Saturday, December 7, 2013

2014 could be a breakthrough year for Indian economy

With the upcoming elections and all sorts of political commentary being written on a daily basis, there seems to be a certain lurking element, that it seemingly going unnoticed by the mass media.

Whether it is intentional or not, Indians are seemingly being blind-sighted by a phenomenon that is being conceived right in front of our eyes: our nation's economy is on the brink of an unprecedented economic resurgence, one that has not been witnessed since India decided to liberalize its economy in 1991.

Specifically, all indicators are pointing towards India whose economy will grow faster in 2014 than anybody could have previously imagined, and how 2014 will be the year that India finally makes that magical jump from the ranks of a '3rd world' economy to a legitimate, economic powerhouse.

However, before we jump the gun and claim that India's economy can be considered to be at par with the likes of China, US and the rest of the West, certain changes must occur.

Firstly, our GDP must grow at a much faster rate than the highest of expectations (a notion that this author strongly believes will occur). Secondly, there must be a very real, visible change that is not only shown through numbers and statistics but is felt by every single Indian citizen.

And last but not least, the outside world must observe and respect the realities; that India is a nation on the brink of undergoing a massive re-development and must genuinely be respected, and perhaps even a little feared.

This column will explain exactly why and how, that is going to happen over these next 12 months.

The numbers don't lie

Gross domestic product, more commonly referred to as GDP, and is by far the economic indicator most referred to when one is attempting to judge a nation's economic development. It stands to reason that, without a shred of doubt, India's GDP is bound to outperform the bleak expectations being thrown around by economists.

Let's break down GDP. GDP can be calculated in three ways, but the easiest and most practical way is to calculate it using the expenditure approach, which sums up the four components of expenditure to calculate the overall GDP. The formula goes as follows:

GDP = private consumption + gross investment + government spending + (exports -- imports), or

So let's go ahead and examine, in detail, the four components and how they are bound to perform in 2014.

Private Consumption (C)

According to, which tracks economic development in all countries and projects future growth among different aspects of the economy, India ranks as number 6 out of a total of 136 countries where data on private consumption growth is available for the year 2014.

The 5 rankings above India, in respective order, are:

Namibia: 12%China: 9.2%Estonia: 8 per centEthiopia: 8 per centVietnam: 8%Sri Lanka: 7.1 per centGhana: 7 per centPapua New Guinea: 7 per centIndia 6.9 per cent

Needless to say, other than China, none of the other countries have an economy anywhere near the size of India's.

Furthermore, the silver lining is that consumption is normally the largest GDP component of the economy. It includes personal expenditures such as the overall purchases of such day to day expenses such as food, rent, jewellery, petrol, and medical expenses.

So if you look at the numbers closely, you realise that the largest component of India's GDP i.e. consumption -- is projected to grow 6.9 per cent next year. Meanwhile, the 'experts' (most of whom do not reside here) are claiming that India's GDP will grow at a rate of 5 per cent overall in 2014.

With a rising middle class that is on the brink of erupting into mass consumption of daily goods (think about the last time you walked into a Big Bazaar), consumer activity in India is picking up at a quicker pace than ever before. All of this translates into that "C" variable in the GDP formula.

More consumer buying = higher GDP. Indians, without a doubt, are going to have no reservations with consuming goods in the next year. Much has been written about 2013 as being a year in which India did not live up to its expectations. The middle class numbers stayed the same: around 300 million, making up around a quarter of the country's population. But GDP stalled in 2013 due to numerous reasons, many of which were outside of India's control.

However, with the US and the rest of the West making economic resurgences, the pastures will be green in 2014 for consumption activity. With a middle class that is expected to grow in the tens of millions, you can bet that consumption activity will grow dramatically.

Investments (I)

How does a business owner allow his customers to consume at a greater speed, lower costs, and higher efficiency in 2014 versus 2013? By investing in his business of course. And, with higher consumption capacity by consumers, entrepreneurs and business owners are bound to invest heavily into their businesses.

FDI (Foreign direct investment) growth is another component that is going to drive India's GDP next year. As has been fore claimed by virtually every economist, FDI activity is increasing on a month by month basis and is only bound to keep increasing over the next year.

The reason is simple: the US economy as well other Western economies have re-emerged out of their 5 year recessions, and foreign investors are actively looking at India to deploy their funds.

One needs to look no further than the story of Wal-Mart and its insistence on wanting to setup shop in India. Since 2008, Wal-Mart has wanted to enter India. For those readers that are unaware, Wal-Mart is by far the biggest retailer in the world.

Wal-Mart tried to setup shop in India by entering into a joint venture (JV) with Bharti, but in October the JV fell apart due to internal complications. Many thought that Wal-Mart would give up on its ambitious plan to setup stores across India, but it has not given up yet.

Just last week, it was announced that Wal-Mart is still lobbying persistently in the US to get US government to convince India to relax its FDI regulations, this time with no strict JV impositions.

All in all, Wal-Mart has spent a total amount of $39.42 million (about Rs.242 crore) on numerous lobbying issues in its attempts to setup a massive conglomerate of retail outlets in India.

If Wal-Mart is pursuing FDI investments so persistently, then you can be rest assured that other global retail giants will be entering India in the near future with similar, ambitious plans as well.

With the RBI insisting that it wants to make it more lucrative and seamless for FDI's to invest in the country in the next year, all signs are pointing towards a massive increase in FDI activity in the country.

Another golden lining is that residential purchase of new homes is included in the 'investment' category of GDP. With falling house prices, 2014 could be the year that a real estate bubble breaks and residential home purchases once again go on an up-climb. Higher home sales = increased GDP.

Government spending (G)

Due to it being an election year, government spending should increase in 2014 as policy makers from all political parties look to uphold promises made. So far through 2013, government spending has remained stagnant due to the insistence by the government to reduce the fiscal deficit.

All this could very well change in 2014, with the government keen on proving to its citizens that it is willing to invest in businesses and the public sector due to the simple fact that actions speak louder than words.

As elections approach, the best way a political party can back up its words is through spending on the needs of its citizens, and what India needs right now is better infrastructure. Already, the government is showing signs of willing to set aside more funds on infrastructure spending in 2014. This all leads to a higher projected GDP.

Exports - Imports (X - M)

The icing on top: with a weak rupee, all export sectors of India are bound to boom in 2014. The IT sector has already had an incredible year in 2013, with the BSE IT Index appreciating an astounding 49 per cent through 2013. With the rupee expected to remain weak due to further rate hikes by the RBI to curb inflation, we can expect the same to continue in 2014.

The export industry will drive India's GDP past any and all projections made. That is due to the fact that, not only will the aforementioned rupee remain weak (a blessing in disguise for export driven companies), but more and more countries in the West that are climbing out of their recessions will look to India for its outsourcing needs.

With the RBI liberalizing the markets through the tedious efforts of its governor Raghuram Rajan, outsourcing will play a key role in 2014 for GDP growth.

So, we have covered the four components that make up India's GDP and have shown why each component should perform better than expectations. A higher than expected GDP would lead to a surge in the stock markets and an economic resurgence. But a question still remains at large: outside of numbers and statistics, how would we know that our economy is improving?

Reality and perception

In order for the rest of the world to recognize India's economic resurgence, it will be vital for citizens to feel that economic progress is being made. In other words, reality must coincide with perceptions. If domestically, Indians feel that there is a big economic development underway, the outside world will recognize this phenomenon and India will generate the type of respect that it deserves.

Without a doubt, 2014 will be the year when India would be able to exactly do it.

With an economic surge, jobs are bound to be created. With the export sectors expected to do exceedingly well in 2014, new outsourcing placements are bound to materialise in all export driven sectors: pharma, IT, textiles, jewellery (due to higher consumption domestically as well as internationally) are a few examples.

Domestic sectors are bound to perform better in 2014 as well. For example, the banking sector is bracing itself for a big turnaround due to the RBI's liberalization of the banking industry, making it easier for banks to acquire loans and reducing the amount of red tape within the sector.

We have already touched upon the retail sector, which will not only drive consumption but will also create jobs as new entrepreneurs enter the landscape and create businesses.

As the famous saying goes -- perception is reality. When the outside world sees what India is going through, its perception of the country is bound to dramatically change. We have come a long way since the liberalization of the Indian economy in 1991, and the outside world no longer sees India the same way it did 25 years ago. It now sees the soon to be 3rd largest economy in the world.

It is about time that the world recognises India for what it truly is.