Professor Aman Aggarwal is currently Professor of Finance and Vice-Chairman at the Indian Institute of Finance. He is also Associate Editor of the quarterly journal of finance - Finance India. His special interests are international finance, corporate finance and derivatives. Professor Aggarwal has published over 40 research papers in highly technical journals about these economic areas and speaks frequently at financial conferences. He spoke with Shivani Pandya CMC ‘18 on March 31, 2016.
Photograph Source: Indian Institute of Finance, Web.
Why does India continue to thrive economically while its economic counterparts – China, Brazil, and Russia – are slowing down?
The Indian economic growth is driven more by domestic than external factors. This is probably the most important reason why India is doing well. When I meet CEOs from all around the world, they are amazed at how India’s corporations are able to continue to grow and make money with the economic environment in India. The reason is simple: Indian companies are more domestically oriented than their counterparts elsewhere.
In India, we opened up in 1991. We had a mixed economic system before; the difference between our mixed economic system today and then is that in the past it was more socialist prior to 1991. However, in 1991, there were a lot of changes made because of the financial crunch India found itself in. We never were in an economic crisis, as defined by the IMP; we never defaulted on any payments. We certainly were in a financial crunch, which is why we opened up the economy.The economic framework we have post -1991 is a mix of more capitalist-oriented structures than socialist or communist ones. We still have certain socialist elements, like the railway system, which is a public good. India is a democracy with over 660 parties that participate in elections and almost 68-70% of the population (roughly over 700 million people) participate in elections. This is favorably unique – there is no other part of the world that has this dynamic.
Politically, each of the regions is represented by different political parties and grows in a different fashion; some are more socialist in nature and some are more capitalistic. At the time of independence, the British left the economy completely dependent on importation of manufactures, and our wealth was taken away. Since then, India started a journey to become more self-sufficient.
There have been different stages and crises. India has not only survived, but thrived. After the Southeast Asian Financial Crisis in 1997-98, 50 or 60 thousand well-trained, well-equipped people came back to India. By 1996, about 70 or 80 thousand people from the United States had left their jobs and moved back to India. The return of such a huge pool of talent has contributed to the Indian economy and given India a competitive edge.
Because we have a huge domestic market and demand. Compared to India, China has a similar population base, but the difference is that China does not have a huge domestic market because it is controlled by an autocratic political regime that discriminates against domestic consumption. For example, if you consider tourism, people from India stay within the country for vacations and visits – this applies to all socio-economic classes. Most countries are not able to provide that level of sustained tourism. Indian people also have a huge savings rate – 33% savings rate officially. It is lower than China’s, but this is because India’s consumption rate is much higher than China’s.
We’re a 2.5 trillion-dollar economy despite the PPP model; the United States on the other hand is a 17.2 trillion-dollar economy, yet they have a low foreign exchange reserve. India’s foreign exchange reserves have significantly increased under the new government. That shows the resilience of the Indian people and from companies all over the world.
We have companies like Tetrapack, Airbus, which is partially owned by the French government and is an important defense contractor, has three plants in India. Why is this important to mention? This shows the open economic approach of India in that they allowed a foreign defense company to operate within the nation. Airbus closed three plants in France to relocate to India. Both these factors clearly show how business can grow in India. Moreover, India is leading all of Asia in manufacturing because of the lack of restrictions. There is a list of a number of businesses where India is a home of research and the development of technical structures. So, we’re making a home for not only Indian companies but also foreign corporations.
Why do companies see a home here? Because they see a huge domestic demand – the domestic capacity to consume whatever they produce here. It is not only that they are producing here to take these goods and services overseas. In most countries like China, which is compared to India quite frequently in the last 10 years, a large amount of what is produced there is actually exported out of the country to the rest of the world.
There are a multitude of businesses where India is the home of research, development, and making goods and services. We’re making profit for other countries as well as India. Why do they see this here? Because they see a huge demand. There is a huge domestic capacity to consume whatever they produce here. It is not that they are only producing here to take these good overseas. Most countries, for example China, a large amount of what is produced in China is actually exported out of China to the rest of the world. In the case of India’s goods and services, I would say almost 50% is sold domestically.
Most countries see profit in India because of the way the market structure has been developed, the savings culture, and capital and disposable income of Indian citizens. Agriculture has also given a boost to the growth. India is an agrarian economy in terms of the labor force. Almost 60-70% of the country’s people is still engaged in pure agriculture. The total agro-based industry has gone in production in part due to companies coming into the country and partnering with organic farmers. For example, Israel has three projects running in Haryana and Punjab to produce food. Why are the projects there? Food security. We have the land and people to successfully do the work. This is definitely an advantage for India.
Finally, India has a very strong parallel economy –the informal economy. The magnitude of the parallel economies around the world varies from country to country. In India we have a parallel economy that is as strong as the formal economy. This is not the case for most nations. The difference in the Indian parallel economy is that it is based in money that has not been taxed. For the Indian consumer who earns black money, this largely contributes to money that enters the market as consumer income. This is a source of India’s economic resilience.
In your opinion, what Make In India policies under the Modi government have been successful and unsuccessful?
In my opinion, what Modi has done in three months or so is something that many other countries might take decades and centuries to accomplish. When he came into office, he not only secured $20 billion over the next 3 years from countries like China, Japan and the United States for different industries, he also created a confidence in the Indian economy that attracted many private enterprises. And he did so during his international tour early on in his term.
Some other things one must understand when considering the success of Make in India policies is that India is a democratic nation with unique party representation. Meaning, the same party is not in power in a large part of the country. As a result, Make in India economic programs can only be successful if there is a “yes” on every level, which is not the case with India. Every state has a different structure and orientation. Modi has overcome some of these barriers as you see with its increased growth, and that is due to our bettered relationships with these countries. The Make in India program, which has invited countries in to build and do business, it increases employment within India – be it a few jobs or several thousands. It is also important to know that the gestation period is 3-5 years for these types of policy moves. We will have to give it at least a year to see the effects of these programs. The 21 programs that the Prime Minister has introduced, as I’ve been informed, are meticulously monitored by a separate cell in his government on a weekly basis. Modi monitors the feedback from each state on the functionality of these programs, which is unique to the Modi government as compared to previous prime ministers.
What are the next steps India needs to take in order to sustain its high growth numbers?
First of all, the growth potential for a country like India is almost about 15% per year. I think India is going to have to work much harder to increase its growth – sustaining it should not be a problem. There are several domestic needs that are still not being met: a large part of the population is still underprivileged and needs better education and healthcare. India has the benefit of being a large country with different economic zones throughout the population and a vibrant workforce to meet those needs. What is produced the north of India is not produced in the south of India. Each region has its own domain for growth, and this is where sustainability comes in.
Some of the positive steps the Modi government has taken in order to sustain growth is its focus on foreign policy, which has been severely absent in previous governments. This has contributed to the growth numbers India has experienced. What needs to be drastically worked on within the Modi government is accountability. Unless you have accountability, no sort of reforms or programs can be successfully implemented. For example, the banking industry is an example of the government’s failure to hold industries accountable. There have been sizable write-offs in the past decade that have been unaccounted for – who pays for them and who benefits? This issue is absolutely necessary to address if further growth is desired in India.