India has become the go-to destination for many investors – and that’s partly because it’s faring better than many of its peers in times of economic volatility, according to economists and analysts.
But the research also shows that India still has a long way to go in building infrastructure and enacting reforms that can attract foreign investors, many of whom still struggle to do business in the country.
“The Indian economy has held up better than most other economies in the world,” Aswath Damodaran, a finance professor at NYU’s Stern School of Business, told CNBC’s “Street Signs Asia” last week.
“It’s maintained in terms of growth, in terms of strength and also attracting money because money can go elsewhere, right? I mean, you’ve taken a lot of markets off the table, l money has to go somewhere.”
“The reality is that India benefits from both an outlier economy and a place where capital goes, that too may change over time. But at the moment I can understand why India is a market attractive to many foreign institutional investors.”
Indian Prime Minister Narendra Modi aims to make India a $5 trillion economy by 2024-2025.
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Reduction in GDP forecasts
GDP growth forecasts for India for 2022 have continued to decline, falling to around 6% in light of global headwinds such as rising interest rates, which raise the prospect of a recession.
The United Nations Conference on Trade and Development said India’s GDP growth will slow to 5.7% in 2022, after reaching 8.2% in 2021. For 2023, it projects a growth rate lower by 4.7%. The World Bank has also cut its 2022-2023 GDP growth forecast for India to 6.5% from an earlier estimate of 7.5%.
Although downgraded, India’s growth forecast is still higher than that of other Asia-Pacific regions. ASEAN+3 (which includes China, Japan and South Korea), for example, is expected to grow 3.7% this year, the ASEAN+3 Macroeconomic Research Bureau reported last week. while economists lowered China’s growth forecasts to 2% and 4%.
In recent months, Indian Prime Minister Narendra Modi and Indian business leaders such as billionaire Gautam Adani have stepped up their efforts to market India to global investors.
Modi plans to make India a $5 trillion economy by 2024-25, while Adani told a recent Forbes conference in Singapore that India will grow from an economy of $3,000 billion to $30 trillion over the next 25 years.
But in research conducted to test Modi’s $5 trillion target last year, Deloitte India said that although the country is a favored destination for foreign direct investment, it needs to enact more reforms for this to happen. objective is achieved.
The report highlighted the need for more FDI in the manufacturing sector, adding that the bulk of investment was led by the services sector, with manufacturing attracting only about a third of the money that goes into services. .
A worker prepares vermicelli, which is used in a traditional sweet dish popularly eaten during the holy month of Ramadan at a factory in Allahabad on April 13, 2021.
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On top of that, the majority of 1,200 business leaders surveyed by Deloitte said India was harder to do business than countries like China and Vietnam.
Entrepreneurs in India’s real estate, industrial and utility sectors find it difficult to invest there due to weak institutional stability and inadequate infrastructure.
“Although perceptions of China have been shaken over the past year, the country remains a close competitor to India among U.S. investors as a destination for their capital investments,” the report said.
That said, India’s reforms have improved over the years and are moving in the right direction, said Sasidaran Gopalan, assistant professor of economics at UAE University.
Nonetheless, while Gopalan agreed that India “stands out both in its backyard and among other emerging markets”, he said it was not the “only game in town”.
Lee Kuan Yew SSingapore School of Public Policy professor Ramkishen Rajan acknowledged that India’s developing reforms and infrastructure push have caught the attention of investors, but said its trade protectionism continues to be a downside. .
“So India is currently experiencing a combination of good politics and good luck. So overall I understand the bullish trend on India, although there is a caveat,” Rajan said. .
“While there has been a relaxation of FDI regulations, India’s reluctance to embrace further trade liberalisation, including joining regional trade agreements, may hamper the extent to which labor-intensive manufacturing will enter the country.”
This would prevent the country from fully utilizing its “demographic dividend”, Rajan said.