Published: July 14, 2023
India is in the ascendant, as evidenced by its rapid rise up the league of top economic performers in recent years. The country’s economy is continuing to gather pace amid a global slowdown and the longer-term outlook is positive thanks to a host of government reforms, a burgeoning middle class, and relatively young population.
In the space of just eight years, India has leapt ahead from being a new entrant into the league of the world’s top 10 economies to now occupy the fifth spot, surpassing the UK in 2022 with a GDP of US$3.75tr.
This remarkable progress reflects in large part the impact of ambitious structural economic reforms by Prime Minister Narendra Modi’s government since it came to power in 2014, with a powerful demographic dividend further underpinning that strong performance.
Slightly less tangible – but equally important to the rapid progress – has been a newfound belief and self-confidence under a stable government with a long-term vision. Its structural reforms in particular highlight the emphasis being placed by Delhi on playing the long game.
Arguably the biggest and boldest of these reforms has been the introduction of Goods and Services Tax (GST) to cut down on a maze of local and central levies, and move the country towards a simple, single tax. Indeed, the GST, launched in 2017, is widely regarded as the single biggest economic reform carried out in India since independence in 1947. While it remains a work in progress with some rough edges, it is helping to formalise the economy and achieve record tax collections.
Other key reforms include the Direct Benefit Transfer (DBT) scheme and the ambitious financial inclusion initiative known as Pradhan Mantri Jan-Dhan Yojana (PMJDY). The latter is a national mission to ensure access to financial services, namely, basic savings and deposit accounts, remittance, credit, insurance, and pensions – in an affordable manner. These have helped to ensure near-zero wastage of the welfare spending undertaken by the government.
Meanwhile, rapid penetration of telecoms connectivity across rural India has spurred the government to fast-track the digitalisation of payments via the Unified Payments Interface (UPI), an instant payments system. It is now the platform of choice for millions of consumers and businesses and is notching up records in both transaction value and volume.
Another high-profile government initiative is the Production Linked Incentive (PLI), launched in 2020. It aims to support the three main pillars of India’s economy: agriculture, services, and manufacturing. One of its major objectives is to turn India into a preferred global manufacturing destination and thus far the programme has delivered a modest but encouraging level of success. More broadly, the government expects the PLI to generate additional output worth INR28tr. and create almost seven million jobs over the next five years.
In addition to these tailwinds, the natural demographic dividend is playing out for India, alongside the rapid rise of angel investing into the start-up ecosystem. According to an EY study, India will have 68.9% of its population in work by 2030[1]. With a relatively young population boasting a median age of just 28.4 years, India not only gets a competitive advantage in terms of workforce but also an opportunity to unleash the consumer power of its youthful citizens. This, in turn, has ignited the entrepreneurial spirit of Indians as well as brought global interest to the country as an investment destination.
As it stands, nearly 70% of India’s GDP is driven by domestic consumption. The country remains the world’s sixth-largest consumer market. Apart from private consumption, India’s GDP is fuelled by government spending, investments, and exports. And in 2022, India was the world’s sixth-largest importer and the ninth-largest exporter.
These factors, together with the bold reforms in train, make for an attractive mix for an investor looking to deploy capital, especially against the backdrop of turbulent global macroeconomic issues, a fracturing geopolitical landscape, and a decidedly uncertain outlook for many major economies. Indeed, in the fiscal year ending 31 March 2023 foreign direct investment (FDI) inflows, including equity inflows, reinvested earnings, and other capital sources, totalled nearly US$80bn, second only to the US$84.8bn recorded over the previous year.
As India’s economy continues to go from strength to strength, BNP Paribas India has ambitious plans to be the gateway of choice for corporates and institutions.
Global trade with India is also on the up. For example, India-EU trade negotiations, which have been stalled since 2013, resumed recently and are evolving, according to the European Commission, into a “balanced, ambitious, comprehensive and mutually beneficial” trade agreement. The importance of these talks to both parties is clear: the EU is India’s third-largest trading partner; with India’s exports standing at US$67bn and imports at US$54bn during April 2022 to February 2023.
All in all, India’s spectacular GDP growth rate of 6.9% in 2022, almost double that of the EU’s 3.5%, makes India a lucrative market as well as an attractive investment destination for EU-based individuals and organisations. As it stands, an India-EU Free Trade Agreement (FTA) is likely to be more comprehensive than India’s recent deals with Australia and the UAE, as it has an ambitious aim to liberalise 94% of the trade in goods. There is expected to be a separate chapter linking trade with sustainable development.
Additional factors that augur well for India’s outlook are its large, growing middle class and young working-age population. Indeed, approximately 55% of the population belongs to the working-age group, driving greater digital adoption and consumption growth in India. The country has also seen rising affluence in recent years, which is driving discretionary demand in categories such as jewellery, fine art, branded restaurants, personal vehicles, hotels, and real estate. This is partly driven by rising retail credit growth, which has been a significant driver of credit growth for banks. As such, we predict healthy levels of growth in India’s financial sector.
Digitalisation and mobile communications and platforms are a key driver for wider economic growth with large numbers of digitally savvy consumers opening up opportunities for cutting-edge businesses in segments such as ecommerce, food delivery, and mobile payments. While there can be questions about the long-term profitability of these companies, they currently continue to see robust growth. And the recent launch of 5G networks will only help to further boost India’s digital economy.
Elsewhere, from an asset quality and credit confidence perspective specifically, BNP Paribas sees very few challenges of systemic consequence in the near term for India. There has been much cautious commentary around unsecured credit, but it must be noted that revolver-rates (the proportion of credit card customers who roll over their liabilities in excess of the minimum payment) are now at 70% of pre-Covid levels. If household leverage levels were truly uncomfortable, we believe revolver rates would be a lead indicator of increasing discomfort. Deleveraged corporate balance sheets also provide confidence on current asset quality as well as medium-term credit growth potential.
Recently, the only constraining factor on credit growth seemed to be much slower deposit growth, which was gradually eating away at bank liquidity ratios. But June saw an uptick of circa 200bps, with deposit growth coming in at 11% in mid-May 2023.
On a cyclical basis, competitiveness from other savings instruments aside, we believe there are two drivers of deposit growth: a lagged multiplier impact from credit growth and monetary/liquidity conditions in the system. As such, we remain optimistic about a pick-up in deposit growth going into the second half of the financial year.
While policy reforms and initiatives introduced over the past decade have undoubtedly helped create a strong foundation for future growth and delivered an improvement in the ease-of-doing-business ranking for India, the government is not standing still. Its latest initiative, the Open Network for Digital Commerce (ONDC) will mean local commerce across segments such as mobility, grocery, food order and delivery, hotel booking, and travel can be discovered and engaged by any network-enabled application. ONDC, in effect, aims to provide Indian businesses with an alternative to proprietary e-commerce sites and promises to further support the country’s high growth rates going forward.
As India’s economy continues to go from strength to strength, BNP Paribas India has ambitious plans to be the gateway of choice for corporates and institutions – accompanying Indian clients overseas and assisting the bank’s multinational clients with their expansion within India.
Thanks to our long heritage in the country, coupled with deep expertise in European markets, BNP Paribas India is a trusted and reliable partner, offering wide-ranging capabilities to support corporate needs – from transaction banking to M&A advisory and everything in between. We look forward to supporting India’s bright future, and to helping our clients reap the rewards of the country’s meteoric rise.
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