ARCHIVED MEDIA RELEASE
PA/22/2001 4 December 2001
Report on Indian economy points to opportunities for Australian investors
A new Australian report on the Indian economy highlights opportunities for Australian traders and investors in India.
The report, titled "India: New Economy, Old Economy", points to developments in several fast-growing sectors and states as providing the best opportunities for Australian traders and investors in India. In particular several 'new economy' service sectors like information technology, telecommunications and finance are identified as growing rapidly.
The report, prepared by the Economic Analytical Unit of the Australian Department of Foreign Affairs and Trade, was launched on 3 December by the Australian Foreign Minister, Mr Alexander Downer.
It underlines how, after a decade of reforms, India's large and diverse economy has become one of the fastest-growing emerging markets in the world. Over the course of a decade India has become a significant trading partner for Australia. In 2001 India is Australia's twelfth largest export market, up from around twentieth a decade ago. And Australian foreign direct investment in India has also risen significantly.
As well as addressing 'new economy' prospects, the report notes that opportunities are emerging for Australian investment in 'old economy' sectors like mining and advanced technology manufacturing.
The report provides an analysis of four fast growing states - Gujarat, Karnataka, Maharashtra and Tamil Nadu - which are attracting the bulk of foreign direct investment into India.
The report provides more than 30 case studies of Australian businesses trading or investing in India in a range of sectors.
In launching the report, Mr Downer emphasised the ever-increasing range of contacts and common interests between Australia and India. He noted that Australia was looking forward to a visit by Prime Minister Vajpayee early in 2002, and said that he hoped to reciprocate Indian External Affairs Minister Jaswant Singh's recent visit to Australia by visiting India next year for a further round of the Foreign Ministers' Framework Dialogue.
Australia is also interested in initiating a senior trade officials' dialogue with India - to build on the range of issues common to both countries in the WTO.
See also the accompanying article by Dr Frances Perkins and Michael Growder. For further information, contact Elizabeth Ward (First Secretary, Economic) on 6888 223, extension 175.
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India - New Economy, Old Economy
Dr Frances Perkins and Michael Growder
India is a large dynamic economy, which due to a decade of reforms stands out as a relatively high achiever. Consensus Economics recently forecast India will grow by over 5 per cent this year in real terms, and accelerate to nearly 6 per cent in 2002. While this is below India's mid 1990's peak growth of over 7 per cent, such an outcome in a world forecast to grow at 3-4 per cent in 2002 would nevertheless be a good result.
A balance of payments crisis in 1991 prompted the Indian Government to implement a series of important economic reforms from the early 1990s. Successive Indian government attempted to dismantle the 40 year old system of state planning and bureaucratic intervention in the economy, abolishing its intrusive industrial licensing system, progressively opening the economy to trade and foreign investment and reforming the financial system. Average real output and per capita income growth improved as a result. The number of middle and high income consumers has continued to rise, and importantly the fall in those living in poverty has accelerated. Now an estimated 60 million Indians live in 'middle class' households with an income over A$6 billion per annum.
India has always been an enormously diverse economy, but sectoral and regional divergence is sharpening since the 1990s reform. Several 'new economy' services sectors like information technology, telecommunications and finance have grown much more strongly since the early 1990s than larger traditional sectors like agriculture, mining, infrastructure and even manufacturing. For example, the software sector has been growing at 46per cent per year in US dollar terms for the past seven years and now employs about 340 thousand people, exporting 70 per cent of its output. Over 20 Indian IT firms now operate in Australia although most of India's IT industry continues to target the US and European markets. The IT enabled sector (call centres, data entry and back office support) is growing even faster, by about 250 per cent in the past two years; and provides considerable cost saving opportunities for Australian firms. These and other service sectors have been able to access India's huge pool of skilled English speaking human resources; they also have been less disadvantaged than 'old economy' sectors by India's high real interest rates, infrastructure shortages and rigid labour laws.
In addition four southern and western states, Gujarat, Karnataka, Maharashtra, and Tamil Nadu have grown much more strongly than other major states over the last decade. While they have only 28 per cent of India's population, they produce 40 per cent of its output and attract 55 per cent of domestic and foreign investment approvals. These states are home to much of the rapidly growing IT industry and also have larger than average service and industrial sectors, which benefited from the last decade's reforms. They have also been helped by above average infrastructure, a greater cultural focus on business and education and state governments which are beginning to reform their business environments.
However, India's reforms have lagged in recent years and even in the faster growing sectors and states, performance is slowing. Despite the skill of the current Prime Minister and the relative stability of his government, the challenge of managing a coalition of over 20 parties has taken its toll on reform legislation and implementation. Strong vested interest opposition also contributes to slowing reform. Hence, budget deficits and real interest rates remain high, infrastructure shortages are acute and infrastructure costs high. Navigating the bureaucracy and laws relating to business can be challenging and significant trade and foreign investment barriers remain. Failure to push ahead rapidly with remaining reforms constrained growth below potential levels over the last three to four years.
For Australian business interested in India, these emerging trends have several important implications. The growing states are among the most attractive destinations for exports and investment; their incomes are higher, they are growing more rapidly than other states, and their governments are more proactive in supporting business. Furthermore, some of the best prospects for Australian exporters lie not only in agricultural and resource commodities, which currently dominate Australian exports to India but increasingly in meeting growing 'new economy' demands for imported goods and services. IT, telecommunications, finance, insurance, health education, environmental services, media, entertainment and biotechnology are all sectors showing increasing promise. As well, exporters and investors are developing opportunities in processed food and fresh fruit, high technology manufacturing, mining, gas and ports. The Economic Analytical Unit's new report on India highlights many case studies of Australian firms already accessing these opportunities.
While India's business environment can challenge even experienced firms, several 'new economy' sectors and high performing states are providing strong trade and investment opportunities.
Frances Perkins is Executive Director of the Economic Analytical Unit in the Australian Department of Foreign Affairs and Trade and Michael Growder is Acting Director, EAU. The Minister for Foreign Affairs, Mr Alexander Downer, launched the EAU report "India - New Economy, Old Economy on 3 December in Melbourne.