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Australian Government - Department of Foreign Affairs and Trade

Advancing the interests of Australia and Australians internationally

Australian Government - Department of Foreign Affairs and Trade

Advancing the interests of Australia and Australians internationally

India New Economy Old Economy

India New Economy Old Economy

Speech by Frances Perkins, Executive Director, Economic Analytical Unit (Sydney launch)

Overview

  • India truly is both a new economy and an old economy. It has always encompassed huge economic and cultural diversity, but a decade of uneven reforms is increasing the divergence between sectors and states.
  • In particular, several 'new economy' sectors are growing much more rapidly than old economy sectors.
  • Also, four southern and western states are performing much more strongly than the rest of India and attracting the bulk of new investment.
  • However, growth prospects in all sectors and states depend on continued reform. Furthermore, the business environment remains challenging.
  • This report identifies the fast growing sectors and states where prospects are brightest for Australian traders, service suppliers and investors. It also considers more general growth, trade and investment prospects.
  • Looking First at Growth Achievements and Prospects
  • Since opening the economy in the early 1990s, India's real per capita income growth has doubled.

Slide 1

  • And the percentage of people living in poverty has fallen more quickly

Slide 2

  • Already about are 60 million people are believed to live in Indian middle class households, with income over $6,000 per year; this number could reach 125 million by 2007.
  • However, since the mid 1990s, governments of India's large decentralised democracy have found it difficult to achieve consensus for further rapid reform. Hence, growth has slowed in recent years.

Slide 3

  • In early 2001, the Indian Government again announced its intention to make further comprehensive reforms.
  • If implemented, these could return India to previous growth peaks
  • A more likely scenario is continuing incremental reform. This should ensure India maintains 5 to 6 per cent growth over the medium term, in line with Consensus and IMF forecasts for this year and next.
  • However, at a time when much of Asia apart from China faces very slow growth or contraction, India's growth prospects look relatively robust.

Fast Growing Sectors

  • One of the report's main findings is that the higher growth since the early 1990s is focused almost exclusively in a few 'new economy' service sectors like IT, finance and telecommunications. These new sectors have grown much more strongly since reforms started
  • Manufacturing's growth is about the same in the 1990s as in the previous decade.
  • 'Old economy', agriculture, mining and infrastructure are growing more slowly than in the 1980s.
  • The report finds that this distinction has grown up largely because these fast growing services sectors are less exposed to key deficiencies in the business environment.

Slide 4

  • IT and particularly software is undoubtedly India's most successful sector, and is characteristic of the new fast growing services sectors. Total revenue expected to have reached about US$11.4 billion in 2000-01, or 2 per cent of GDP.
  • The software sector now dominates the IT industry and has been growing almost 50 per cent per annum over the past 7 years

Slide 5

  • IT's spectacular growth is due the country's huge pool of skilled, relatively low cost IT engineers and strongly supportive government policy.
  • Unlike 'old economy' manufacturing, India's high interest rates, infrastructure shortages and rigid labour laws do not hold back the software industry; furthermore, it exports about 70 per cent of its output.
  • However, skilled staff shortages have been pushing up IT engineer salaries by around 20 per cent per year since the late 1990s and are a challenge to its medium-term competitiveness.
  • The IT enabled sector, including call centres, back office support and data entry, is growing even faster than software. This sector accesses a much larger pool of potential employees, so may have even stronger long term growth prospects.
  • In combination with the considerable strengths and creativity of the Australian IT industry, collaboration with India's IT industry offer Australian firms major opportunities to enhance internal competitiveness and secure new markets both at home and abroad.
  • The report examines several Australian firms successfully developing software in India including ANZ IT and Lumley Technology.
  • Like IT, other new economy sectors including financial services, telecommunications, health, education, biotechnology, environmental services, media and entertainment also are benefiting from reforms and suffer less from the constraints the old economy faces. The report details reforms, opportunities and many case studies of Australian firms succeeding in these sectors.
  • Also, the number of Indian students and tourists coming to Australia is increasing exponentially.

Slide 6

INDIA'S FAST GROWING STATES

  • Reforms not only favour 'new economy' sectors but also a few high performing states that are capturing the lion's share of India's growth.
  • Four southern and western states, Gujarat, Karnataka, Maharashtra and Tamil Nadu, are growing significantly faster than other major states.

Slide 7

  • While they have only 28 per cent of India's population, these states produce 40 per cent of its output and attract 55 per cent of its local and foreign investment.

Slide 8

  • These states are excelling because of beneficial economic structures, better than average infrastructure, higher export orientation and more encouraging attitudes towards business and education. As well, most are centres for new economy sectors including IT. More recently, some state policy reforms are reinforcing these advantages.
  • Australian businesses can benefit from focusing their export and investment efforts in these high performing states.
  • Their higher incomes, faster growth and better business environments often offer investors and traders more and potentially better opportunities.

THE BUSINESS ENVIRONMENT

  • Another key message of the report is that despite many reforms, foreign companies still consider India a challenging business environment.
  • The main problems foreign companies encounter include red tape, transparency issues and infrastructure shortages and expense.

Slide 9

  • Three key strategies emerging from the report's 30 Australian firm case studies and numerous further business interviews are:
    • o the crucial nature of business partner choices
    • o the need for patience and perseverance in dealing with the bureaucracy
    • o the good potential for sales growth and profits if businesses succeed on these first two issues and have a well priced or unique product or service.
  • As well, India still imposes many import restrictions including high tariffs.
  • While many key sectors including manufacturing, infrastructure and software now permit 100 per cent FDI, several other sectors still cap foreign ownership below 100 per cent.
  • Hence, despite India's reforms, growing incomes, low labour costs and the widespread use of English India only received only US$2.5 billion in new FDI in 2000, while China attracted over US$40 billion.

WHERE ARE THE BEST BUSINESS OPPORTUNITIES

  • So, India's reforms are creating interesting trade and investment opportunities for Australian firms in a range of fast growing 'new economy' sectors and high performing states.

Slide 10

  • As well, higher incomes and trade liberalisation are boosting Australian commodity, niche manufactures and services exports to India.
  • Resources still dominate Australian exports to India, and are likely to do so for some time.

Slide 11

  • Among the 'old economy' sectors, some parts of mining, advanced technology manufacturing and niche infrastructure like ports currently are the most prospective for direct investment and related goods and services exports.

Slide 12

SUMMING UP

  • Apart from these prospects, in new and old economy sectors, the report finds India needs further comprehensive reforms to consolidate its growth and expand these opportunities.
  • In the short term, Australian businesses operating in India can expect incremental economic and business environment reforms to continue; more comprehensive reform is unlikely given political constraints the central government faces.
  • Infrastructure shortages are likely to remain acute and labour market reform is unlikely in the medium term.
  • Nevertheless, if India's reforms deepen, its growth potential is huge. Already Australian businesses are accessing promising trade and investment opportunities and prospects for expanding commercial relations

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