Surging with self-confidence and ambition

By Jo Johnson
Published: January 25 2006 18:30

Not so long ago, remembers Kamal Nath, India’s commerce minister, the Indian delegates attending this week’s meeting of the World Economic Forum in Davos would all have been armed with “The List”. Foreign travel was a privilege and family and friends would compile long lists of luxuries unavailable at home.

“Toblerone and Vat 69, Old Spice and Brut and other famous brands of the 1960s and 1970s would burst out of our bags,” he said at a luxury goods conference in Mumbai this month. “Even in the 1980s, brands forgotten abroad continued to be coveted in an India that was living several brand cycles back in time.”

It was a different world. Gucci, Jimmy Choo and Vogue this month became the latest brands to announce plans to set up within easy reach of the business capital’s affluent elite and drooling distance of a middle class now estimated to be larger, at 300m, than the entire population of the US.

With neighbourhood stores now stocking Pringles and After Eights and with foreign products sold in malls across in India, “The List”, of course, has disappeared. Its demise, along with the record number of Indian businessmen attending Davos this year, speaks volumes about India’s accelerating integration into the global economy.

As the Davos programme illustrates, India, long overshadowed by China, its populous northern neighbour, is the country of the moment. Signs abound of an India surging with self confidence and a global investor community increasingly anxious to do business with the world’s fastest-growing free market democracy and default back office. The surge in interest is recent. Portfolio investors, aided by low US interest rates, have pumped 25 per cent more cash into the Indian stock market over the past two years than in the preceding 11 years put together, according to Morgan Stanley. This has helped push the Sensex share index up by more than 50 per cent in 12 months.

At the root of this change is a reappraisal of the country’s economic potential. This has been brought on by a jump in the trend growth rate to 7 to 8 per cent, double the “Hindu rate of growth” to which India seemed condemned for much of the post-war period, and by the government’s promises of 10 per cent growth in the near future.

“If the government didn’t do anything and just got out of the way, the growth rate might go to 10 per cent and if they really tried it might go to 12 per cent,” says Scott Bayman, chief executive of General Electric in India. “Kidding aside, there’s a recognition now among the key guys in the government that they can get to 10 per cent.”

As the balance of power in the global economy shifts towards Asia, such turbocharged growth rates promise to shorten the time frame in which India rises up the ranks of world economic powers. Deutsche Bank says it could become the third-largest economy by 2020 on a purchasing power parity basis. With Manmohan Singh, the prime minister, calling for the 21st century to be “the Indian century”, the geo-political ramifications of India’s rise are attracting attention. Washington has been ardently courting India, once the ultimate non-aligned nation, as a potential counterweight to China in the emerging multi-polar world. “Over the century ahead, there will be no region more vital to America’s long term military, economic and political interests than Asia,” says Nicholas Burns, US under-secretary of state. “And the part of Asia that is now receiving the most substantial new attention is south Asia and, in particular, India.”
George W. Bush will next month become the latest leader to beat a path to Mr Singh’s office, following in the steps of Wen Jiabao, Junichiro Koizumi and Tony Blair. He is likely to recognise a now west-tilting India as a de facto nuclear power, in spite of its refusal to sign the Nuclear Non-proliferation Treaty, and acknowledge its claim to a seat on the United Nations Security Council. The buzz makes India’s rise seem inevitable but much depends on sustaining a growth rate of 7 to 8 per cent, the minimum needed to create jobs in what will, by 2050, be the world’s most populous country. The risk is that a timid coalition government might miss the chance to fulfil India’s potential.

“In order to maintain the overall growth rate of the economy at its current levels and carry it closer to annual double-digit levels, we have to remain committed to an aggressive agenda for economic reforms,” Palaniappan Chidambaram, India’s finance minister, said in a speech this month to the Asian Development Bank.

 “I think where we are right now is a massive vindication of the reforms initiated in 1991,” says Suman Bery, director-general of the National Council for Applied Economic Research. “But each one of these things peters out and you’ve got to keep at it. The world changes and this too shall pass. We’ve got to get on with it.”

Progress might be slow but, whether measured in terms of India’s trade as a share of gross domestic product, the number of companies seeking overseas listings and acquisitions or the global ambitions of its resurgent manufacturers, India is now intertwining with the world beyond its borders as never before. The transformation has far to go. Trade represents just 29 per cent of Indian GDP, compared with about 57 per cent of China’s. Although India has made some progress in eliminating trade barriers since it joined the World Trade Organisation in 1995, import tariffs remain high. India is still a minnow in world trade, with its goods exports accounting for just 0.8 per cent of the global total, compared with 6.4 per cent for China’s.

But its share could quadruple in a decade, according to McKinsey, if the myriad infrastructural and regulatory hurdles to global competitiveness facing manufacturers are lifted. Its potential to attract more foreign direct investment is also considerable, given that existing flows are small both in absolute terms and as a percentage of GDP. India received less than one-tenth of the $60bn of FDI that went to China in 2004. This could increase rapidly if market deregulation and liberalisation make further progress. Anecdotal evidence suggests a wall of cash waiting to enter. Foreign companies are rushing to hold board meetings in India, occupancy rates in hotels exceed 100 per cent because of double booking and McKinsey reports three times as many visits by Fortune 500 chief executives contemplating investments as last year.

“The tipping point will be deregulation of retail and banking,” says Ranjit Pandit, co-founder of McKinsey’s India practice. Once elections in the left’s bastions of West Bengal and Kerala are out of the way, he expects the government to allow FDI in retail but to shy away from bringing forward banking liberalisation not scheduled until 2009.

“It’s a permanent tug of war but the commitments made at the WTO and in FTAs mean that window available to Indian companies to remain protected is getting smaller and smaller,” says Mr Srinivasan. “I remind them that Indian companies that have ventured out and embraced liberalisation have been extremely successful.”