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Can India be a major motor of world growth?

John Redwood, Charles Stanley's Chief Global Economist, looks at the continuing rise of India.

Can India be a major motor of world growth?

by
John Redwood

in Features

19.03.2019

We have been used to China being the world’s leading emerging market country, achieving rapid rates of growth for many years to provide some boost to a world economy often flagging from slow – or even no – growth in the developed world. India has played a supporting role with her lower levels of income per head and less aggressive development strategy. China has now emerged as the world’s second largest economy, on its way to being the world’s biggest as incomes per head rise.

More recently, there has been a slowdown in Chinese growth, whilst India has continued to power ahead. It is now widely expected that India will remain the fastest growing of the larger emerging market countries for the foreseeable future, as China wrestles with past debts, trade squabbles, technology rows and the need to rebalance her economy away from heavy reliance on industry and exports. China and India both have huge populations. China at its current growth rate will still make the bigger contribution to world growth as a whole given the higher starting levels of output and income per head, but gradually India will use her higher growth rate to move up the tables of important economies in the world and take on more of the burden of driving world growth.

India is about to embark on a long general election, lasting for much of April and May. The election rolls from state to state, with a multitude of smaller, local and regional parties contesting against the ruling BJP-led coalition on the one hand and the Congress Party led coalition on the other. The mood is different from last time, when Narendra Modi swept to victory based on an enthusiasm for his pro-business wish to modernise India and raise living standards. Then he was able to cut through the range of parties and opinions in an active but often local and fragmented Indian democracy, and attract enough support to his coalition to give him an overall victory. This time the polls suggest his party and coalition will lose seats, though it should win enough for him to be able to form a government again. Mr Modi’s popularity remains well ahead of Rahul Gandhi, the Congress party leader, but this needs to be translated into party support and Parliamentary seats won. Markets may prefer this outcome, though they should study what Mr Modi has achieved so far and what he might be able to do in future if his majority is reduced or removed by voters this May.

Mr Modi has projected an international and pro-business image, and has had some success in attracting money and talent back to the sub-continent from overseas. He promised reforms of the labour laws, which proved difficult, and land reforms which also proved contentious. His two big reforms turned out to be the reform of bank notes and bank accounts, and the introduction of a new India-wide uniform sales tax. He has promoted “made in India”, and a digital service led India as well. He wants a large increase in Indian manufacturing output, favouring industry-led growth as China managed. So far, it has proved difficult to push the percentage of the Indian economy in manufacturing up as he would like, with it around just 15%. There is still a large agriculture sector where he is following policies trying to raise incomes of small-scale farmers.

There are mixed reviews of his decision to withdraw the two largest denomination bank notes and make people open bank accounts and declare the money. The government says it was a success. They point to a further rise in the number of people who now have bank accounts, and to increases in tax collected. His critics say the withdrawal disrupted business activity amongst the many small businesses that transact without bringing benefits. They claim the rise in bank accounts was happening before the reform and just continued. They allege that many people found other ways to conceal wealth and income from the taxman, with property a popular device to absorb cash without declaring all that was involved.

The introduction of a General Sales Tax was a long-held ambition of both sides in the main Indian political system, eventually carried through by this government. The idea was to simplify taxes, reducing the number of rates and abolishing many of the different ways India and the individual states of the Union had devised for taxing transactions. The individual states share in the revenues. Cross-border transactions between states within the country are made easier by the common system. It was seen as a necessary modernisation to integrate the huge India wide market more effectively. The Modi government has made progress in reforming bankruptcy laws, speeding up business arbitration for disputes, making real estate development a bit easier, pressing through various necessary infrastructure improvements and promoting more hydrocarbon development.

It looks as if the election will clip Mr Modi’s power a bit but leave him in office. The case for Indian investment is long term, based on the likely achievement of higher rates of growth than most economies, allied to more companies coming to the stock market as living standards rise and more Indian savers want riskier investments. The market is not cheap, but growth always comes at a price.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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