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India – Economic Transformation or Damp Squib?

09 July 2015

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This time last year we reviewed market prospects in India for the Isle of Man after election of Prime Minister Modi’s majority Government.

Government-Buildings-Delhi

At the time this was widely billed as a ‘Game Changer’ for the Indian economy…

Fast forward one year and the common view held by those better placed to comment than I is that the ‘Modi effect’ is waning somewhat; a lot of good rhetoric and foreign promotion has occurred but not delivery of internal reforms and broader political support needed.

It seems the reality is the scale of the task was underestimated.

There is a need for real change and tangible reform by early 2016 if credibility and confidence are to be retained.

The new Prime Minister can be applauded though for his energy and change leadership aspirations but this seems to be difficult to cascade through the system.

Further interest rate cuts, improved monetary policy and infrastructure investment are still needed before growth will be achieved.

The promise then is longer term, certainly beyond 2016; there are some positive signs eg £7bn injected to ‘prime the pump’ in new infrastructure along with tax free bonds….but perhaps we are witnessing evolutionary change rather than the transformation expected…

Longer term, India’s ambitious ‘Make it in India’ campaign to replace China as the low cost global manufacturing centre, remains core to its potential success along with its young well - educated labour force.

India’s growth (currently 7.5%) is, unlike China’s, predicated mainly on internal demand and needs further stimulation to match projections yet is ultimately expected to exceed 9% again.

Positive news? Inflation is down, country credit rating is up (Moody’s Baa3) and deficit targets are achievable alongside corporate tax reductions (35% to 30% over 4 years).

Renewed confidence in India in 2014 showed good returns in internal markets (circa 13 - 14%), but in 2015, this has declined.

Negatives? Indian banks are undercapitalised, so unable to provide much finance, the tax system remains adversarial for foreigners and their new Companies Act is over- complex and burdensome.

The outlook summary is ‘bearish’ (cooling sentiment, unresolved tax issues, bank bad debts), but with good long term potential - if only the pace of reform and scale of change needed can be achieved.

So what does this mean for the Isle of Man?

For our Department, India does not offer the current potential of China, hence our prioritisation of that.

For those businesses proactive in India there are some great pickings for CSPs/wealth managers investing time and effort to sustain and build relationships; but overall the market is not delivering much outbound investment presently so targeted efforts are the order of the day.

The days of the AIM boom for Indian companies using Isle of Man as a favoured destination for listings have lessened, but that is another story, but what remains are strong business relationships on which to develop.

India needs to come up with the right answers now to encourage the market to grow.

Let’s hope Mr Modi can deliver on his rhetoric in the coming year and next time we can report on some new found opportunities for all from that.

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