India in transition

I have just returned from a short business trip to Mumbai, India.  The client is a domestic bank with a short history but impressive plans to grow within the Indian retail market.  I must say the relationship has taught be much about what in the West is often described as an emerging market – frequently with little knowledge beyond hearsay behind the realities of the situation of the economic prospects for the country.

I return from this assignment with one major impression of the warmth and energy of the senior management team.  They were open to new ideas and generous in their hospitality.  They are proud in the achievements of their country: proud too of the contribution they can make to its continued growth, development and increasing prosperity.  It is a welcome evidence of pride not just – as they said – in ‘the money’ but in the economic welfare of the economy.  Something that does not seem to pervade the wider global banking industry at present.

A second issue that surprised me was

the importance they put in the urgency with which the EU needs to iron out the problems of the EuroZone economies.  It reminded me of the huge importance the EU has for India as a trading partner (A number here re trade figures).  Although the Pacific Rim nations are set to account for some 70% of growth over the coming decades according to most economic forecasts, and although they will have some 65% of all middle class consumers during that time and although their growth rates are near double digit, the developed West is still richer per person than their high growth counterparts and have a much more established infrastructure to support market growth than many emerging markets.

Finally, there are many signs in India of what we could call an economy in transition.  There is inflationary pressure within the system: food prices for example are currently running at 12% per annum – the overall level of price inflation is some 9%.  There are labour bottlenecks as the demand for talent outstrips the supply of appropriately educated workers.  There is a demographic dividend to be achieved if they can get the right balance between expanding the supply of workers who create demand for products that drives the virtuous economic cycle of growth.  It really does seem as if the economy and business are growing despite the actions of government: mired in allegations of corruption, an overwhelming environment of regulation and indecision over the right mix of fiscal and monetary policy.

It is clear that the Indian economy is in major need of market reforms to unlock its potential and remove some of the blockages to sustained growth.  Two key industries are suffering at the moment: the airline sector and retailing.  Both should be booming given the performance of India but both are struggling.  Two of their three main international airlines are now about to go bankrupt under the weight of mis-managment and woefully poor performance.  It is causing the government to loosen its controls that forbid Foreign Direct Investment in Indian companies.  It is clear their near term prospects for growth depend both on how the global economy fares as well as how rapidly the can unlock sustained domestic growth.  Their long term performance will depend on how they establish an Indian model of business that allows the influence of other market based economies to accelerate their transition while holding onto the distinctive values that makes India the very special country that it clearly is.