euroland euro (EUR). Convertibility for the rupee is taking place slowly as much red-tape is being eliminated. The current account is fully convertible while the capital account is not. Full convertibility might move the rupee towards depreciation pressures. India’s high foreign exchange reserves policy of containing appreciation of the rupee against the USD by selling rupees, this helps to maintain a stable exchange rate although critics state that reserves could be re-invested into the Indian economy.
Capital controls are also available to limit the appreciation of the currency in order to support India’s export industry.
CURRENCY HISTORY: historical valuations include year 1993 average at 30.49 INR to the USD, January 1994 at 31.43, January 1995 at 31.36 (high), January 1996 at 35.8, January 1997 at 35.8, January 1998 at 39.1, January 1999 at 42.29, January 2000 at 43.53, January 2001 at 46.54, January 2002 at 48.29, January 2003 at 47.9, January 2004 at 45.41, January 2005 at 43.66, January 2006 at 44.21, January 2007 at 44.21, January 2008 at 39.27, March 2009 at 51.14 (low), and January 2010 at 45.9. Throughout the 1990's, the Indian rupee for the most part has performed quite well and relatively stable. The last threat of a major currency crisis to the rupee was from the 1997 Asian economic shock and in 1991 with India experiencing balance of payments difficulties. Currency crisis dates include July 1991 (Indian economic reforms & an oil price spike during a balance of payments crisis) and March 1993 where India experienced balance of payments difficulties. In recent years, the rupee hit a high of 42.90 INR to the USD in 2007, the highest level since 1999.
CURRENCY FORECAST: India will remain a country of extremes. Surging foreign exchange reserves, low external debt, high government subsidies, rapid GDP growth and weak public finances summarize the overall economic situation that has been in play the last few years and is likely to remain the course over the medium term. By year 2025, there will be approximately 600 million Indians in the middle class. Longer term by 2040, India will be the world’s third largest economy. This country development bodes well for the creation of a currency bloc based on rupee currency unit that will compete against other blocs in the future such as the USD, JPY, CNY, EUR, gold and the Russian ruble.
A stronger technology driven economy in India may result in a much stronger currency over the medium term if India can successfully manage the other challenges that exist such as poverty, infrastructure and budgetary constraints. Large foreign exchange reserves along with continued high GDP growth and low inflation levels in the 5 percent range continue to support the rupee. However, the one major caveat to a gradual appreciating rupee is India's challenging fiscal situation with large deficits at all levels of government. As long as GDP growth rates remain high, the fiscal situation can be contained. Further, it is expected that remittances from Indians working abroad are to stay strong at 3 percent of GDP. The 5 year forecast for year 2015 is likely projected to be in the range of 35 Indian rupees to the USD as India learns to adapt to further free market policies.
UPDATED: June 24, 2010
