Subrata Majumder
Sign of green shoots is visible. India’s GDP growth sparked to 7.4 per cent in 2014-15 from 6.9 per cent in 2013-14, much beyond the expectation. ADB forecasted a further surge to 7.8 per cent growth in 2015-16. IMF Chief Christine Lagarde was upbeat on India’s growth. She conceded that India was bright spot in a cloudy global economy. India’s growth has become a global point of discussion and debate, particularly when the global growth is tramped by recession and is expected to reel under 2 per cent in 2015.
ADB confided that the momentum will persist. The growth will accelerate further high to 8.2 per cent in 2016-17, it forecasted. Astonishingly, the bank went one step ahead to exhilarate India’s growth, when it forecasted that India will overtake Chinese growth. Chinese growth will tapper to 7.2 per cent in 2015-16 and 7 per cent in 2016-17, the bank said.
China , which was in the driving seat for the highest growth over a decade, is engulfed by downward swing. Its GDP growth slipped to 7.4 per cent in 2014 from 7.8 per cent in 2013. IMF has further trimmed Chinese growth to 6.8 per cent in 2015 and 6.3 per cent in 2016.
To the surprise of many economists and analysts, manufacturing sector was the trigger for India’s GDP growth. Based on the new series, manufacturing sector surged to 6.8 per cent growth in 2014-15 and service sector growth slowed down to 8.4 per cent, the main plank for GDP growth. The growth pattern revealed a structural change in GDP growth. The change is tending similar on the line of Chinese pattern of growth, where the manufacturing sector was the base for GDP growth. Manufacturing, investment and exports were the three pillars for Chinese growth. Investment in exports manufacturing was the key driver for Chinese growth. However, in this growth trajectory foreign investment played an important role in China. Larger part of the investment in export manufacturing were made by foreign investors. Their investment contributed 60 per cent to GDP growth.
European and global slump forced China to invoke structural changes in the economy. The slump nudged the Chinese policy makers to shift penchant from export based to domestic based consumption growth model. To stimulate the domestic consumption, Chinese government infused US$ 2 trillion in the economy to prop up the market liquidity. But, instead of channeling the resources into productive purposes which could increase the domestic consumption, China splurged the fund into fixed investments.
Most of these asset fixed funds were undertaken by state-owned enterprises and local governments. Ultimately these investments proved unproductive. This resulted in an imbalance between consumption and investment. Consumption failed to increase in proportion to the Chinese liquidity of fund in the market. Against investment ratio of 40 per cent to GDP, ratio of consumption to GDP was 36 per cent only. The situation aggravated the Government debt, triggering it to 280 per cent of GDP. Most of the construction projects in China are now saddled by massive over-capacity.
The global slump and despair in China set new strategies for the MNCs to invest in China. It was China+1 strategy. The strategy was seen an hedge against investment risk in China. Besides, the country was loosing cost competitiveness due to high appreciation of renminbi. The new strategy helps MNCs in risk diversification by spreading production process across the border in other Asian countries with bigger domestic demand like in India and low cost countries such as Vietnam, Indonesia and Thailand.
TESCO was a case in point. Despite the tattering FDI policy in multi-brand retail , TESCO’s penchant towards multi-brand retail in India endorsed its China+1 strategy as the remedial measure to insulate the investment in China. Spending twenty years with over 100 stores in China , TESCO – the retail giant of UK- has entered in multi-brand retail in India in December last as part of their China+1 strategy. High labour cost became the biggest barrier for TESCO in China, according to Mr Christophe Roussel, CEO of TESCO, China.
Will the surge in GDP growth be propitious to ‘Make in India’? In the backdrop of the economy on the rebound, which was catalyzed by spurt in manufacturing, the growth is expected to inject a new life to ‘Make in India’. The movement was launched with big bang last year. But, soon it was thrown into dismay and investors were backtracking from their investment zeal. To them, Make in India was only a concept. It committed for ease of doing business. But, it has not yet given a policy boost to propel up the movement. Two budgets were laid by Modi Government. But, there was no notable policy breakthrough to encourage investment under the movement. Even though budgets mentioned several measures for ease of doing business, such as e-Biz Portal and skill development – but they disappointed the big investors and foreign investors, given the lack of incentives to the investors.
Now, with the surge in growth momentum, India has emerged as a bright spot for spurt in domestic consumption growth. It is endowed with second largest populous country and comprised of a vast young people. “Whatever you produce, you can sell in India” is the new catchphrase. India’s growth is insulated from the external shocks. In this respect, it scores a point over China. India has the second highest household savings ratio to GDP in the world, representing 37 per cent of GDP. Here also, India has an edge over China. Private domestic consumption in India accounts for 57 per cent of GDP as compared to 35% in China.
Given the structural changes in the economy and manufacturing turning the pillar for growth, India’s growth is believed to splurge a sustainable growth. Even though China excelled India in attracting three times more FDI in 2014, downturn in China’s GDP growth and the failure to resurrect the economy on domestic based factors are inevitable. It will dither foreign investors to expand or make fresh investment in China.
FDI has an important role in manufacturing and infrastructure sectors. In this perspective, FDI is a high powered beam to fructify Make in India programme. Mr Modi is lucky with tapering of oil prices. Given the propitious situations which made the economic fundamentals strong, it is imperative that India should encourage big investors and FDI to inject growth hormones in Make in India. (IPA)
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