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India's Economy at the Midnight Hour: Australia's India Strategy

Executive Summary

India's economic prospects have changed substantially. In the 1990s, India
will attract international attention as it grows at a rate comparable to that
projected for South-East Asia. At average annual growth rates of some 6 per
cent per year, by the year 2000 India will have a GDP of around US$430 billion
(in 1992 dollar terms). Based on this assessment, India, with a GDP less than
that of Australia in 1992, would overtake Australia in economic size by the
year 2000. Projected annual imports of US$49 billion (in 1992 dollar terms) by
the end of the 1990s suggest that Australian firms should take India's
potential into consideration as they formulate their trade and investment
strategies. India's economic growth outlook could mean a doubling of
Australian annual exports to the market by the year 2000.

The Indian economy is vast - a population of 866 million, a resource-rich
land mass with established industrial capacity, the ninth largest
manufacturing economy in the world, or the fifth largest if measured by
Purchasing Power Parity. But hitherto India's role in world trade has been
insignificant. This has been the result of pursuit of autarchic
import-substitution policies since independence, continuing well beyond the
period for which they may have been effective.

But the enormous strategic, political and economic upheavals around the
world over the last few years have forced the pace of change in India too. As
a consequence, India has embarked on a course of radical economic reform,
restructuring the domestic economy to promote greater efficiency,
productivity, and competitiveness, and opening up the economy to the forces of
international competition.

Economic reform will bring the Indian economy firmly into international
trade and investment considerations. The reform process appears sustainable if
the pace and sequence of reforms is carefully modulated. In any case, there is
no turning back. Past policies have failed, and now stand discredited.
International trends favour liberalisation, and multilateral economic and
financial institutions, as well as India's major trading partners, are
exerting pressure on India to maintain the momentum for reform.

Although continuation of reform can be predicted with some confidence, the
pace of reform is less certain. A projected average growth rate of 6 per cent
per year for the rest of the 1990s is based on a relatively cautious
assessment of the pace of reform - it is a base-case scenario. Those who
believe a projection of average growth of 6 per cent a year for the 1990s to
be excessively optimistic rather than cautious, are often unaware that India
achieved average annual growth of 5 per cent during the 1980s. A cautious
assessment is based on the lessons of India's recent economic performance,
some concern over the financing of India's deficit and doubts over rapid
reform in some key areas, such as the bureaucracy and the labour market, where
predictions of smooth progress seem overly optimistic.

At growth rates of 6 per cent per year, India should be able to absorb its
growing labour force and achieve an equitable distribution of the benefits of
growth. This has been identified by the World Bank as a key element of success
in the East Asian 'Miracle'.

Another key element of East Asian economic growth was the coincidence of
reform from within and investment interest from outside. There is every
indication that India will be able to attract international investment
interest to fuel development and growth. Since 1991 there has been a sudden
surge in inflows of foreign investment in response to the liberalised
environment. In 1993/94 the total foreign capital inflow into India is
expected to be US$5 billion compared to US$580 million in 1992/93. While
historically based perceptions in the international community are ensuring a
high degree of caution among investors, there is also evidence of a latent
interest in India due to the sheer size of its population and the potentially
large market it represents. India will face strong competition for
international investment funds, particularly from China, but also from
South-East Asia. Nevertheless, many international investors will feel unable
to ignore India as an investment destination.

In the 1990s, world economic growth and the trading regime are unlikely to
be as accommodating as they were during the 1980s, but the potential for India
to capture the benefits of rapid technology transfer will help to sustain
rapid growth and structural change. India's advantages in skilled labour will
facilitate such change.

India's economic development is not likely to be deflected by major
domestic political change. In the short term, the active and vocal
constituencies opposed to reform - labour, some opposition parties, parts of
the bureaucracy and the formerly protected corporate sector - may be able to
capture a measure of popular support and ensure media attention. But so long
as the government continues on its course, the benefits of reform should
become apparent to an increasingly broad sector of the population, who will
eventually form a much larger constituency in favour of reform. The political
and bureaucratic environments, however, will ensure uneven patterns of
development within India. Some States will reform faster and develop more
rapidly than others. Similarly, some industry sectors will develop more
rapidly than others. This growth pattern will present foreign investors,
exporters and importers with a matrix of opportunities by sector and by State.
Generalised statements about India's opportunities will not be enough for
individual firms making pragmatic commercial decisions. The Indian market is
complex. Opportunistic, ill-researched approaches bear high risks.

India will face some constraints in its efforts to industrialise.
Infrastructure will need to be upgraded and developed rapidly to keep pace
with economic growth. Many other parts of Asia have come up against this
constraint as they entered the 1990s and there will be substantial competition
for international capital to build and improve infrastructure. India's
comparative advantage in skilled workers will be absorbed quickly as growth
continues apace. Although India has higher education strengths, upgrading of
general levels of education and wider coverage will be needed. Education
levels and technical skills training will need significant attention if India
is to maintain an advantage it currently has over many East Asian competitors.

Export growth will be dependent on markets for Indian products, which in
turn will rely to a great extent on the strength of recovery in the world
economy, and India's capacity not only to develop competitiveness and
reliability but also to project it successfully to a cautious world. Stronger
growth in the United States augurs well for Indian exports, particularly given
recent strong US investment in Indian production, but slower growth in Japan
and Europe may dampen export growth to some extent. India's past inability to
lock into regional production and regional trade patterns developing in the
rest of Asia mean that the self-reinforcing growth being enjoyed by countries
in East Asia will not flow on to India in the shorter term. However, trends
towards increased investment from Singapore and other regional countries may
draw India into regional production and trade as the decade progresses.

Vast new markets will emerge in India as the reform process stimulates
industrialisation and export capacity. India's imports are likely to more than
double by the end of the century. Imports of capital and intermediate goods
and infrastructure-related goods and services are expected to expand
particularly strongly. The big, expanding middle class will add to the demand
for imports of both goods and services and the sophistication of markets. The
Indian middle class is conservatively estimated at 120 million, and is growing
by around 20 million - more than the entire Australian population - each year.
This does indeed suggest that opportunities in India deserve the attention of
the Australian business community.

India's liberalisation comes at a fortuitous time for Australia. In many
ways, Australia and India are going through a similar process. Of course the
Australian economy has always been more dependent on world trade, and much
less protected, than India's. But globalisation has had a similar impact in
forcing Australia to drop remaining trade barriers and achieve international
competitiveness. To attain this, Australia has had an agenda of macro and
microeconomic reform, including deregulation of the financial sector, labour
market reforms, restructuring of the public sector and government enterprises,
and phasing down of tariffs. Australian business is now more outward-looking
and export-oriented than at any stage in our history.

While relations between India and Australia have always been friendly, they
have not been particularly close. Cricket has been the surest bond, and the
only times Australia monopolised Indian attention was when it took to the
crease. There have been waves of 'rediscovery' - in the early 1970s, and again
in the mid-1980s - when attempts were made to establish more solid ties. But
these foundered eventually on India's lack of interest in opening up in its
dealings with the rest of the world. In those years, India still relied
heavily on its mutually supportive relations with the former USSR and the
countries of the Eastern Bloc in trade and in defence. Culturally, its focus
was towards Britain, Europe and the United States, where a large number of
Indians had emigrated, rather than to Australia or the rest of Asia.

But given the shifts in the global environment India is now beginning to
recognise the dynamic economic growth in East Asia. Gradually, it is also
realising Australia's significance - as a key player in the Cambodian peace
settlement, in the Cairns Group, and in APEC - in this regional context. So
the climate is right for a new, and qualitatively different, wave of expanding
economic relations.

In recent years, Australian business has seen the growth of the East Asian
economies, and has reoriented itself to focus on opportunities presented in
these countries. India has not been part of their horizons. Our report shows
that India has an 'image problem' with Australian business. Even those who are
running profitable business operations with India perceive the business
environment in negative terms. India is currently considered to be more
difficult in this respect than other Asian countries.

This negative image must be redressed. Although some difficulties remain,
old stereotypes no longer reflect the realities of the Indian market. India is
changing, and our competitors have been quick to realise this. Increasingly,
India is becoming the focus of international attention. More and more, India
is being hailed as the 'new tiger', and its economic prospects are being
compared favourably to the other giant in the region, China. But India is less
likely to experience the extraordinary growth rates of China. India's growth
is also likely to be less volatile relative to China's 'boom-bust' cycles.
India has maintained stable and respectable growth rates since independence
(average annual growth of around 3.5 per cent until the 1980s and 5 per cent
during the 1980s). In many ways future growth is building on that momentum
with an added boost from major economic reform processes. India's growth
performance may more closely resemble that experienced in much of South-East
Asia as a result of liberalisation and economic reform in the 1970s and 1980s.
It is incumbent on Australia not to let pass this opportune moment for
establishing closer economic relations with India.

If Australia continues to neglect the Indian market, we stand to miss out
on the opportunities that Indian economic liberalisation presents. And in a
market approaching 900 million people, the opportunities are significant.
India will not be the right market for all Australian firms, but it should not
be dismissed on the basis of outdated information and perceptions. Our
analysis of the Indian economy shows that the Indian economy today possesses a
number of strengths which are not sufficiently well known or being taken into
account. These include a large reserve of skilled labour, an established
corporate sector and industrial base, thriving financial institutions,
comparable legal and administrative systems, and widespread use of English.
While numerous constraints also remain - a bloated and at times obstructive
bureaucracy, poor infrastructure and labour market rigidities - these are
being addressed. Change will be gradual, but this cautious approach may also
enhance stability in the longer term.

This report highlights opportunities both in sectors where Australia has
comparative advantage and an established trade record, as well as new areas.
Recognising the diversity of India, the report also identifies the states
Australian companies might target on the basis of superior infrastructure and
complementarity. These are Gujarat, Maharashtra, Punjab, Haryana, West Bengal,
Tamil Nadu and Karnataka.

For the 1990s, even if Australia's exports were to continue to grow at
current rates, we would lose market share to our competitors. Although the
value of our exports would increase in absolute terms in line with India's
economic growth, there would be slower growth in imports from Australia than
in total Indian imports, because our exports are concentrated in sectors where
the rate of import growth is likely to be relatively low. To be successful
will require increased efforts, as well as a comprehensive rethinking of how
best to pursue closer economic ties. In the final chapter of the report we map
out a strategy for the future, for the mutual benefit of India and Australia.
This encompasses suggestions for activities across a range of areas. Networks
and linkages are a particularly important asset in doing business with India,
and greater attention should be concentrated on developing these. The services
of Australia's Indian community may be of value for this purpose.

Ultimately, while Governments can set in place a framework to facilitate
business activity, companies have to be prepared to examine the Indian market
on its merits. We commend it to them as a market of enormous potential.

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Last Updated: 24 September 2014
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