India with a population of over 1 billion is a nation presently under going a profound change. 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 5th largest economy in terms of purchasing power with GDP estimated at $2.5 trillion USD (2001). India 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 Vajpayee, a moderate took power in 1999, he represents the (BJP) Hindu nationalist Bharatiya Janata Party. Next general elections are scheduled for 2004. The BJP led coalition has the support of 20 smaller parties. The opposition is the Congress Party of which inaguarated India's free market policies in 1991. India today is the world's largest democaracy since seeking independence in 1947. Strong democratic institutions, large population, huge potential for growth if foreign direct investment (FDI) follows. Internal relgious conflicts do exist particularly in the industrial state of Gujarat where differences exist between Muslims and Hindus. Of national political concern is the fact 400 million Indians live on the equivalent of $1 USD/day.
ECONOMY: is presently performing quite well as more recently in the fall 2002 which was an exceptionally strong economic performance blowing against the winds of the global economic slowdown with stronger corporate earnings that are growing at 15 to 20 percent annually. 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. Indian software exports are estimated to be valued at $50 billion USD by 2008 with current growth rates at 40 percent per year. 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 suchs as Microsoft investing monies. Other Indian hi-tech success stories include Wipro and Satyam. Software alone represents 12 percent of India's total exports.
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 BI.C 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. However, 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 Over the last 5 years, India similar to China has had one of the world's fastest GDP growth rates averaging 5.5 percent. Year 2003 growth estimate is at 5.8 percent. GDP per capita as measured by purchasing power parity is approximately $2,500 USD. The United States is the largest export market for India's products and services. Inflation for year 2000 at 3.8 percent, 2001 at 5.18 percent and October 2002 at 2.8 percent and inflation for 2003 is estimated at between 4 to 5 percent. Debt to GDP is high and projected to hit 90 percent in 2003. India's balance of payments is bascially balanced as this is partly attibuted to a growing USD remittances from Indian workers abroad particularly in the Gulf region valued at $10 billion USD/year which helps to offset oil imports in the capital account. Current high real interest rates are helping to keep the rupee strong. Low nominal interest rates at 5.5 to 6 percent, relatively low inflation environment, quite stable considering the size of the nation with its large cheap labour pool. Stockmarket is presently fairly valued at 12.5 times earnings which is below historical valuations. Strong domestic consumption and FDI is growing although badly lagging China's levels. India today is one of Asia's largest oil importers with oil imports pegged at 1.1 million b/p/d (1998). It is estimated that 8 percent GDP growth will be required in order to tackle poverty. Agriculture employs 70 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 centres are an important industry segment growing at 70 percent per year servicing many large global congolomerates 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.
Outlook
India with large economic reforms over the last decade is gradually moving towards a large free market economy similar to that of the United States. India is opening up to foreign ownership along with an active program of privatization taking place. However, India faces direct immediate challenges in its growth plan in that its government finances particularly the large federal budget deficit running at 6 percent of GDP totalling approximately 11 percent of GDP when all levels of government are factored in. Future economic growth to come from monetary policy and the continuing lowering of domestic interest rates as fiscal policy is at the wall due to high budget deficits. 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, neighbouring 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 labour market and poor infrastructure including too many electrical power shortages. 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. Historically, leaders and thinkers of the world.
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.
CONCERN: widespread poverty estimated at 40 percent of the population of which 25 percent living in extreme poverty conditions, infrastructure difficulties - pollution control & water quality, literacy rate at 52 percent, too few post graduate education facilities, government's weak fiscal position, growing national debt, delayed privatizations.
BANKING SYSTEM: Reserve Bank of India, India's central bank has huge official reserves as of October 2002 at $64 billion USD excluding gold and growing, significant jump from June 2001 at $43 billion USD. 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 defent the rupee. National network of banks consists of 68,000 branches of which only 200 are foreign banks. There is tremendous growth in areas of consumer credit and retail banking.
KNOWLEDGE: 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.
REGIONAL: India's historical tension and past conflict with Pakistan over the Kashmir region is overblown. The potential for nuclear conflict is there but will not happen in BI.C's view. India and Pakistan have fought 3 wars since 1947. Islamic militants are fighting for Kashmir's independence or its merger with Pakistan over the last 12 years; sixty thousand have died over the Kashmir conflict. At prsent, there are over 1 million soldiers deployed on the border between these two nuclear armed neighbours. India has stated that there is no possibility of nuclear war with Pakistan because of MAD, mutally assured destruction. This Kashmir conflict is hype for political gain as the risk to the Indian rupee is minimal. Finally, India is becoming a military superpower as it is well documented for its buying of Russian military hardware from naval ships to tanks.
CURRENCY: ISO Symbol 'INR', Indian rupee. The Indian rupee is currently strong and appreciating versus a weakening US-dollar. 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. India's debt burden is the main reason why it has not gone to full convertibility. Full convertibility might move the rupee towards depreciation pressures.
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, January 1996 at 35.8, January 1997 at 35.8, January 1998 at 39.1, January 1999 at 42.29, Janaury 2000 at 43.53, January 2001 at 46.54, Janaury 2002 at 48.29, May 2002 at 48.96, December 2002 at 48.1. 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) and March 1993 where India experienced balance of payments difficulties.
CURRENCY FORECAST: 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 national government. As long as GDP growth rates remain high, the fiscal situation can be contained. The 5 year forecast for year 2005 is likely projected to be in the range of 35 Indian rupees to the USD as India learns to adapt to free market policies. Exchange controls liberalised. Float.
UPDATED: January 9, 2003
