Indian economy outperforming other major economies - A Perspective
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CONTENTS Introduction Economic Prospects for 2010 GDP growth in India Mergers & Acquisitions in India FII & FDI investment in India Rural India growth story Growth potential India & China: A Comparison A Comparison with BRIC and Major economies
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Introduction The economy of India is the eleventh largest economy in the world by nominal GDP and the fourth largest by purchasing power parity (PPP). Following strong economic reforms from the socialist inspired economy of a post-independence Indian nation, the country began to develop a fast-paced economic growth, as free market principles were initiated in 1990 for international competition and foreign investment. India is an emerging economic power with a very large pool of human and natural resources, and a growing large pool of skilled professionals. Economists predict that by 2020, India will be among the leading economies of the world. India has witnessed unprecedented levels of economic expansion, along with countries like China, Russia, Mexico and Brazil. India, being a cost effective and labor intensive economy, has benefited immensely from outsourcing of work from developed countries, and a strong manufacturing and export oriented industrial framework. With the economic pace picking up, global commodity prices have staged a comeback from their lows and global trade has also seen healthy growth over the last two years. India was under social democratic-based policies from 1947 to 1991. The economy was characterized by extensive regulation, protectionism, public ownership, pervasive corruption and slow growth. Since 1991, continuing economic liberalization has moved the country toward a market-based economy. A revival of economic reforms and better economic policy in 2000s accelerated India's economic growth rate. In recent years, Indian cities have continued to liberalize business regulations. By 2008, India had established itself as the world's second-fastest growing major economy. But the year 2009 was not really good for the Indian equity market and the whole economy was also going into recession
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Economic Prospects for 2010 The year 2009 saw a significant slowdown in India's GDP growth rate to 6.8% as well as the return of a large projected fiscal deficit of 6.8% of GDP which would be among the highest in the world. The global economy seems to be recovering after the recent economic shock. The Indian economy, however, was hit in the latter part of the global recession and the real economic growth witnessed a sharp fall, followed by lower exports, lower capital outflow and corporate restructuring. It is expected that the global economies will continue to sustain in the short-term, as the effect of stimulus programs is yet to bear fruit and tax cuts are working their way through the system in 2010. Due to the strong position of liquidity in the market, large corporations now have access to capital in the corporate credit markets. India's Economic Outlook Projection Year GDP Growth CPI
2007 9.40% 6.40%
2008 7.30% 9.30%
2009 5.40% 5.50%
2010 8.00% 4.90%
In order to sustain economic growth during the time of the worst recession, government authorities in India have announced the stimulus packages to prop up economic growth. To finance the stimulus packages, the Indian government has raised over $100 billion over the last four quarters in a way to finance the stimulus package. The country’s public debt, according to the RBI, has surged to over 50% of the total GDP and the RBI has started printing new currency notes. Central Government Debt In Rs. Crores Public Debt 1. External Debt 2. Internal Debt
Q3 2008 2,099,286.23 237,351.77 1,861,934.46
Q3 2009 2,505,450.74 294,941.67 2,210,509.07
% of GDP 50.71%
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India is a fascinating country from an economic standpoint because it is so diverse. In India, you see many of the more traditional industries such as village farming, fishing, and handicrafts that are blended with modern sectors such as telecommunications, transportation, and tourism. Today, nearly 50% of the people work in the agriculture, fisheries, and farming sectors and with the Progressive Alliance or UPA, India’s government has been able to boost the rural economy by developing basic facilities and infrastructure. With this, the quality of life for the poor people living and working in rural areas has improved significantly. Some of the other areas that have changed to improve India’s economy includes the government reducing controls on foreign imports and exports, loosening controls for investments, and allowing higher limits for Foreign Direct Investment in a few of the primary sectors. While this country has experienced growth and economic improvements, fast tariff growth in some of the more sensitive sectors to include agriculture, fisheries, and farming could cause challenges for foreign access to the country’s huge and expanding market. However, the service sector is greatly expanding and has started to assume an increasingly important role. The fact that the Indian speaking population in India is growing by the day means that India has become a hub of outsourcing activities for some of the major economies of the world including the United Kingdom and the United States. Outsourcing to India has been primarily in the areas of technical support and customer services. Other areas where India is expected to make progress include manufacturing, construction
of
ships,
aviation,
pharmaceuticals,
biotechnology,
tourism,
nanotechnology, telecommunications and retailing. Growth rates in these sectors are
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expected to increase dramatically. Also we must not forget the infrastructure sector as we have to see tremendous growth in the coming years in this particular sector.
GDP Growth in India The Gross Domestic Product (GDP) in India expanded at an annual rate of 8.80 percent in the last reported quarter. From 2004 until 2010, India's average quarterly GDP Growth was 8.37 percent reaching an historical high of 10.10 percent in September of 2006 and a record low of 5.50 percen percentt in December of 2004. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more tthan han half of India's output with less than one third of its labor force. The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points. India GDP Growth Rate Chart and Historical Data:
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Year
Mar
Jun
Sep
Dec
2010 2009 2008
8.60 5.80 8.50
8.80 6.00 7.80
8.60 7.50
6.50 6.10
India's economy expanded 8.8% in the second quarter from a year earlier, compared to an 8.6% on-year expansion in the first, lifted by robust activity in manufacturing. Agricultural output along with strong development in the Industrial and Mining sector has helped to boost the Indian economy. Agricultural output rose 2.8 per cent y-o-y thanks to improved harvests. Industrial production increased by 12% and in the mining sector by 9%. However, in spite of strong supply data, private consumption slumped to 0.3% y-o-y in Q2 from 2.6% in Q1, fixed investment has dropped to 3.7% from 17.7%, government consumption growth was negative and both export and import growth contracted. The Reserve Bank of India has stated that it had seen an annual growth of 8.5% steadily. The main priority of the Reserve Bank is to curb the ongoing inflation, which peaked at 11% last month. Interest rates have been increased by the banks to contain the inflation, but it could slow down the growth of the Indian economy in the coming months. But even though there has been a rise in the interest rates there hasn’t been much change in the distribution of loans, the Indian customer is hardly affected with the hiked interest rates. This means that in spite of the mounting inflation, we will see a growth in the investment by the people. Further, the World Bank has projected an 8 per cent growth for India in 2010, which will make it the fastest-growing economy for the first time, overtaking China‘s expected 7.7 per cent growth. Recently, Asian Development Board has forecasted that
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Indian economy will grow at a rate of 8.7% in FY11 vs. 8.5% this year driven by domestic demand, company profits and favorable financial conditions.
Mergers and Acquisitions in India Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was not so common. The situation has undergone a sea change in the last couple of years. Acquisition of foreign companies by the Indian businesses has been the latest trend in the Indian corporate sector. The practice of mergers and acquisitions has attained considerable significance in the contemporary corporate scenario which is broadly used for reorganizing the business entities. Indian industries were exposed to plethora of challenges both nationally and internationally, since the introduction of Indian economic reform in 1991. The cut-throat competition in international market compelled the Indian firms to opt for mergers and acquisitions strategies, making it a vital premeditated option. The factors responsible for making the merger and acquisition deals favorable in India are: Dynamic government policies Corporate investments in industry Economic stability “Ready to experiment� attitude of Indian industrialists The Indian IT and ITES sectors have already proved their potential in the global market. The other Indian sectors like pharmaceuticals telecommunications, steel, construction, etc are also following the same trend. The increased participation of the Indian companies in the global corporate sector has further facilitated the merger and
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Acquisition activities in India. In spite of
the massive downturn in 2009,
the future of M&A deals in India looks promising. Indian telecom major Bharti Airtel is all set to merge with its South African counterpart MTN, with a deal worth USD 23 billion.
Ten Biggest Mergers & Acquisitions Deals in India Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an all cash deal which cumulatively amounted to $12.2 billion. Vodafone purchased administering interest of 67% owned by Hutch-Essar for a total worth of $11.1 billion on February 11, 2007. India Aluminum and copper giant Hindalco Industries purchased Canada-based firm Novelis Inc in February 2007. The total worth of the deal was $6-billion. Indian pharmaceutical industry registered its first biggest in 2008 M&A deal through the acquisition of Japanese pharmaceutical company Daiichi Sankyo by Indian major Ranbaxy for $4.5 billion. The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009. The deal amounted to $2.8 billion and was considered as one of the biggest takeovers after 96.8% of London based companies' shareholders acknowledged the buyout proposal. In November 2008 NTT DOCOMO, the Japan based telecom firm acquired 26% stake in Tata Teleservices for USD 2.7 billion. India's financial industry saw the merging of two prominent banks - HDFC Bank and Centurion Bank of Punjab. The deal took place in February 2008 for $2.4 billion. Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March 2008. The deal amounted to $2.3 billion. 2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8 billion making it ninth biggest-ever M&A agreement involving an Indian company. In May 2007, Suzlon Energy obtained the Germany-based wind turbine producer Repower. The 10th largest in India, the M&A deal amounted to $1.7 billion.
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Top Ten Acquisition made by Indian Companies ACQUIRER
TARGET COMPANY
COUNTRY TARGETED
DEAL VALUE ($ ML)
INDUSTRY
Tata Steel
Corus Group
UK
12,200
Steel
Hindalco
Novelis
Canada
5,982
Steel
Ranbaxy
Daiichi Sankyo
Japan
4,500
Pharmaceutical
ONGC
Imperial Energy
UK
2,800
Oil and Gas
Tata Motors
Jaguar & Land Rover
Ford Motor
2,300
Automobile
Sterlite
Asarco
USA
1,800
Mining
Suzlon
Repower
Germany
1,700
Energy
Videocon
Daewoo
Korea
729
Electronics
Dr. Reddy
Betapharm
Germany
597
Pharmaceutical
Suzlon
Hansen Group
Belgium
565
Energy
HPCL
Kenya Petroleum
Kenya
500
Oil and Gas
Ranbaxy Labs
Terapia SA
Romania
324
Pharmaceutical
Tata Steel
Natsteel
Singapore
293
Steel
Videocon
Thomson SA
France
290
Electronics
VSNL
Teleglobe
Canada
239
Telecom
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The above data evidently shows that Indian companies have grown really quick and provides sufficient opportunity to the FIIs and FDIs to invest their money in the Indian companies which has resulted in the rapid growth of our economy.
FII Investment in India One of the factors responsible for the tremendous growth of the Indian economy has been its booming foreign trade. Through or previous report we have tried to establish the fact that the FIIs are reportedly increasing their investment in Indian equity market. The investment by the FIIs has helped boost the growth of our Indian companies by providing them the capital they require for carrying out their long term projects. The investment by our companies, in their respective sectors has helped in the progress of our Indian economy.
FDI Investment in India Improving global sentiment and a growing conducive environment in India are increasingly facilitating foreign investors’ role in the country currently. Several other factors being attributed to the revival in FDI in the country include liberal investment policies and reforms, innovative and technologically advanced products being manufactured in India and low cost and effective solutions. India has been ranked at the third place in global foreign direct investments, following the economic meltdown, and will continue to remain among the top five attractive destinations for international investors during the next two years, according to UNCTAD. The Indian retail market, which is the fifth largest retail destination globally, has been ranked the most attractive emerging market for investment in the retail sector by A T
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Kearney's annual Global Retail Development Index (GRDI), in 2009. A recent Ernst & Young study predicts Mumbai and Bangalore to be the next global centers of investment along with Shanghai.
The Rural India Growth Story The Indian growth story is spreading to the rural and semi-urban areas as well. The next phase of growth is expected to come from rural markets with rural India accounting for almost half of the domestic retail market, valued over US$ 300 billion. Rural India is set to witness an economic boom, with per capita income having grown by 50 per cent over the last 10 years, mainly on account of rising commodity prices and improved productivity. Development of basic infrastructure, generation of employment guarantee schemes, better information services and access to funding are also bringing prosperity to rural households.
Advantages to India According to the World Fact Book, India is among the world's youngest nations with a median age of 25 years as compared to 43 in Japan and 36 in USA. Of the BRIC—Brazil, Russia, India and China—countries, India is projected to stay the youngest with its working-age population estimated to rise to 70 per cent of the total demographic by 2030, the largest in the world. India will see 70 million new entrants to its workforce over the next 5 years. India has the second largest area of arable land in the world, making it one of the world's largest food producers. Over 200 million tonnes of food grains are produced annually. India is the world's largest producer of milk (100 million tonnes per annum), sugarcane (315 million tonnes per annum) and tea (930 million kg per annum) and the second largest producer of rice, fruit and vegetables.
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With the largest number of listed companies - 10,000 across 23 stock exchanges, India has the third largest investor base in the world. India's healthy banking system with a network of 70,000 branches is among the largest in the world. According to a study by the McKinsey Global Institute (MGI), India's consumer market will be the world's fifth largest (from twelfth) in the world by 2025 and India's middle class will swell by over ten times from its current size of 50 million to 583 million people by 2025. India, which recorded production of 22.14 million tonne of steel during April-August 2009, is likely to emerge as the world's third largest steel producer in the current year. India continues to be the most preferred destination—among 50 top countries—for companies looking to offshore their information technology (IT) and back-office functions, according to global management consultancy, AT Kearney. The Indian stock markets have risen to be amongst the best performers globally across the emerging and developed markets in 2009 year-to-date, according to an analytical study by MSCI indices. India has reclaimed its position as the most attractive destination for global retailers despite the downturn, according to the Global Retail Development Index (GRDI) brought out by US-based global management consulting firm, A T Kearney.
Growth potential According to the CII Ernst & Young report titled 'India 2012: Telecom growth continues,' India's telecom services industry revenues are projected to reach US$ 54 billion in 2012, up from US$ 31 billion in 2008. The Indian telecom industry
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Registered the highest number of subscriber additions at 15.84 million in March 2009, setting a global record. A McKinsey report, 'The rise of Indian Consumer Market', estimates that the Indian consumer market is likely to grow four times by 2025, which is currently valued at US$ 511 billion. India ranks among the top 12 producers of manufacturing value added (MVA)— witnessing an increase of 12.3 per cent in its MVA output in 2005-07 as against 6.9 per cent in 2000-05—according to the United Nations Industrial Development Organization (UNIDO). In textiles, the country is ranked fourth, while in electrical machinery and apparatus it is ranked fifth. It holds sixth position in the basic metals category; seventh in chemicals and chemical products; 10th in leather, leather products, refined petroleum products and nuclear fuel; twelfth in machinery and equipment and motor vehicles. In a development slated to enhance India's macroeconomic health as well as energy security, Reliance Industries (RIL) has commenced natural gas production from its D-6 block in the Krishna-Godavari (KG) basin. India has a market value of US$ 270.98 billion in low-carbon and environmental goods & services (LCEGS). With a 6 per cent share of the US$ 4.32 trillion global market, the country is tied with Japan at the third position. PE players are planning to raise funds for the infrastructure sector. Presently, around US$ 1.42 billion is being raised by India-dedicated infrastructure funds, according to data released by Preqin, a global firm that tracks PE and alternative assets. Infrastructure, including roads, power, highways, airports, ports and railways, has emerged as an asset class with long-term growth that can provide relatively stable
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returns, said an Assocham-Ernst & Young survey on Private Equity in Indian Infrastructure: Strengthening the Nexus. With the availability of the 3G spectrum, about 275 million Indian subscribers will use 3G-enabled services, and the number of 3G-enabled handsets will reach close to 395 million by 2013-end.
India & China: A Comparison Ten years ago, it was unthinkable to compare China with India. The emergence of India and China as major global players heralds new realities. Both countries have transformed the global political architecture increasingly shifting power from West to the East. The question issue here is the nature of the India’s economic growth and its potentials to outperform China. According to Economist Intelligence Unit (EIU), India is the second largest growing economy after China. But EIU forecasts that India will surpass China as the fasted growing major economy by 2018. And as against the estimation of the Indian government which has projected the Indian economy to grow by 7.2 percent this fiscal, EIU has estimated the growth to be 7.7 percent. The growth for the next five years is estimated to be on the average of eight percent as against the 9 percent in the year 2011-2012. Two years ago the view that India might have a more competitive economy than China was met with incredulity. To-day comparison of the two countries offers valuable insights for the global economy. A fundamental distinction is that China’s growth stems from resource accumulation while India’s is rooted in increasing efficiency.
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China’s economic superpower ambition has flaws, including graft and waste. India, in contrast, enjoys many hidden, long-term advantages. Although India’s literacy rate is much lower than China’s, its technical and management institutes are far better than such schools in China. It is estimated that that only 10 per cent of Chinese engineers have the skills required to work in a global company, while the comparable number for India is 25 per cent.
A comparison with BRIC & Other Major Economies Country
GDP Bn US$
GDP Growth
Interest Rate
Inflation
Unemployment
Current Account
China
4909
10.30%
5.31%
3.50%
4.20%
70500.00
India
1296
8.80%
5.00%
11.25%
8.00%
-13.00
Russia
1231
5.20%
7.75%
6.10%
6.80%
33318.00
USA
14256
1.70%
0.25%
1.10%
9.60%
-123.00
UK
2175
1.20%
0.50%
3.10%
7.80%
-10.00
Brazil
1572
1.20%
10.75%
4.49%
6.70%
-3000.00
Europe
12456
1.00%
1.00%
1.60%
10.00%
-25.00
Japan
5068
0.37%
0.10%
-0.90%
5.20%
1047.00
This table clearly shows that India is the Second fastest budding economy in terms of GDP growth rate. India’s interest rates are lowest among the BRIC countries making it easier for the people to borrow money in India. The money borrowed eventually gets invested and thus help in boosting the Indian economy. Unemployment rate in India is less than United States as well as Europe and is giving close competition to United Kingdom.
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