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Overcomin fnancial barriers or exporterscOUNTRY PROFILE

Doual Craword, Senior Economist 

dcraword@ec.gov.au

OVERVIEW

Since the early 1990s, the Indian economy has become more

market-oriented and open to trade and oreign investment. This

has helped raise economic growth and lower poverty. Overall,

India is the 11th largest economy at market exchange rates, but

a high growth rate and large population means that it is likely to

INDIA APRIL 2013

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move quickly up the league tables. Nonetheless, despite recent

progress, India still aces signicant challenges, including large

scal and external decits, high infation, weak inrastructure,

burdensome bureaucracy and still high levels o poverty.

Economic growth has averaged 8% over the past 15 years.

Correspondingly, poverty has allen; while still low, per capita

income has risen rom around US$300 in the 1980s to almost

US$1600. However, it is still well below the regional average and

gains have been unequally distributed across India.

Chart 2 summarises the key risks aced by exporters and

investors in India. A signicant impediment is the business

climate — particularly contract enorceability. The business

climate varies considerably by state and industry. Rupee

volatility and, more recently, slowing growth are other

challenges or exporters and investors.

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India | April 2013

ECONOMY

India has become an important export market or Australia. India

is Australia’s 4th largest export market, consuming nearly 5% o

Australia exports. Major exports are coal, gold and education-

related travel.

India’s economic outlook has deteriorated. GDP growth has

slowed under the weight o high interest rates, alling business

condence and a weaker external environment. Business

condence has been dented by high interest rates, general

economic uncertainty, and the government’s ailure to press

ahead with structural reorms. The government’s capacity to

respond to the growth slowdown has also been limited by its

lack o scal fexibility — the general government decit isrunning at around 8% o GDP (including o-balance sheet items)

and public debt is equivalent to 65% o GDP.

Infation has remained stubbornly high despite the weakness

in GDP growth. This may point to deeper supply-side problems

– o inrastructure, business supply chains and the labour

market ailing to keep up with rapid economic growth. Roads

are just one example: they compare poorly with those in most

other Asian economies. A less obvious example is the limited

availability o cold storage acilities and rerigerated transport;

as a result, one th o all ood produced is reportedly wasted.

Against the US$, the rupee dropped by 22% rom end-2011

to April 2013– one o the worst perormances o all emerging

market currencies (Chart 2).

Nonetheless, the probability o an external debt crisis looks

low. The gross external debt load is low at 18% o GDP – the

government chiefy borrows domestically. Moreover, while FX

reserves have allen recently, they are still a sizeable buer

against capital fight. Refecting these actors, India has an

investment grade oreign currency sovereign risk rating -

Standard & Poor’s and Fitch: BBB- and Moody’s: Baa3. S&P’s T&C

assessment – meaning the likelihood that the sovereign will

restrict external debt repayments by non-sovereigns – is BBB+.

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India | April 2013

POLITICS

India is the world’s largest democracy, with a British-style

parliamentary system. Freedom House, the political and civil

rights monitor, rates India as ‘Free’, making it one o the ew

countries in Asia with this rating. In contrast to this robust

democracy, India ranks in the bottom quartile o countries or

political stability, according to the World Bank (Chart 5).

The strong electoral showing o the Congress Party led

United Progressive Alliance (UPA) in 2009 gave Prime Minister

Manmohan Singh an opportunity to orge a relatively stable

second-term government, because the UPA no longer had to rely

on support rom ar let parties to maintain its parliamentary

majority.

The government continues to pursue economic reorms and

liberalisation, but changes have been, and will continue to

be, gradual. One reason is the resistance to economic reorms

rom within the Congress Party and its coalition partners. Nextelections are due by May 2014.

BUSINESS

India has numerous attractions as an investment and trade

destination. First, its vast and growing domestic market o

nearly 1.2 billion people — on some estimates 400 million people

will enter India’s middle class over the next 15-20 years. Second,

the large and skilled English-speaking workorce. Still, barriers to

investment and trade are substantial, i declining.

O key concern to oreign investors is India’s burdensome

bureaucracy and regulations. On the World Bank’s ease o doing

business gauge – which measures ‘regulation and red tape

relevant to a domestic small to medium-size rm’ — India ranks

poorly at 132 out o 185 countries (Chart 6, LHS). Enorcing

contracts, paying taxes and starting a business are particularly

dicult. The World Bank estimates that a plainti in a payment

dispute has to go through 46 procedures, which take an average

1420 days to complete and costs 40% o the claim.

Another issue is that the business climate varies between

India’s 30 states (and ve territories). State governments havebroad powers, resulting in regulation varying markedly on

such issues as land use, the environment and labour. Moreover,

anti-industry protest movements, oten driven by local armers,

have thwarted numerous investments, particularly in the poorer

northern and eastern states. For example, in Orissa, a planned

US$12 billion steel mill and iron ore mine by South Korean

steel-maker Posco – viewed as India’s biggest single oreign

direct investment – has been repeatedly delayed due to land

protests and legal challenges, despite receiving government

clearance in 2005. In general, the more prosperous southern and

western states are seen as more reormist and open to oreigninvestment.

Still, steps are being taken to improve the regulatory

environment. The government in September and October 2012announced a rat o reorms, including opening up the multi-

brand retail sector and aviation to oreign ownership. A Cabinet

Committee on Investment has been established to quicken

approval o large projects. A new tax code is also in the works,

with a goods and services tax replacing the plethora o indirect

taxes. In addition, special economic zones (SEZs), which oer tax

immunities, zero customs duties and less restrictive regulatory

and labour laws, have been created. But investment in the SEZs

has also been hamstrung by diculty in acquiring land and ears

that concessions could be withdrawn in the uture.

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India | April 2013

SOCIETY

India is the world’s second most populous nation and one o the

most diverse, with 18 ocially recognised languages. Moreover,

the population is growing relatively strongly, at 1.6% a year.

However, while strong economic growth has lited average

incomes, poverty remains a serious social issue, especially

compared to the progress made in reducing poverty rates in therest o Developing Asia (Chart 7).

Poverty is concentrated in certain groups and in certain areas o

the country. Despite being ocially illegal, social and economic

discrimination due to the Hindu caste system remains prevalent,

especially in rural areas. India’s ‘scheduled tribes’, which make up

8% o the population, also suer economic marginalisation.

India periodically experiences sectarian tensions and violence.

For example, in 1992 the destruction o a mosque in the holy

city o Ayodhya by Hindu nationalists sparked widespread

riots. In Mumbai alone, more than 900 people were killed. Morerecently, in 2002 religious violence in Gujarat resulted in over

700 deaths.

SECURITY

Some issues to watch.

• Terrorism. Foreign embassies warn o a high terrorist threat.

In November 2008, a series o coordinated terrorist attacks

was launched in Mumbai. More than 170 people were

killed. Attacks have occurred elsewhere in India in recent

years, including New Delhi.

• Naxalites. Maoist rebels known as ‘Naxalites’ are active in

parts o east and central India. They are a signicant orce

in rural areas o Bihar, Jharkhand, Chhattisgarh, West

Bengal and Orissa and have attacked government ocials,

inrastructure and industry, including mining operations.

• The North east. A number o insurgent groups operate in

India’s seven north-eastern states (Assam, Meghalaya,

Tripura, Arunachal Pradesh, Mizoram, Manipur, and Nagaland).

These groups are seeking greater autonomy or independence

or their ethnic or tribal group. According to the South Asia

Terrorism Portal, violence is particularly concentrated in

Manipur and Assam.

• Border disputes. India’s relationship with Pakistan has been

strained since partition in 1947. The ongoing territorial

dispute over Kashmir remains an obstacle to improved

relations. India’s relationship with China has improved,but border demarcation in the north east state o Arunachal

Pradesh remains a sensitive issue, as is China’s growing

ties with Pakistan, Myanmar and Sri Lanka.

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India | April 2013

INTERPRETINg ChART 2

Business cycle risk. A volatile business cycle

can be a special headache or exporters and

investors, because it means that downturns will

be steep – and corporate casualties high.

Currency risk. In today’s world o widely foating

exchange rates and sophisticated currency

hedging techniques, some degree o currency

volatility is quite acceptable, and presents little

risk. But where a country has a weak balance o

payments or is prone to wide swings in capital

fows, it can suer sudden and dramatic currency

moves that can bankrupt large swathes o its

corporate and banking sectors.

Currency inconvertibility risk. I the country

suers rom a weak balance o payments, not

only is it prone to steep currency depreciation,but there is a temptation or the government

to impose exchange controls that prevent

importers rom converting local currency

into oreign currency in order to make trade

payments.

Systemic bankin risk. Weak balance sheets

and poor lending practices can sometimes trigger

sector-wide banking crises.

Soverein deault risk. Fiscal mismanagement

can put governments under nancial strainto which they respond by delaying or halting

payments to overseas suppliers and creditors.

With the government cut o rom credit, a

sovereign deault also increases the likelihood

o a sharp downswing in the economy, currency

inconvertibility and a systemic banking crisis.

Difculty/cost o enorcin contracts. I you get

into a contractual dispute, will the country’s legal

and judicial system help or hinder you in pursuing

a claim? Drawing upon World Bank data on the

cost and time involved in enorcing contracts

(at www.doinbusiness.org) we seek to measure

the degree o help or hindrance

The scale runs rom negligible to extreme.

INDIA - SELECTED INDICATORS*

People 

Population (bn) 1.21

Ocial language Hindi,English

UN Human Development Index** Medium

Economic***GDP ($US bn) 1,947

GDP per capita ($US) 1,592

Real GDP growth (15 year average, %) 7.0

Fiscal balance -8.1

Public debt 65.0

Foreign direct investment 1.7

Current account -4.2

External debt (2010) 18.1

Foreign reserves 290.0

S&P oreign currency debt rating BBB-/negative

OECD country risk rating 3

Governance

World Bank - Ease o doing business 132/185

Freedom House - Political rights and civil liberties Free

Transparency International - Corruption Perception Index 94/176

*All gures are 2012 unless specied

**The HDI is composite measure o human development: long & healthy lie (lie expectancy),

education (literacy & education enrolment) and income (GDP per capita)

***Expressed as % o GDP unless specied

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