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Indian economy growth sectors and significant opportunities

by internationalbanker

By Cary Springfield – cary.springfield@internationalbanker.com

Revising the earlier forecast, Crisil has recently reported that India’s GDP will grow at the rate of 6 per cent during the financial year 2014-15, a rate considerably higher than the figure of 4.8 per cent estimated for the current fiscal. The reasons for the revised estimates, given by the agency include:

  • visible signs of  acceleration of  the economic reform process
  • faster than anticipated clearance of major projects
  • removal of bottlenecks in  the mining sector
  • recovery in export demand, led by a growth in global economy

This forecast is strongly supported by an optimistic global outlook. Analysts expect US GDP to grow at 2.8 per cent in the current year, compared to the figure of 1.7 per cent for 2013. The European economy is also expected to expand modestly, for the first time, after two recession hit years. For the next financial year, Indian Government’s efforts to clean up the local policy logjams are likely to pay dividends. Since the mining ban on iron ore has been lifted in the southern states of Karnataka and Goa, supply-side bottlenecks for industries will be resolved to a great extent and integration of southern states into the power grid can help improve power availability for a consistent growth in industrial production. Higher industrial output can further accelerate the key services sectors such as banking and transport.

The World Bank, on the other hand, projects a growth rate of 5.4 per cent in 2014-15 and 6.4% for 2015-16. An OECD study 2012 “Economic Outlook” projects a growth rate of 7.2% for 2012-2017 period and 6.5% for 2018-2028 period. While the Indian Government hopes to put the country back to high growth trajectory of 8%, within two years, we need to look at the considerable political risks, on account of the elections due within four months. Even though the major contenders for power remain committed to an ongoing process of economic reforms, the possibility of a third group of parties forming a government cannot be completely ruled out at this stage. A third group supported by leftist parties may create roadblocks for the ongoing liberalization process.

India had registered a growth rate of 7.6% for almost a decade between 2001-02 and 2009-10 largely due to steady value of rupee (1USD = 45 Indian rupee) and steady growth of the service sector, apart from many other favorable factors. During this period certain states, with investor friendly policies, grew much faster than others. Western and southern states had an accelerated rate of growth. While Gujarat registered a growth rate of 10.2%, Maharashtra and Haryana grew around 9.0%. In 2007, Goldman Sachs had predicted that Indian economy would quadruple by 2020, which is indicative of a growth rate of more than 11%. This estimate now needs to be corrected by considering the impact of global recession between 2008 and 2013. However the country has potential to enter a high growth trajectory of 8 to 9% within three years from now, provided, the right policy framework is in place.

The economy suffered a setback with a low growth rate of 5 per cent during 2011-12, owing mainly due to global recession compounded by domestic factors, such as a delay in the clearance of projects, inflation and high interest rates. Expected growth rate during the current fiscal is estimated to be around 4.8 percent. However, many investors continue to be bullish on the Indian economy on a long term basis.  It continues to be one of the fastest growing economies, next only to the Chinese economy, on a long term outlook. It is the ninth largest economy in the world. It is also one of the globally preferred destinations of the international investors, as per the findings of a survey conducted by the consulting firm EY (formerly called Ernst & Young). The advantages are: the abundant availability of skilled labor force as well as the support of a healthy domestic market demand.

The survey conducted by EY indicates that Indian sectors such as information technology, telecom, communication media and infrastructure along with other industry sectors continue to be preferred by foreign investors.

In July 2013 the Indian Government approved an increase in Foreign Direct Investment limits in 12 of the 20 crucial sectors, which includes aviation and defense for the first time. For the fast growing telecom sector the FDI limit has been raised to 100%. For the multibrand retail, FDI limits have been raised to 51% under certain conditions (subject also to approval of respective states). Simplification of approval procedures has been undertaken for gas refineries, stock exchanges, power trade, and commodity exchanges bringing them under an automatic approval route.

Some promising sectors of the Indian economy with high growth potential are discussed below:

1. Engineering

The engineering sector has remained a high potential business, which has played a crucial role in boosting the economy and supporting the growth of other key sectors of the economy. It contributes almost 8 percent to the annual GDP. India is the largest exporter of machinery and other engineering products in the third world countries. India competes successfully in the global capital goods market, catering to the needs of steel plants, power plants, cement, petrochemical units as well as mining. It also exports farm equipment, such as tractors and harvesters, construction machinery, passenger cars, electrics, electronics and pollution control equipment.

2. Transportation

The transportation industry is an evergreen sector in India, with very large potential for growth. This sector comprises roadways, ports, super highways, rail as well as aviation. It is a high growth sector contributing to 8.5% of GDP. This sector has unique opportunities of foreign investments in highway construction and management but is also bogged down by issues of land acquisition and environmental clearances.  Aviation too has good potential under new FDI norms. Railways are yet to open up for private investment, but will offer tremendous opportunities as and when it gets restrictions are lifted.

3. InfoTech Industry

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The Infosys Auditorium

India’s strength in the Information technology sector is based on the development of sophisticated knowledge base and competence of specially trained professionals. The industry constitutes the export driven IT services sector and business process outsourcing. The IT and ITES companies contribute substantially to Indian GDP growth. It has been the prime mover of the services sector in India, which in turn contributes to the extent of almost 60% of the GDP. The city of Bangalore (now called Bengaluru) is the IT capital of India. The industry accounts for almost 25% of the total exports from India. It has grown at an exponential velocity and has led to accelerated development of metropolitan cities spurring the growth of other sectors. This has continued to be the most preferred sector of global investors. This sector will be the immediate beneficiary of the current global recovery.

Today an increasing number of equity diversified mutual funds are seen favoring technology companies and telecom firms, among the sensitivity index stocks, as the IT sector benefits from a rupee stabilized at a lower level and there is an increasing demand for IT services from US and the other developed economies.

4. Banking and Insurance

The banking sector in India has witnessed a vast growth, supported by sizeable investments in IT and diversification of innovative service offerings. The banking sector index has increased at a compounded rate of over 10-12 percent per annum since the year 2001. Mutual funds of this sector have given a return of 9 to 12% over last 3 years. As and when public sector banks are privatized the value discovery process could result in gains for investors.

India’s life insurance business ranks fifth among the largest global markets. The sector has been growing at rates exceeding 20%. The nonlife insurance Industry has grown at rate of 15%. The insurance sector opened up to private investors in last few years and the market is getting competitive with the entry of global players. Overall this strengthens the risk management capability of the economy.

5. Real estate

With ever growing demand for housing and commercial space, Indian real estate has emerged as one of the fastest growing sectors of the emerging markets. It has attracted significant participation of foreign investors. Real estate has been contributing as much as 13% of the country’s GDP. Rapid corporatization has helped it to attract funds from the capital market. Rapid urbanization has helped the sector to grow.

6 Retailing business

From the present market size of US$ 500 billion, the Indian retailing trade is expected to reach US$ 1.3 trillion by the end of 2020, as per the report of Ministry of food and consumer affairs in India. The opportunity has attracted significant investments from global players. India’s rapidly growing urbanization has contributed to the growth of the organized retailing in the country. The retail industry is the backbone of growth of the economy with over 20% contribution towards the national GDP. The Indian retail sector is ranked among the top five global retail markets.

Non conventional sectors like Education and Training, Entertainment and media, as well as Telecom and Pharma sectors also have very good growth potential.

 

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