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From strength to strength: Trade is vital for the future of India’s economy
June 28, 2016, 6:29 am

Of all the BRICS countries, India has been the stand-out economic performer in the last few years. Alexander Rost, Regional Head Indian Subcontinent & ASEAN at Commerzbank, explains the factors behind its recent success, and sets out a blueprint for sustaining the country’s economy through industry and trade.

In recent years, BRICS countries, on the whole, have faced significant political and economic challenges.

However, India has bucked the trend. Now the world’s fastest-growing major economy – with GDP growth rates reaching 7 per cent and above in recent years – its limited exposure to slowing Chinese trade demand and the bonus of low global oil prices have been vital to the country’s recent success.

Sustaining and building on this progress is the next step. The country will need to focus on the development of a diversified, higher-value export trade to secure long-term earnings. It must also encourage investment from abroad in order to increase its new exporting capacity.

Key to grasping new trading opportunities will be Prime Minister Narendra Modi’s drive to build a global reputation as a production hub, while the country’s banks can provide the business connections and help foster the industrial environment needed to fulfil India’s trade aspirations.

Surpassing expectations

India’s economic performance has been hitting the headlines recently. Recording GDP growth of 7.9 per cent in the first quarter of 2016, India has now overtaken China as the fastest-growing major economy in the world.

Despite volatility in global markets, India’s stock markets have stood firm. Flows of foreign direct investment (FDI) remain at encouraging levels, and fiscal consolidation has capped the national deficit at a promising 3.9 per cent of GDP: down from 7.6 per cent in 2009, this has surpassed expectations.

Several major factors can explain such a performance in recent years. Firstly, India is one of the least-exposed economies to China’s slowing growth. This means it has emerged relatively unscathed from the sluggish demand for Chinese trade that has hurt many growing economies that remain reliant on their ties with China.

Secondly, low global oil prices since mid-2014 have spurred India’s economic growth – in stark contrast to the energy-exporting BRICS members, Russia and Brazil. As India imports around 80 per cent of its oil, low energy prices have provided a boost to its industrialisation efforts, contributing to reduced transportation, operating and input costs for manufacturers.

As a result, India’s GDP from manufacturing surged 12.6 per cent to hit an all-time high of around $80 billion in the third quarter of last year.

High reliance on exports means trade must be diversified

On the surface, therefore, economic prospects appear positive. Yet, on closer inspection, challenges remain.

India’s exports have been falling for 17 months in a row, and have dropped by 6.7 per cent compared to this time last year. In fact, 2015-2016 was the first time in six years that India’s volume of exports contracted.

This is because a considerable proportion of India’s total exports comprises either raw commodities such as precious metals (12 per cent) and natural resource-based products like refined oil (32 per cent); both of which are highly exposed to volatile market prices.

In addition, 25 per cent of India’s export comprises relatively low-value added, low-tech manufactures such as clothing (25 per cent).

With almost a quarter of its GDP dependent on revenues from exports, India can ill afford for this trend to continue. India’s economic future, therefore, will depend on the diversification of its export profile.

One area in which we’ve noticed room for improvement in this respect is Indo-German trade. While Germany is the country’s most significant European trade partner, the make-up of India’s exports to the country has essentially remained the same for the past decade (focusing on organic chemicals and textiles).

Adding a more diverse range of higher-value goods to the export mix will help secure volumes of bilateral trade for the future – and can build on the impressive €17 billion of Indo-German bilateral trade recorded in 2015.

And India certainly has the capacity for such diversification. Exporters could take advantage of great opportunities in India’s growing pharmaceutical, IT and hi-tech sectors. For instance, exports of pharmaceuticals – India’s 5th top export – have grown by over 50 per cent since 2011.

Ultimately, by diversifying its export profile, India can allay the threat of volatile market prices and ensure demand, thus securing vital export earnings for the long term.

Fostering a more fertile investment environment

Prime Minister Narendra Modi, seen here with Russian President Vladimir Putin in 2014, has traveled to 40 countries to boost India's trade ties [PPIO]

Prime Minister Narendra Modi, seen here with Russian President Vladimir Putin in 2014, has traveled to 40 countries to boost India’s trade ties [PPIO]

Of course, if India is to develop such a broad range of higher-value international exports, it must build a strong manufacturing base to support it. This, of course, will require the creation of an attractive investment environment.

Currently, delays from bureaucratic red tape, poor quality transport and power infrastructure, and difficulties in land acquisition all threaten to dissuade foreign companies from engaging with India’s industrial ambitions.

The need to address these concerns has not been lost on India’s Prime Minister, Narendra Modi. With a reputation as a pro-business, technocratic administrator, Modi is hoping to encourage foreign investors by driving through tax, regulatory and liberalisation reforms, and implementing new policy for development of the country’s manufacturing capacity.

Indeed, expectations are high. According to the central bank, FDI flows to India’s manufacturing sector have increased by as much as 31 per cent since the launch of one of such initiatives, the ‘Make in India’ campaign.

Unveiled in September 2015, this plan strives to turn the country into an industrial hub – creating 100 million jobs in manufacturing over the next six years – by smoothing regulation, boosting infrastructure, fostering development of key skills, adding modern technology to industry, and increasing the availability of finance.

Extending outreach

A more fertile investment environment will also contribute to establishing much-needed new trading markets.

One region ripe for the picking is Africa. Building on the India-Africa Forum Summit last October, a trading partnership will doubtless be strengthened by pledges from both sides to increase trading activity.

However, India may also look closer to home for new trade opportunities. The developing economies of neighbouring Bangladesh and Vietnam have thus far remained relatively untapped by Indian trading companies. These growing economies, with their rising middle classes, stand to offer millions of new buyers, and their geographic proximity is an obvious advantage when it comes to cross-border trade.

With this in mind, Prime Minister Narendra Modi has already visited close to 40 countries. For instance, he discussed ramping up trade in Bangladesh last year.

Of course, establishing a foothold in Asian export markets will hinge on India’s ability to compete with the region’s established trade partners, Japan and China, whose manufactured exports have long dominated trade in the area.

In order to stand a chance against such competition, India must establish itself as a ‘production hub’ and a leader in global trade.

Banks facilitate the financing

Banks, for their part, will be vital to realising this ambition. On the one hand, local Indian banks – like the more than 50 maintaining links with Commerzbank – can channel financing to the trading companies that will form the backbone of India’s economy.

On the other hand, international banks have the essential access to the cross-border banking connections that Indian exporters need. They help India’s foreign trading partners navigate new and unfamiliar territories, all the while absorbing risks for foreign counter-parties.

India may currently be the star performer of the BRICS economies, but sustained success relies on building the foundations for broader trade. If it can improve its investment environment, and explore new export markets, it can realise its ambitions for the long term.

The views expressed in this article are the author's own and do not necessarily reflect the publisher's editorial policy.

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