The latest report on Global Macro Shifts by Franklin Templeton talks about several structural reforms initiated during the last decade, including tax reforms such as the implementation of the GST and the rationalisation of corporate tax, the Insolvency and Bankruptcy Code (IBC) to reduce balance sheet stress, and multiple steps to formalize the economy, including digitalisation
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The latest report on the Global Macro Shifts by Franklin Templeton, which came at a time when India is witnessing the Lok Sabha elections, says that India offers new economic and investment advantages as both long-term reforms and recent, post-pandemic changes in the global economy combine fortuitously. The Templeton Global Macro also gives an overview of India’s story of post-independence economic growth and reform and then shifts focus to the key factors that it believes will be important for unlocking India’s future potential.
What does the report say?
The report, titled India: Unlocking the Potential, says that India’s story of post-independence economic growth has been uneven, although it can be broadly characterized by gradual reform. However, today, the reform efforts are focused on promoting the formalisation and digitalisation of the Indian economy. An expansion of the country’s manufacturing sector and promotion of foreign direct investments have the potential to improve economic efficiency and allow for the further expansion of India’s growth horizon, it states.
While talking in detail about post-independent India, the report says that the macroeconomic imbalances of the late 1980s and early 1990s and the crises they engendered pushed the government toward introducing the structural reforms of 1991. In the subsequent period, trade and investments were liberalised, import licensing on almost all intermediate inputs and capital goods was removed, and entry restrictions for firms were simplified.
Some of the key points that the report highlights are, that India’s economy is of global importance; it is already the fifth-largest economy in the world, and it is a key contributor to global economic growth, yet there is still considerable untapped potential.
It has a large and young population and an open and democratic political system. Although it has more than a sixth of the world’s population, India currently produces only 7 per cent of the world’s output, the report adds.
Further, India’s outlook has improved, benefiting in particular from recent policy reforms, which have helped the country address some long-standing macroeconomic vulnerabilities, including high inflation and large current account and fiscal deficits.
The report adds, “We expect that India will benefit significantly from global reshoring initiatives, including “China plus one” policies. Real gross domestic product (GDP) growth in the past decade averaged 5.8 per cent, and the International Monetary Fund (IMF) forecasts growth of 6.3 per cent for the next few years.”
India’s growth potential remains high as the country continues to enjoy a large demographic dividend while it is expected that policymaking challenges will stay visible given the size and diversity of the economy.
Growth in a nutshell
- India’s contribution to global real growth is 16 per cent. According to the IMF, India will likely account for 18 per cent of global real growth by 2028.
- The current GDP per capita is US$2,850. India’s GDP per capita has grown considerably since 1980, when it was only US$272 per capita.
- With a labour force of approximately 650 million people, India has the second largest labour force in the world behind China, a growing portion of which is entering the formal sector.
- India’s Foreign exchange reserves are at US$616 billion and the country has enough foreign exchange reserves to cover 11 months of imports where three months’ import cover is generally used as a guideline.
- In the Sovereign credit rating, India was upgraded to investment grade by Moody’s in 2004, Fitch in 2006 and S&P in 2007.
- India is the fifth-largest economy in the world and S&P Global predicts that the country will become the third-largest economy by 2030, surpassing Japan and Germany.
The report talks about several structural reforms initiated during the last decade, including tax reforms (such as the implementation of the GST and the rationalisation of corporate tax), the Insolvency and Bankruptcy Code (IBC) to reduce balance sheet stress, and multiple steps to formalize the economy (including digitalization).
Agriculture sector
India has been pursuing agricultural self-sufficiency since its independence and today agriculture’s share in India’s economy has progressively declined to below 20 per cent due to the high growth rates of the industrial and services sectors. However, the Agriculture sector’s importance in India’s economic and social fabric goes well beyond this indicator, the report adds. The improvement in the agricultural sector in recent decades is attributed to a series of steps that led to the availability of infrastructure and new farm technologies, which have influenced cultivation practices and cropping patterns.
Service Sector
Meanwhile, India’s services exports have risen 1.7 times from their levels before the pandemic (2018) and are currently tracking at an all-time high of 4.4 per cent of global services exports, up from 2 per cent in 2005. The improvement in services exports reflects the re-orientation of India’s growth model. This has been supported by the confluence of supply-side policy reforms and a move toward global supply-chain diversification. While this will help the exports of both goods and services, the gains are being reflected swiftly on the services side. The key components of services exports are software services, which account for the largest share (49 per cent), followed by business services (26 per cent).
India’s business services exports have witnessed a rapid expansion and currently stand at three times their level in 2014. As per the National Association of Software and Service Companies (NASSCOM), more than 1,580 GCCS are stationed in India, representing a growth of 60 per cent since 2015 and employing over 1.66 million people.
Manufacturing Sector
In the manufacturing sector, significant initiatives have been introduced under the “Atmanirbhar Bharat” (self-reliant India) and “Make in India” programs to enhance India’s manufacturing capabilities and exports across industries. According to FDI Markets, India was the most attractive destination country in the Asia region by a significant margin in 2022, both by number (994) and by the magnitude of increase (+126%) in the number of announced FDI projects in 2022 compared to 2021.
The report also talks highly of the Modi government’s policy initiatives for digital payment transactions, which represent a significant step toward achieving the goal of a cashless society. This should help drive an increase in the number of people using digital payment methods, which in turn will help reduce the dependence on cash transactions. Since 2016, a plethora of measures that accelerated the digitalization of the economy and the emergence of the gig economy have facilitated higher formalization of the Indian economy.
Similarly, the national mission for financial inclusion known as the Pradhan Mantri Jan Dhan Yojana (PMJDY), announced in 2014, has advanced financial inclusion by bringing the unbanked into the banking system and has expanded the financial architecture of India. Among these accounts, approximately 55.5 per cent belong to women, and 67 per cent have been opened in rural or semi-urban areas. Cumulative deposits in these accounts now surpass INR2 trillion, the report adds.
The report concludes that the higher economic efficiency resulting from recent reforms and the increasing formalization of the economy will allow India to expand its potential growth rate. The Indian economy seems set to double its current annual GDP of almost US$3.5 trillion to US$7 trillion by 2030. Achieving such high growth consistently over a medium-term time frame will need more than demographics or consumption—often recognized as India’s twin strengths—hence the importance of these reforms.
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