Rate rises and graft scandals threaten India growth

NEW DELHI - India is set for scorching growth this year but concern is mounting about its longer-term outlook, with the central bank seen hiking interest rates further and corruption scandals worrying investors.

The stock market has already dropped some 17 per cent this year, hit by fears that economic growth will cool due to higher interest rates and souring foreign investor sentiment amid a spate of high-profile corruption scandals.

In January, foreign institutional investors turned net sellers for the first time in eight months, dumping some $1.4 billion (S$1.79 billion) in Indian stocks, according to industry data.

 

"Corruption and ensuing political risk has without question become a major concern" with foreign investors, Mumbai brokerage Espirito Santo Securities said in a commentary.

The government says it is confident India's economy will expand by 8.6 per cent in the fiscal year ending in March, eclipsing the previous year's 8.0 per cent growth.

But growth may slacken to 7.7 per cent next year as resurgent oil prices and further rate rises to tame inflation "take their toll", Credit Suisse economist Robert Prior-Wandesforde cautioned.

Goldman Sachs economist Tushar Poddar said he was holding to his growth projection of 8.7 per cent for next year but added risks to the forecast were "firmly to the downside".

Such growth would delight Western nations where expansion is anaemic, but India is striving to lift its expansion to double digits - levels it says are needed to raise living standards of its impoverished millions.

Signs of an economic slowdown were highlighted in data late last week, which showed that industrial output growth in December slackened to 1.6 per cent from 19 per cent the same month a year earlier - its weakest pace in 20 months.

"There is the worry that the (monetary) policy tightening will inflict serious damage on growth," said Kevin Grice of Capital Economics.

But despite appeals from business, which fears the economy is losing traction, the poor numbers are not expected to deter the central bank from tightening monetary policy in March for an eighth time in just over a year as it seeks to lower inflation running at over 8.4 per cent.

"We must understand ultimately if inflation is not controlled, you cannot sustain a high growth rate," central bank deputy governor K.C. Chakrabarty said last week.

Rising prices have also emerged as a dominant concern of the Congress government, whose core supporters - the poor - have been worst hit by galloping prices, especially of food.

On top of the economic worries, a slew of scandals have broken out, including the arrest of a former telecoms minister on suspicion of selling mobile licences at cut-rate prices, costing the treasury up to $40 billion.

Allegations of rampant corruption at the New Delhi Commonwealth Games last year led to the sacking of the event's chief in January, after delays and vast budget overruns in the event caused the government acute embarrassment.

Premier Manmohan Singh, whose leadership has been called into question by critics over the scandals, has sounded the alarm about the "menace" of corruption that he warned is tarnishing India's image.

He said this month administrative practices must be revamped to "reduce opportunities for corruption" and added that India needs a "paradigm shift" to modernise production methods to end bottlenecks and ease inflation.

Indeed, unless the government bites the reform bullet, "the future may see nothing better than the average growth of the last eight years - 8.4 per cent," warned T.N. Ninan, publisher of leading financial daily Business Standard.

For nine to 10 per cent growth, India needs "further reform measures to free up markets, vastly improved delivery of services by the government, proper physical infrastructure - and much less corruption," Ninan said.

Infotech in 2020: The $300 billion question

From $4 billion in 1998 to its worth of over $60 billion today, the information technology (IT) and IT-enabled Services (ITeS) industry has become a major driver of India's economic growth story. A National Association of Software and Services Companies (Nasscom) study done by McKinsey suggests that the industry has quadrupled its GDP contribution to four per cent, contributed to 45 per cent of all incremental urban employment created in the last 10 years, employed over two million people and gave impetus to new entrepreneurs, and increased the number of tertiary education institutions in the country. The industry has also enhanced India's credibility as a business destination, forging relationships with most of the world's biggest companies. However, the next decade will see the industry at an inflection point: About 80 per cent of new growth opportunities will come from markets that are not currently core to the IT industry. In fact, we predict that India's total revenue potential in 2020 – including exporting traditional IT/ITeS, IT for domestic market and exporting IT-enabled innovations – could be as high as $300 billion. In order for the IT services industry to grow its exports, it will need to develop differentiated business models to serve new markets with entirely different needs from core markets such as Fortune 500 companies in banking, financial services and insurance (BFSI), telco, and manufacturing in developed economies. Small and medium enterprises (SMEs), BRIC countries (Brazil, Russia, India and China), and several new sectors like public services, healthcare, media and utilities will emerge as the growth engines of the future. Each of these will require new business models to capture the opportunity. For example, BRIC countries will require distinctive value propositions beyond mere labour arbitrage. Similarly, targeting SMEs will require moving from account-centric service delivery to productised service platforms. Here, exports alone can contribute $175 billion. Similarly, in 2020, the domestic IT/ITes business opportunity could be as high as $50 billion — the equivalent of our total exports today. A recent McKinsey survey of Indian banking's top CEOs and CIOs suggested IT was among their top three priorities, and almost 75 per cent were planning to increase their future IT spend. The IT industry will need to reorient itself to prepare rapidly globalising Indian banks and corporations as they scale up to international competition. ICT-enabled innovations in healthcare, education, financial services, and public services can drive the socio-economic inclusion of 30 million citizens each year— faster, cheaper and more effectively than traditional models. For example, around 40 to 50 per cent of India's population is out of range of primary healthcare centres. Innovative solutions such as remote diagnostics and mobile healthcare can overcome the limitations of traditional models and give us a real opportunity to achieve inclusive growth. India can also become a laboratory for innovation for the world in at least three areas—energy efficiency and climate change, mobile applications, and clinical research outsourcing—which could contribute an additional $50-75 billion of the total opportunity. Challenges But creating global innovation hubs will need focused corporate investment in R&D, a significant increase in the number of postgraduates, and increased collaboration between Government, industry, and universities. IT-enabled inclusive growth will require enhancing IT literacy, developing broadband penetration, and implementing a national information infrastructure like Aadhaar. Capturing the export opportunity will require a six-fold increase in talent from the current two million to 13.5 million, and the growth of 10 to 15 Tier-II cities with world class infrastructure. But at the current pace of reform, infrastructure development and corporate innovation, we expect nearly half ($150 billion) of the opportunity to be at risk. Whether India's public and private stakeholders can act and deliver on the full potential—that is the 300 billion dollar question.