China’s economy is slowing. Brazil is struggling as commodity prices plunge. Russia, facing Western sanctions and weak oil revenue, is headed into a recession.
As other big developing markets stumble, India is emerging as one of the few hopes for global growth.
The stock market and rupee are surging. Multinational companies are looking to expand their Indian operations or start new ones. The growth in India’s economy, long a laggard, just matched China’s pace in recent months.
India is riding high on the early success of Prime Minister Narendra Modi and a raft of new business-friendly policies instituted in his first eight months.
Small units no longer need to shut down every year for government inspectors to spend a day checking boilers. Foreign investment rules have been relaxed for insurers, military contractors and real estate companies. A broad tax overhaul is underway.
Whether India’s momentum is short-lived or sustainable hinges on whether Modi can push through deeper reforms, including addressing the persistent poverty and corruption that plague the economy. Lacking the necessary political support to overhaul legislation quickly, he has largely relied on temporary measures to make changes.
India, in part, is benefiting from favourable economic winds, the same ones wreaking havoc in Russia, Venezuela and elsewhere.
The country’s reliance on imported oil, for example, has been its bane for decades. By last summer, oil was a $100-billion drag on the economy, roughly 5% of the entire country’s economic output.
With crude prices now halved, fuel costs for trucks and cars have plunged, pulling down transport expenses and inflation. The cost of government fuel subsidies has nose-dived, helping curb the country’s chronic budget deficits.
“We’ve got essentially a $50-billion gift for the economy,” said Raghuram Rajan, the governor of the Reserve Bank of India.
India is also profiting from the troubles of other emerging markets.
China’s investigations of multinationals, persistent tensions with neighbouring countries and surging blue-collar wages have prompted many companies to start looking elsewhere for large labour forces.
Big companies like General Motors have recently moved their international or Asia headquarters from Shanghai to Singapore as they expand further into India and its main rival as an alternative to China or Indonesia.
“All the circumstances have come together to make manufacturing and growth happen,” said Shailesh Haribhakti, chairman, MentorCap Management, a boutique investment bank in Mumbai.
As India’s fortunes begin to shift, Modi is trying to tackle thornier economic issues. He wants to expand the private sector’s role in coal mining, a government-dominated industry. He is looking to accelerate the construction of roads and other infrastructure. On the tax front, Modi hopes gradually to replace state taxes on goods that cross state borders with a national tax. The challenges are significant.
The World Bank recently ranked India as the 142nd-hardest place to do business out of 189 countries.
Even some of Modi’s supporters are cautious about what he has accomplished so far. “Lots of people have been blindly jumping into India on euphoria and hype,” said Rajeev Chandrasekhar, a wealthy financier and a member of the upper house of Parliament who wants more extensive reforms when the prime minister sends the new budget to Parliament on February 28. “He hasn’t introduced any new ideas, and that is what he needs to do in February.”
Modi’s senior advisers say that they have begun making significant changes and that critics are too impatient. “There are a lot of inherited, legacy issues we had to work through,” like budget deficits and persistent inflation, said Jayant Sinha, the minister of state for finance. “You have to give us a little bit of time for every business to feel the difference.”