According to a new investment report from Deutsche Bank research, new Indian Prime Minister Narendra Modi is clearly trying to move the East Indian giant away from a service-oriented economy towards an export and manufacturing-focused economy. Deutsche Bank analysts Sanjeev Sanyal and colleagues point out Modi’s new strategy will require keeping the Rupee weak and dramatically expanding the financial system. International experience shows that the model can generate growth and jobs, but sustaining such rapid financial expansion is not without risks.
India has become well-known for its services exports over the last few decades, but the general consensus has been that financial and infrastructural limitations make it difficult for the country to develop into a major exporter of manufactured goods. The DB analysts, however, believe that Modi has chosen an opportune moment to retool the Indian economy. The report focuses on the success story of India’s automobile sector as a case study.
What can past market crashes teach us about the current one?
The markets have largely recovered since the March selloff, but most would agree we're not out of the woods yet. The COVID-19 pandemic isn't close to being over, so it seems that volatility is here to stay, at least until the pandemic becomes less severe. Q2 2020 hedge fund letters, conferences and more At the Read More
Financial sector growth key to Modi’s plans
Sanyal et al. point out that the critical ingredient in this export-driven growth model is the ability of the domestic financial sector to sustain a rapid economic expansion. They note: “While the banking system is likely to remain the key driver, attention should be paid to expanding the wider ecosystem of bond markets, insurance companies, mutual funds and so on. The government will also have to seriously think about injecting capital into the public sector banks. We feel that the government will eventually dilute its stake in public sector banks to ~51% and perhaps even lower.”
Need for infrastructure development in India
Dramatic improvement in major public infrastructure, including transportation networks and power generation, will also be required if India is going to successfully transition to a manufactured goods export model. The DB report highlights transportation networks as a key bottleneck to Indian industrial expansion. Sanyal and colleagues argue that India must significantly improve transport connectivity as well as immediately begin to address the skewed transport mode mix that is biased towards roads (more rail needed).
The analysts highlight that there have been a number of reasonably successful national reforms of India’s power industry over the last 15 years, but that a “second generation” of reform is urgently needed today, especially at the local level. They also note fuel supplies remain a bottleneck for expansion, with India importing almost 85% of its crude oil and a big chunk of natural gas and coal as well.
Try to duplicate the success of the Indian auto sector
Sanyal et al. point to the success of the Indian automobile sector as a model for developing other manufacturing industries in India. The deregulation of Indian auto sector began in the mid-1980s. Before that, the government had regulated capacity, annual production, import of machines and also instituted a draconian tax structure which restricted market size. The first phase of the auto sector ‘domestic liberalization’ included easing of licensing for capacity expansion, foreign partnerships and so forth.
In 1991, the government allowed 51% foreign direct investment in the sector and added incentives for companies setting up production facilities. In 2002, the government moved to permit 100% FDI in the automotive sector. Similar deregulation could have a positive impact on other manufacturing sectors.