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Indian economy surges as other big developing market stumble

YarnsandFibers News Bureau 2015-02-26 17:00:00 – Australia

Multinational companies are looking to expand their Indian operations or start new ones as the stock market and rupee are surging. The growth in India's economy, long a laggard, just matched China's pace in recent months.

India is emerging as one of the few hopes for global growth, as other big developing markets stumble. 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.

Renewed optimism from outside investors is spurring business expansion in cities around the country like Tiruppur, a hub of India's yarn and textile industry. Most of the factories in Tiruppur are doubling or tripling their capacity, and these are huge factories, said Pritam Sanghai, the director of Arjay Apparel Industries.

Small factories 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.

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.

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 favorable 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 $US100 billion drag on the economy, roughly 5 percent 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.

Raghuram G. Rajan, the governor of the Reserve Bank of India said that India have got essentially a $US50 billion gift for the economy.

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 labor forces.

All the circumstances have come together to make manufacturing and growth happen, said Shailesh V. Haribhakti, the chairman of 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.

In a January visit to New Delhi, President Barack Obama highlighted chronic regulatory obstacles in India. There are still too many barriers - hoops to jump through, bureaucratic restrictions - that make it hard to start a business, or to export, to import, to close a deal, deliver on a deal. But Obama acknowledged the country's progress, stating that Prime Minister Modi has initiated reforms that will help overcome some of these barriers.

The World Bank has recently ranked India as the 142nd-hardest place to do business out of 189 countries.

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