A Deep Dive into India’s Macroeconomic Health

to Evaluate its Attractiveness for Investment

Course: Emerging Market Economics

Faculty: Dr. Sangita Kamdar

Submitted by Group 10, Division A:

Anisha Agarwal – B020
Jayesh Vaya – B013
Jijnyasa Patowary – B045
Junaid Ahmed – B060
Prarabdh Sharma – B031
Priyanshi Shah – J026
Contents

1. OVERVIEW ABOUT INDIA AS AN EMERGING ECONOMY ..................2

2. MACROECONOMIC INDICATORS TO ASSESS THE HEALTH OF
THE INDIAN ECONOMY .....................................................................................2
3. GOVERNMENT INITIATIVES THAT PROMOTE INVESTMENTS IN
THE COUNTRY ......................................................................................................7
4. RISKS AND OPPORTUNITIES AFFECTING INVESTMENTS .................9
CONCLUSION AND FUTURE OUTLOOK FOR INDIA AS AN
EMERGING ECONOMY FOR INVESTMENTS .............................................10
REFERENCES .......................................................................................................12

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 1. OVERVIEW ABOUT INDIA AS AN EMERGING ECONOMY
India is one of the top 10 emerging markets and the second most attractive emerging market at that. With a population of one
billion and above, India is the 6th largest country in the world in terms of nominal GDP and 3rd in terms of purchasing power
parity. At 6.77%, India constitutes 3rd largest proportion of GDP at 6.77% (PPP in 2020).

There are three main factors that have been key in India’s growth story:
1. Young working-age population
2. Rising education and skill level
3. Rapidly growing middle class

A country of diversified culture, it also has a diversified industry base, having large scale production capacities in cement, steel,
coal, chemicals, heavy machinery and textiles. The workforce of India is highly educated and trained, making India one of the
largest exporters of computer software. The country has limited dependence on exports and is fueled by domestic consumption
and investment. 50% of India’s economy comes from its strong service sector, which has been a driving force in accelerating
the economic progress of the country. The service sector also supplements industrialization as well as the export of various
commodities and resources.

A distinguishing factor of India, compared to other emerging markets, is that it has a very sophisticated commercial code. The
country has focused on economic progress in its national policies. The Modi government, in the last few years, has opened the
economy of India to the rest of the globe in an unimaginable way. With soaring ambition, the government removed anarchic
company laws and introduced policies that have provided ease to both businesses and investors. Much focus has been on
attracting foreign investors, especially NRIs to invest long term in India.

Beyond economics, India has nuclear weapons capability with a large army and navy force, making it an influential country. It
is United States’ largest economic partner with strong trade and investment links.

2. MACROECONOMIC INDICATORS TO ASSESS THE HEALTH OF THE INDIAN ECONOMY

I. GDP and Growth

The graph shows that India’s Real GDP has grown at

an average rate of 7% over the last 10 years. This
clearly shows that the Indian economy is growing
quickly. Primary drivers for this growth have been
growing the labor force, middle class population and
increasing government spending in the public sector.

Looking at the components of GDP, we

understand that real GDP has grown from 122
lakh crore in 2016-17 to 134 lakh crore in
2020-21. Consumption as a % of GDP has
grown from 69.9% in 2016-17 to 71.65.
Investment as % of GDP has declined from
28.19% in 2016-17 to 26.70 in 2020-21.

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Private investment has fallen over the years whereas the government has focused on increasing public spending to build basic
infrastructure to support growth. Government spending as % of GDP has increased continuously from 10.30% in 2016-17 to
12.60% in 2020-21. Household consumption saw downward trend from 9.1% in FY 2021 to a 5.5% rise in FY 2020. However,
expenditure by the government on public utilities increased by 2.91 % in FY21, much slower than the 7.88 % rise seen in FY20.
Government Final Consumption Expenditure (GFCE) rose by 2.91 percent from Rs. 15.41 lakh crore in the previous year to Rs.
15.86 lakh crore in FY21.

India’s sectoral composition of GDP shows that it is primarily led by the services sector with a contribution of 54.27%, following
by manufacturing at 29.35%, and agriculture by 16.38%. This is despite the agricultural sector being the high employing sector
for the economy. India needs to tackle with a relatively under-developed manufacturing base and low productivity per yield in
the agricultural sector.

II. Unemployment
Average unemployment rate in India is about 5.5% which has spiked in the recent past due to the covid-19 pandemic and locked
across the country. Indian unemployment rate for 2020 was 7.11%, a 1.84% increase from 2019.

The given factors are driving unemployment:

• Lack of the Stock of Physical Capital
• Use of Capital-Intensive Techniques
• Inequitable Distribution of Land: Over the past three years, the average share size has shown a steady downward trend.
According to the Agricultural Census of 201516, the average operating land area in 201516 decreased from 1.15 hectares
in 201011 to 1.08 hectares in 201516. Small and marginal land (10 hectares) only represents 0.57% of the full ownership
of the land.
• Rigid Protective Labour Legislation: Recent changes in Labour Act by the government are aimed at making labor law
less rigid.

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 • Neglecting of the Role of Agriculture in Employment Generation
• Lack of Infrastructure
• Female participation in the labor force participation has decreased from 30.28% in 1990 to 20.52% in 2019.

III. Inflation Rates

Over the years inflation rate in India has been in the accepted range of 2-6%. In the recent past, there has been a surge in
inflation primarily due to increased price of food and beverages and increase in fuel prices.

Category-wise Inflation trends:

● The Food and Beverage Index, which accounts for 45.86 percent of the CPI, increased to 5.58 percent YoY in June 2021,
compared to 5.24 percent YoY in May 2021. This increase was mostly driven by sequential price increases in oils and fats,
eggs, fruits, and pulses. This increase in food costs accounts for 41% of CPI inflation in June 2021.
● In June 2021, inflation in the Fuel and Light Index, which has a weight of 6.84 percent in the CPI, rose to 12.68 percent
YoY from 11.86 percent in May 2021. Increased gasoline and diesel prices appear to be a factor. This will continue to be
a systemic concern in the future, as the government struggles to reconcile the demand for additional money from high
excise rates with other priorities.
● In June 2021, the Housing Price Index, which has a weight of 10.07 percent in the CPI, fell to 3.75 percent YoY from
3.86 percent YoY in May 2021. For the last three months, the Housing Price Index's contribution to CPI inflation has been
dropping, and in June 2021, it contributed 6.1 percent to CPI inflation.

The inflation trend in India is driven by both temporary and long-term forces. Pressures from the supply-side have resulted in
tightening of the food prices will ease with the coming of a normal southwest monsoon. In addition, government assistance in
maintaining buffer stockpiles can help to keep pulse prices down. The rise in edible oil prices continues to be concerning, as it is
largely a mirror of foreign prices.
Some downside risks stem from the upward trend of international crude oil and base metal commodity prices. They represent a
high systemic risk because India is highly dependent on the import of these items. Although continued supply cuts have caused
crude oil prices to rise, as the global economy is slowly unlocking, increased demand has led to a sharp rise in metal prices.
Taken together, they pose a lasting risk to inflationary pressures.

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IV. Debt and Deficits

The above graphs show that between 2008-09 and 2019-20, India’s key debt figures (fiscal, revenue and primary debt) as a % of
GDP were on a declining trend. In FY 2019-20, fiscal deficit rose due to low revenue realization for the government.

However, owing to the on-going Covid-19 crisis, the fiscal deficit as % of GDP surged as the government made significant
expenditures to boost the economy, in the wake of dampened household consumption which has been the key driver of the Indian
economy. India’s finance minister presented a fiscal deficit of 9.5% or INR 18.5 lakh crore for FY-2021 while executing a fiscal
consolidation plan to lower the deficit to 4.5% by FY-2026. In actuality, India's fiscal deficit was lower at 9.3% or INR 18.21
lakh crore of GDP as per FY 2020-21 data by the Controller General of Accounts.

On the revenue front, after implementation of the GST regime in 2017, gross GST collections fell short of the targeted INR 1.12
lakh crore by INR 1 lakh crore in FY 2018-19, and have showcased a volatile trend on a month-to-month basis. GST collections
also took a hit during the Covid-19 crisis, however, with ease of lockdown restrictions, GST collections crossed INR 1 trillion
by July 2021 which indicates recovery of the Indian economy. Furthermore, as compliance frameworks are adopted by state
governments and organizations at a larger scale, GST revenues are set to showcase a more stable and robust trend for India. The
govt. is also focusing on enhancing capital infrastructure to revive the economy by increasing capital expenditure from budgeted
INR 4.12 lakh crores to INR 5.5 lakh crore for FY 2021-22, which is a welcome move. Effective fiscal consolidation will have
to be carried out to ensure crowding out of private investment is minimized and fiscal expenditure targets long-term asset creation
for sustainable and inclusive economic growth.

V. External Balances and Exchange Rates

India’s foreign exchange reserves are in a healthy state and the current account deficit (CAD) has also been maintained at a
sustainable level by focusing on long-term, non-debt creating capital inflows, and de-emphasizing short-term, debt-creating
capital inflows.

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 After the 1990-91 Balance of Payment crisis, the
Rangarajan Committee proposed recommendations to
reform India’s external sector through (1) restrictions
on size, maturity and end-utilization of external
commercial borrowings (ECBs), (2) LIBOR-based
interest rate ceiling non-resident deposits to reduce
instability of these flows, (3) pre-payment and
refinancing of high-cost external debt, and (4)
enhancing FDI and FPI flows into the economy.

India also effectively transitioned to a market-driven exchange rate system 1994, with current account convertibility being
introduced in 1993. With various market reforms introduced in the external sector, CAD as a % of GDP has shown a declining
trend wherein it fell from 1.2% in the 1990s to 0.5% in the 2000s, and then averaging at 2.2% in 2010s. Conversely, current
account surplus as a % of GDP has seen an increasing trend, wherein it rose from 2.3% in the 1990s to 3.4% in the 2000s, and
stabilized at 3.1% in the 2010s.

Additionally, long-term, non-debt creating flows like foreign investment as a % of GDP rose from 0.9% in the 1990s to 2.7% in
the 2000s, finally averaging 2.5% in the 2010s, while ECBs have seen a declining trend.

The covid-19 crisis put to test the current framework for external accounts management and India’s accumulated external
balances have been able to cushion economic turbulence.

VI. Savings and Investment

Since the global financial recession of 2008, India’s savings rate has been on a declining trend. India’s household savings is the
primary source of investment for both the corporate and government sector, and the declining trend can be worrisome. The
savings rate has fallen from a high of 37% in 2008 to approximately 30.5% in 2018. However, this declining trend is owed to a
reduction of household savings, especially of ‘physical savings’, while households' savings on financial assets have remained
stable at approximately 7% of GDP (with bank deposits contributing to these savings the highest at 27%).

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Declining household physical savings showcases a decline in estimated capital formation as this indicates households’ muted
investment in sectors like construction and machinery. The ongoing pandemic caused an increase in household savings in the
first quarter of FY 2020-21; however, it rose in the second and third quarter to over 9.8%. This can be attributed with resumption
of economic activities wherein households changed their consumption patterns from “only essentials” spending to more
discretionary spending.

Additionally, with falling household savings, household liabilities

have risen from INR 1635.98 billion in FY 2008-09 to INR 6739.22
billion in FY 2017-18. The main challenge for the Indian economy is
to mobilize the existing pool of savings into profitable investments to
boost the economy in the coming years. India can experience
sustained growth through an investment-led model instead of a
consumption-oriented model. However, with declining savings which
are a key source of investment, the above trends can hamper the health
of the economy.

3. GOVERNMENT INITIATIVES THAT PROMOTE INVESTMENTS IN THE COUNTRY

I. Make in India: Make in India was an initiative launched to facilitate investment from across the world and strengthen the
manufacturing sector of India. It was aimed to develop a modern and innovative infrastructure to open up new sectors for the
foreign investments. The focus of the initiative was around 25 sectors including automobile, agrochemicals, textiles, electronics
etc. The programme will also facilitate improving the ranking of Ease of Doing Business which shall in turn affect the investment
scenario in the country.

II. Empowered Group of secretaries (EGoS)/Project Development Cell (PDC): EGoS and PDCs were set up with the
approval of the Union Cabinet of India for the purpose of attracting investments in India. This was launched with the aim to
create an investment economy in India to facilitate domestic as well as foreign investments to boost the Indian economy.
The Government of India has laid down the following core objectives with respect to EGoS to support and facilitate investments:
• To bring in global as well as domestic investment in the country and facilitate timely clearance and faster
coordination across various departments.
• To set targets for the completion of different stages and evaluate the investments on actual investments and
the creation of project
PDC is headed by Joint Secretary level nodal officers and is present across 29 departments of the GOI. The objective is to create
projects with complete approvals and detailed reports for the investors. Any issue identified can be resolved to finalize the
agreement thus facilitating a hassle-free process. The PDCs also work to interact with various stakeholders to discuss and analyse
the potential of investment in various sectors and explore new opportunities as well.

III. Project Monitoring Group

It was set up by the Cabinet Secretariat in the year 2013 and has now been merged with the Department for promotion of Industry
and Internal Trade in the year 2019 with the ‘Invest India’ being the provider of all sorts of support for its proper functioning.
The aim of this institution is to aid in the resolving of the issues and hindrances, and ensuring the speedy commissioning of large-
scale infrastructure projects in the Public and Private Sectors. As of 15th December 2020, a total of 1108 Infrastructure Projects
worth INR 43.2 Lakh Crore have been listed on the newly made PMG Portal (Only projects with an estimated value of 500
Crores and above) for their issue resolution. Out of them 248 are the ‘Pragati’ projects.

IV. Invest India

It’s a non-profit company which has been set up as a joint venture between the Department for Promotion of Industry and Internal
trade, Federation of Indian Chambers of Commerce & Industry (FICCI), CII, NASSCOM and various State Governments. The
main objective of this institution is to transform the whole country’s business ecosystem by simplifying various processes for the
investors. It is also a one stop destination for finding any government policy

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V. Ease of Doing Business
Let’s have a look at the various government initiatives using the theme of Ease of Doing Business:
• PAN, TAN, and DIN have been merged into a single form for company incorporation
• Companies with an authorized capital of up to Rs 15 lakh were exempted from incorporation fees. The Companies
• Act 2015 was passed to remove requirements of minimum paid-up capital and common seal for companies
• Approval systems for issuing building permits have been fast-tracked with features like common application form,
digital signatures and online scrutiny
• The total number of procedures and cost of obtaining permits (from 23.2% to 5.4% of the economy’s per capita income)
reduced significantly
• The number of mandatory documents required for customs purposes for import and export of goods was reduced to three
• The online integrated application portal and a risk management system has brought more transparency and reduced
frequency of custom inspections
• A case management tool was developed to track status, generate or view court orders etc
• Electricity connection is provided within 7 days if no Right of Way (ROW) is required else in 15 days and development
charges capped
• All sub-registrar offices have been digitized and record integrated with the Land records department which reduces the
time taken significantly
• The Insolvency and Bankruptcy Code 2016 has introduced new dimensions in resolving insolvency in India
• Corporate tax for midsize companies has reduced from 30% to 25%
• GST which subsumes 8 taxes at Central level and 9 taxes at the State level
• Business Reforms Action Plan (BRAP) introduced at State Level

VI. Startup India

It is the flagship initiative of the Government of India to foster the start-up culture and build a complete ecosystem for
entrepreneurship in India. A total of 22 states have formulated start-up policies since 2014. It was launched in 2016, and the
statistics for the latest available report as follows:
• 14,036 applications out of all have been recognized by DIPP as start-ups
• The compliance norms have been eased out
• Relaxed norms of procurement
• Given tax benefits in the form of:
o Tax Exemption: The Finance Act of 2016 has made provisions for the startups to get income tax exemption for 3
years in a block of 5 years
o Capital Gains Tax Exemption: The Finance Act 2016 mentioned Section 54 EE which provides exemption of
capital gains upto INR 50 lakhs
o Removal of Angel Tax

VIII. Foreign Direct Investment

The Indian Government has taken up the liberal policy on FDI under which upto 100% FDI is allowed in most of the sectors,
with the aim of attracting higher levels of FDI. Furthermore, there have been many significant changes in the FDI policy to keep
India an attractive investment destination. After the abolishment of the Foreign Investment Promotion Board the overall process
of granting these FDI approvals has become smoother and simpler. A new foreign investment portal has been created to facilitate
the clearing of the applications

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VIII. Financial Liberalisation
It is a very important aspect of the Indian Economic reforms. It was followed by the deregulation of the central banks, interest
rates and the strict norms of the Accounting practices in the banking sector (Basel Capital Norms). To allow greater freedom of
cross border capital flows the domestic financial system was also integrated with the global financial system.

IX. Industrial Liberalisation

The IDR Framework under the DIPP provides the necessary framework and structure for implementing the Industrial Policy,
through various amendments the objective for a more liberal policy were attained. The set of reforms which started in 1991 were
made by keeping a bigger role for the private initiatives. The main objectives of the policy are as follows:
• Maintaining sustained growth in the productivity
• Enhance employment
• Establish India as a major player in the global economy
• International Competitiveness
• Freedom and flexibility in the industry
• New reforms to deregulate the Industry (refer to state wise reforms mentioned in the references)

X. National Design Policy

Approved in 2007, this caters to the promotion of Indian design and also the setting up of Innovation Hubs for various sectors
viz. Automobile and transportation, Digital products. The government will also provide financial support through mechanisms
of venture funding and loans.

XI. National Intellectual Property Rights Policy

It was approved in 2016, this was formulated with a vision to create and harness the synergies of intellectual property and
concerned bodies. It sets a structure to implement, monitor and review. The following objectives have been covered by this
policy:
• IPR Awareness
• Generation of IPRs
• Legal and Legislative framework
• Enforcement and Adjudication
• Human Capital Development

4. RISKS AND OPPORTUNITIES AFFECTING INVESTMENTS

Opportunities:
I. Demographic Dividend: India has one of the world's youngest populations, with 47 percent of the population under the age
of 25. This translates to a workforce that will remain active and productive for a long period. Despite rising wages, India continues
to be one of the cheapest labor markets in the world. When compared to other Asian countries, the cost arbitrage still gives the
country a significant edge. The cost of labor is, in fact, a primary driver of FDI into the country.

II. Market Size: India's increasing middle class accounts for about 45 percent of the country's enormous customer base. The
Indian middle class also has purchasing power, which encourages more international companies to enter and profit from the retail
and service sectors in India.

III. Economic Performance: The economy is booming, and it's predicted to keep going for the next two years. The domestic
economy is robust enough to keep demand going, and the inflation rate, while higher than the aim of 4%, is still manageable.
Rising crude oil prices are a source of anxiety in the United States, but they are also a source of concern around the world.

IV. Relaxation in FDI norms: The Indian government is developing a strategy to achieve its goal of $ 100 billion in FDI inflows.
Increased FDI flows have resulted from a plethora of steps implemented by the Indian government to reduce FDI regulations.
The following are some of these measures:
● Allow 100 percent foreign direct investment in a single retail brand via an automatic approach.
● With government approval, allow foreign airlines to invest up to 49% directly or indirectly in Air India.

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 ● Allow 100 percent FDI in the e-commerce marketplace paradigm.
● Relaxation of government clearance for FDI in Real Estate Broking Services up to 100 percent.
● Improving the single-window clearing mechanism to expedite approvals.
● In the FDI policy, the definition of "medical devices" has been changed.
● All NRI investments are treated as domestic investments.

V. New Bankruptcy Framework: Another factor driving investments is the country's new bankruptcy system, the Insolvency
and Bankruptcy Code (IBC) has resulted in asset divestment. Some of India's biggest manufacturing names, particularly in the
steel industry, have been put up for auction. As a result, wealthy foreign investors are pouring money into them as well as Major
Indian Conglomerates are investing in them.

Risks:
I. Political: The nation's political instability is one of the most pressing issues. On the one hand, India's status as the world's
largest democratic government instills a sense of pride and security, but the harsh reality is that there are flaws. Simply said, the
manner the government in the 2000s was built on coalitions between a few groups is reason enough to be sceptical. Furthermore,
each new administration has specific arrangements that are unique in terms of decision-making, and if there is a subsequent
change in government, this will result in a shift in strategy and increased susceptibility.

II. Security: Another important element that should be properly considered and addressed is the ever-present security threat.
This danger includes the geopolitical threat posed by Pakistan, as well as the ongoing dispute over Kashmir, which has taken
these two nuclear-armed states to the brink of conflict on several occasions. Household fear-based tyranny in the Kashmir valley,
as well as in Assam, Manipur, and Nagaland, where numerous separatists gather work, would be among the other security threats.

III. Infrastructure: If there is sufficient foundation in the country, it is undoubtedly a great prize for the speculator. In India,
there is a substantial lack of strong foundations throughout the country, such as proper streets, motorways, a sufficient supply of
clean water, and an uninterruptible supply of power, to name a few. Regardless, there is a downside to this lack of infrastructure.

IV. Equity challenge: India is clearly developing at a faster rate presently than it was earlier, but it is clear that progress has
been uneven. This means that although the more affluent areas have been tapped, the less affluent areas have been underutilized.
To gain a complete picture of development, it's critical to make sure that the rural areas are improving at roughly the same rate
as the urbanized areas. In this vein, supporting social conformity while maintaining a respectable level of financial progress.

V. Federal Challenge: The need to accelerate the adoption of policies, rules, and regulations is one of the most significant
problems facing bigger FDI. It is critical that policies be implemented consistently across all the states in India. As a result, it is
critical to demand that all Indian states implement policies at the same time.

CONCLUSION AND FUTURE OUTLOOK FOR INDIA AS AN EMERGING ECONOMY FOR

INVESTMENTS
India is a front runner among the emerging markets with its business-friendly reforms, growth in manufacturing and
infrastructural development, and political stability. The country has remarkable global rankings: 11th in consumer markets, 17th
in financial market sophistication, 24th in banking, 39th in innovation, 44th in business sophistication, 51st in global
competitiveness. In an effort to attain its ambitious economic goals, India has made key strategic partnerships with other
countries such as with USA as part of the Next Steps in Strategic Partnership, with the G4 (Germany, Brazil, Japan and India)
in hopes of getting a permanent seat in the United Nations Security Council and with the Association of Southeast Asian Nation
in the framework of the Look East Policy. The current reforms by the government are giving a boost to the growth of the
country. These positive reforms are the reason that India has moved up 12 places in the World Bank’s Ease of Doing Business
ranking and have resulted in the increasing foreign investments in India.

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Despite the impact of the deadly Covid-19 induced pandemic, key macroeconomic variables like private consumption, fixed
investments, exports, and public spending increased by 2.7%, 10.9%, 8.8% and 28.3% respectively. Despite GDP contraction
in FY 2020, India’s economic growth is expected to increase in the coming financial year due to pent-up demand for various
consumer and investment goods. This presents India as an important destination for foreign and domestic investment, as India
hopes to shift from consumption-focused model to an investment-focused one to ensure sustainability of growth patterns.

Some key sectors that present investment opportunities in real terms are the BFSI, Infrastructure, Automobiles (emergence of
EVs and increasing public expenditure on infrastructure to complement the sector), Information Technology, and Consumer
Electronics (increased penetration in rural markets). For example, the SaaS industry to expected to grow by 5 times over the
coming five years as the sector continues to growth at an average CAGR of 51%, creating over 2 lakh+ jobs.

From India’s perspective, structural changes to the current labor market scenario, continued restructuring of PSUs, effective
mobilization of savings, etc. need to be driven to enhance the economy’s attractiveness for investment.

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OVERVIEW ABOUT INDIA AS AN EMERGING ECONOMY

India is one of the top 10 emerging markets and the second most attractive emerging market at that. With a population of
one billion and above, India is the 6th largest country in the world in terms of nominal GDP and 3rd in terms of purchasing
power parity. At 6.77%, India constitutes 3rd largest proportion of GDP at 6.77% ﴾PPP in 2020﴿.
There are three main factors that have been key in India’s growth story:
1. Young working‐age population
2. Rising education and skill level
3. Rapidly growing middle class

A country of diversified culture, it also has a diversified industry base, having large scale production capacities in cement,
steel, coal, chemicals, heavy machinery and textiles. The workforce of India is highly educated and trained, making India
one of the largest exporters of computer software. The country has limited dependence on exports and is fueled by
domestic consumption and investment. 50% of India’s economy comes from its strong service sector, which has been a
driving force in accelerating the economic progress of the country. The service sector also supplements industrialization as
well as the export of various commodities and resources.
A distinguishing factor of India, compared to other emerging markets, is that it has a very sophisticated commercial code.
The country has focused on economic progress in its national policies. The Modi government, in the last few years, has
opened the economy of India to the rest of the globe in an unimaginable way. With soaring ambition, the government
removed anarchic company laws and introduced policies that have provided ease to both businesses and investors. Much
focus has been on attracting foreign investors, especially NRIs to invest long term in India.
Beyond economics, India has nuclear weapons capability with a large army and navy force, making it an influential country.
It is United States’ largest economic partner with strong trade and investment links.
2. MACROECONOMIC INDICATORS TO ASSESS THE HEALTH OF THE INDIAN ECONOMY

I. GDP and Growth

The graph shows that India’s Real GDP has grown at an average rate of 7% over the last 10 years. This clearly shows that
the Indian economy is growing quickly. Primary drivers for this growth have been growing the labor force, middle class
population and increasing government spending in the public sector.

Looking at the components of GDP, we understand that real GDP has grown from 122 lakh crore in 2016‐17 to 134 lakh
crore in 2020‐21. Consumption as a % of GDP has grown from 69.9% in 2016‐17 to 71.65. Investment as % of GDP has
declined from 28.19% in 2016‐17 to 26.70 in 2020‐21. Private investment has fallen over the years whereas the government
has focused on increasing public spending to build basic infrastructure to support growth. Government spending as % of
GDP has increased continuously from 10.30% in 2016‐17 to 12.60% in 2020‐21. Household consumption saw downward
trend from 9.1% in FY 2021 to a 5.5% rise in FY 2020. However, expenditure by the government on public utilities increased
by 2.91 % in FY21, much slower than the 7.88 % rise seen in FY20. Government Final Consumption Expenditure ﴾GFCE﴿ rose
 Page 2
by 2.91 percent from Rs. 15.41 lakh crore in the previous year to Rs. 15.86 lakh crore in FY21.

India’s sectoral composition of GDP shows that it is primarily led by the services sector with a contribution of 54.27%,
following by manufacturing at 29.35%, and agriculture by 16.38%. This is despite the agricultural sector being the high
employing sector for the economy. India needs to tackle with a relatively under‐developed manufacturing base and low
productivity per yield in the agricultural sector.
II. Unemployment
Average unemployment rate in India is about 5.5% which has spiked in the recent past due to the covid‐19 pandemic and
locked across the country. Indian unemployment rate for 2020 was 7.11%, a 1.84% increase from 2019.

The given factors are driving unemployment:

• Lack of the Stock of Physical Capital
• Use of Capital‐Intensive Techniques
• Inequitable Distribution of Land: Over the past three years, the average share size has shown a steady downward
trend. According to the Agricultural Census of 201516, the average operating land area in 201516 decreased from 1.15
hectares in 201011 to 1.08 hectares in 201516. Small and marginal land ﴾10 hectares﴿ only represents 0.57% of the full
ownership of the land.
• Rigid Protective Labour Legislation: Recent changes in Labour Act by the government are aimed at making labor law
less rigid.

• Neglecting of the Role of Agriculture in Employment Generation

• Lack of Infrastructure
• Female participation in the labor force participation has decreased from 30.28% in 1990 to 20.52% in 2019.

III. Inflation Rates

Over the years inflation rate in India has been in the accepted range of 2‐6%. In the recent past, there has been a surge in
inflation primarily due to increased price of food and beverages and increase in fuel prices.

Category‐wise Inflation trends:

● The Food and Beverage Index, which accounts for 45.86 percent of the CPI, increased to 5.58 percent YoY in June
2021, compared to 5.24 percent YoY in May 2021. This increase was mostly driven by sequential price increases in oils and
fats, eggs, fruits, and pulses. This increase in food costs accounts for 41% of CPI inflation in June 2021.
● In June 2021, inflation in the Fuel and Light Index, which has a weight of 6.84 percent in the CPI, rose to 12.68 percent
YoY from 11.86 percent in May 2021. Increased gasoline and diesel prices appear to be a factor. This will continue to be a
systemic concern in the future, as the government struggles to reconcile the demand for additional money from high
excise rates with other priorities.

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Title: Uptick in India's headline inflation: A transitory phase | ORF
Jul 18, 2021 — Food and Beverage Index, which has the highest weight of 45.86 percent in CPI, rose to 5.58 percent YoY in
June 2021 versus 5.24 percent YoY ...
https://www.orfonline.org/expert‐speak/uptick‐india‐headline‐inflation‐transitory‐phase/
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● In June 2021, the Housing Price Index, which has a weight of 10.07 percent in the CPI, fell to 3.75 percent YoY from
3.86 percent YoY in May 2021. For the last three months, the Housing Price Index's contribution to CPI inflation has been
dropping, and in June 2021, it contributed 6.1 percent to CPI inflation.
The inflation trend in India is driven by both temporary and long‐term forces. Pressures from the supply‐side have resulted
in tightening of the food prices will ease with the coming of a normal southwest monsoon. In addition, government
assistance in maintaining buffer stockpiles can help to keep pulse prices down. The rise in edible oil prices continues to be
concerning, as it is largely a mirror of foreign prices.
Some downside risks stem from the upward trend of international crude oil and base metal commodity prices. They
represent a high systemic risk because India is highly dependent on the import of these items. Although continued supply
cuts have caused crude oil prices to rise, as the global economy is slowly unlocking, increased demand has led to a sharp
rise in metal prices. Taken together, they pose a lasting risk to inflationary pressures.

IV. Debt and Deficits

The above graphs show that between 2008‐09 and 2019‐20, India’s key debt figures ﴾fiscal, revenue and primary debt﴿ as a
% of GDP were on a declining trend. In FY 2019‐20, fiscal deficit rose due to low revenue realization for the government.
However, owing to the on‐going Covid‐19 crisis, the fiscal deficit as % of GDP surged as the government made significant
expenditures to boost the economy, in the wake of dampened household consumption which has been the key driver of
the Indian economy. India’s finance minister presented a fiscal deficit of 9.5% or INR 18.5 lakh crore for FY‐2021 while
executing a fiscal consolidation plan to lower the deficit to 4.5% by FY‐2026. In actuality, India's fiscal deficit was lower at
9.3% or INR 18.21 lakh crore of GDP as per FY 2020‐21 data by the Controller General of Accounts.
On the revenue front, after implementation of the GST regime in 2017, gross GST collections fell short of the targeted INR
1.12 lakh crore by INR 1 lakh crore in FY 2018‐19, and have showcased a volatile trend on a month‐to‐month basis. GST
collections also took a hit during the Covid‐19 crisis, however, with ease of lockdown restrictions, GST collections crossed
INR 1 trillion by July 2021 which indicates recovery of the Indian economy. Furthermore, as compliance frameworks are
adopted by state governments and organizations at a larger scale, GST revenues are set to showcase a more stable and
robust trend for India. The govt. is also focusing on enhancing capital infrastructure to revive the economy by increasing
capital expenditure from budgeted INR 4.12 lakh crores to INR 5.5 lakh crore for FY 2021‐22, which is a welcome move.
Effective fiscal consolidation will have to be carried out to ensure crowding out of private investment is minimized and
fiscal expenditure targets long‐term asset creation for sustainable and inclusive economic growth.

V. External Balances and Exchange Rates

India’s foreign exchange reserves are in a healthy state and the current account deficit ﴾CAD﴿ has also been maintained at a
sustainable level by focusing on long‐term, non‐debt creating capital inflows, and de‐emphasizing short‐term, debt‐
creating capital inflows.
 Page 2

After the 1990‐91 Balance of Payment crisis, the Rangarajan Committee proposed recommendations to reform India’s
external sector through ﴾1﴿ restrictions on size, maturity and end‐utilization of external commercial borrowings ﴾ECBs﴿, ﴾2﴿
LIBOR‐based interest rate ceiling non‐resident deposits to reduce instability of these flows, ﴾3﴿ pre‐payment and
refinancing of high‐cost external debt, and ﴾4﴿ enhancing FDI and FPI flows into the economy.

India also effectively transitioned to a market‐driven exchange rate system 1994, with current account convertibility being
introduced in 1993. With various market reforms introduced in the external sector, CAD as a % of GDP has shown a
declining trend wherein it fell from 1.2% in the 1990s to 0.5% in the 2000s, and then averaging at 2.2% in 2010s.
Conversely, current account surplus as a % of GDP has seen an increasing trend, wherein it rose from 2.3% in the 1990s to
3.4% in the 2000s, and stabilized at 3.1% in the 2010s.

Additionally, long‐term, non‐debt creating flows like foreign investment as a % of GDP rose from 0.9% in the 1990s to
2.7% in the 2000s, finally averaging 2.5% in the 2010s, while ECBs have seen a declining trend.
The covid‐19 crisis put to test the current framework for external accounts management and India’s accumulated external
balances have been able to cushion economic turbulence.

VI. Savings and Investment

Since the global financial recession of 2008, India’s savings rate has been on a declining trend. India’s household savings is
the primary source of investment for both the corporate and government sector, and the declining trend can be
worrisome. The savings rate has fallen from a high of 37% in 2008 to approximately 30.5% in 2018. However, this declining
trend is owed to a reduction of household savings, especially of ‘physical savings’, while households' savings on financial
assets have remained stable at approximately 7% of GDP ﴾with bank deposits contributing to these savings the highest at
27%﴿.
Declining household physical savings showcases a decline in estimated capital formation as this indicates households’
muted investment in sectors like construction and machinery. The ongoing pandemic caused an increase in household
savings in the first quarter of FY 2020‐21; however, it rose in the second and third quarter to over 9.8%. This can be
attributed with resumption of economic activities wherein households changed their consumption patterns from “only
essentials” spending to more discretionary spending.

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Additionally, with falling household savings, household liabilities have risen from INR 1635.98 billion in FY 2008‐09 to INR
6739.22 billion in FY 2017‐18. The main challenge for the Indian economy is to mobilize the existing pool of savings into
profitable investments to boost the economy in the coming years. India can experience sustained growth through an
investment‐led model instead of a consumption‐oriented model. However, with declining savings which are a key source
of investment, the above trends can hamper the health of the economy.

3. GOVERNMENT INITIATIVES THAT PROMOTE INVESTMENTS IN THE COUNTRY

I. Make in India: Make in India was an initiative launched to facilitate investment from across the world and strengthen the
manufacturing sector of India. It was aimed to develop a modern and innovative infrastructure to open up new sectors for
the foreign investments. The focus of the initiative was around 25 sectors including automobile, agrochemicals, textiles,
electronics etc. The programme will also facilitate improving the ranking of Ease of Doing Business which shall in turn
affect the investment scenario in the country.

II. Empowered Group of secretaries ﴾EGoS﴿/Project Development Cell ﴾PDC﴿: EGoS and PDCs were set up with the approval
of the Union Cabinet of India for the purpose of attracting investments in India. This was launched with the aim to create
an investment economy in India to facilitate domestic as well as foreign investments to boost the Indian economy.
The Government of India has laid down the following core objectives with respect to EGoS to support and facilitate
investments:
• To bring in global as well as domestic investment in the country and facilitate timely clearance and faster coordination
across various departments.
• To set targets for the completion of different stages and evaluate the investments on actual investments and the
creation of project
PDC is headed by Joint Secretary level nodal officers and is present across 29 departments of the GOI. The objective is to
create projects with complete approvals and detailed reports for the investors. Any issue identified can be resolved to
finalize the agreement thus facilitating a hassle‐free process. The PDCs also work to interact with various stakeholders to
discuss and analyse the potential of investment in various sectors and explore new opportunities as well.

III. Project Monitoring Group

It was set up by the Cabinet Secretariat in the year 2013 and has now been merged with the Department for promotion of
Industry and Internal Trade in the year 2019 with the ‘Invest India’ being the provider of all sorts of support for its proper
functioning. The aim of this institution is to aid in the resolving of the issues and hindrances, and ensuring the speedy
commissioning of large‐scale infrastructure projects in the Public and Private Sectors. As of 15th December 2020, a total of
1108 Infrastructure Projects worth INR 43.2 Lakh Crore have been listed on the newly made PMG Portal ﴾Only projects with
an estimated value of 500 Crores and above﴿ for their issue resolution. Out of them 248 are the ‘Pragati’ projects.

IV. Invest India

It’s a non‐profit company which has been set up as a joint venture between the Department for Promotion of Industry and
 Page 2
Internal trade, Federation of Indian Chambers of Commerce & Industry ﴾FICCI﴿, CII, NASSCOM and various State
Governments. The main objective of this institution is to transform the whole country’s business ecosystem by simplifying
various processes for the investors. It is also a one stop destination for finding any government policy
V. Ease of Doing Business
Let’s have a look at the various government initiatives using the theme of Ease of Doing Business:
• PAN, TAN, and DIN have been merged into a single form for company incorporation
• Companies with an authorized capital of up to Rs 15 lakh were exempted from incorporation fees. The Companies
• Act 2015 was passed to remove requirements of minimum paid‐up capital and common seal for companies
• Approval systems for issuing building permits have been fast‐tracked with features like common application form,
digital signatures and online scrutiny
• The total number of procedures and cost of obtaining permits﴾from 23.2% to 5.4% of the economy’s per capita
income﴿ reduced significantly
• The number of mandatory documents required for customs purposes for import and export of goods was reduced to
three
• The online integrated application portal and a risk management system has brought more transparency and reduced
frequency of custom inspections
• A case management tool was developed to track status, generate or view court orders etc
• Electricity connection is provided within 7 days if no Right of Way﴾ROW﴿ is required else in 15 days and development
charges capped
• All sub‐registrar offices have been digitized and record integrated with the Land records department which reduces
the time taken significantly
• The Insolvency and Bankruptcy Code 2016 has introduced new dimensions in resolving insolvency in India
• Corporate tax for midsize companies has reduced from 30% to 25%
• GST which subsumes 8 taxes at Central level and 9 taxes at the State level
• Business Reforms Action Plan ﴾BRAP﴿ introduced at State Level

VI. Startup India

It is the flagship initiative of the Government of India to foster the start‐up culture and build a complete ecosystem for
entrepreneurship in India. A total of 22 states have formulated start‐up policies since 2014. It was launched in 2016, and
the statistics for the latest available report as follows:
• 14,036 applications out of all have been recognized by DIPP as start‐ups
• The compliance norms have been eased out
• Relaxed norms of procurement
• Given tax benefits in the form of:
o Tax Exemption: The Finance Act of 2016 has made provisions for the startups to get income tax exemption for 3 years
in a block of 5 years
o Capital Gains Tax Exemption: The Finance Act 2016 mentioned Section 54 EE which provides exemption of capital
gains upto INR 50 lakhs
o Removal of Angel Tax

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Title: LIC Policy: Attractive tax benefits you can get on your
Jul 23, 2019 — Individuals are given tax benefits in the form of standard deductions and various investments. Well, indirectly
insurance is also a type of ...
https://www.indiatvnews.com/fyi/lic‐policy‐tax‐benefits‐on‐insurance‐premiums‐itr‐filing‐last‐date‐537262
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VIII. Foreign Direct Investment

The Indian Government has taken up the liberal policy on FDI under which upto 100% FDI is allowed in most of the sectors,
with the aim of attracting higher levels of FDI. Furthermore, there have been many significant changes in the FDI policy to
keep India an attractive investment destination. After the abolishment of the Foreign Investment Promotion Board the
overall process of granting these FDI approvals has become smoother and simpler. A new foreign investment portal has
been created to facilitate the clearing of the applications

VIII. Financial Liberalisation

It is a very important aspect of the Indian Economic reforms. It was followed by the deregulation of the central banks,
interest rates and the strict norms of the Accounting practices in the banking sector ﴾Basel Capital Norms﴿. To allow greater
freedom of cross border capital flows the domestic financial system was also integrated with the global financial system.

IX. Industrial Liberalisation

The IDR Framework under the DIPP provides the necessary framework and structure for implementing the Industrial Policy,
through various amendments the objective for a more liberal policy were attained. The set of reforms which started in 1991
were made by keeping a bigger role for the private initiatives. The main objectives of the policy are as follows:
• Maintaining sustained growth in the productivity
• Enhance employment
• Establish India as a major player in the global economy
• International Competitiveness
• Freedom and flexibility in the industry
• New reforms to deregulate the Industry ﴾refer to state wise reforms mentioned in the references﴿

X. National Design Policy

Approved in 2007, this caters to the promotion of Indian design and also the setting up of Innovation Hubs for various
sectors viz. Automobile and transportation, Digital products. The government will also provide financial support through
mechanisms of venture funding and loans.

XI. National Intellectual Property Rights Policy

It was approved in 2016, this was formulated with a vision to create and harness the synergies of intellectual property and
concerned bodies. It sets a structure to implement, monitor and review. The following objectives have been covered by this
policy:
• IPR Awareness
• Generation of IPRs
• Legal and Legislative framework
• Enforcement and Adjudication
• Human Capital Development
4. RISKS AND OPPORTUNITIES AFFECTING INVESTMENTS
Opportunities:
I. Demographic Dividend: India has one of the world's youngest populations, with 47 percent of the population under the
age of 25. This translates to a workforce that will remain active and productive for a long period. Despite rising wages,
India continues to be one of the cheapest labor markets in the world. When compared to other Asian countries, the cost
arbitrage still gives the country a significant edge. The cost of labor is, in fact, a primary driver of FDI into the country.
 Page 2
II. Market Size: India's increasing middle class accounts for about 45 percent of the country's enormous customer base. The
Indian middle class also has purchasing power, which encourages more international companies to enter and profit from
the retail and service sectors in India.

III. Economic Performance: The economy is booming, and it's predicted to keep going for the next two years. The domestic
economy is robust enough to keep demand going, and the inflation rate, while higher than the aim of 4%, is still
manageable. Rising crude oil prices are a source of anxiety in the United States, but they are also a source of concern
around the world.

IV. Relaxation in FDI norms: The Indian government is developing a strategy to achieve its goal of $ 100 billion in FDI
inflows. Increased FDI flows have resulted from a plethora of steps implemented by the Indian government to reduce FDI
regulations.
The following are some of these measures:
● Allow 100 percent foreign direct investment in a single retail brand via an automatic approach.
● With government approval, allow foreign airlines to invest up to 49% directly or indirectly in Air India.

● Allow 100 percent FDI in the e‐commerce marketplace paradigm.

● Relaxation of government clearance for FDI in Real Estate Broking Services up to 100 percent.
● Improving the single‐window clearing mechanism to expedite approvals.
● In the FDI policy, the definition of "medical devices" has been changed.
● All NRI investments are treated as domestic investments.

V. New Bankruptcy Framework: Another factor driving investments is the country's new bankruptcy system, the Insolvency
and Bankruptcy Code ﴾IBC﴿ has resulted in asset divestment. Some of India's biggest manufacturing names, particularly in
the steel industry, have been put up for auction. As a result, wealthy foreign investors are pouring money into them as well
as Major Indian Conglomerates are investing in them.

Risks:
I. Political: The nation's political instability is one of the most pressing issues. On the one hand, India's status as the world's
largest democratic government instills a sense of pride and security, but the harsh reality is that there are flaws. Simply
said, the manner the government in the 2000s was built on coalitions between a few groups is reason enough to be
sceptical. Furthermore, each new administration has specific arrangements that are unique in terms of decision‐making,
and if there is a subsequent change in government, this will result in a shift in strategy and increased susceptibility.

II. Security: Another important element that should be properly considered and addressed is the ever‐present security
threat. This danger includes the geopolitical threat posed by Pakistan, as well as the ongoing dispute over Kashmir, which
has taken these two nuclear‐armed states to the brink of conflict on several occasions. Household fear‐based tyranny in
the Kashmir valley, as well as in Assam, Manipur, and Nagaland, where numerous separatists gather work, would be among
the other security threats.

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Title: Ministry of Labour and Employment Government of the People ...
The main objectives of the policy are as follows: i. Withdrawing working children from different forms of occupations including the hazardous work
working children in income generating activities with a view ...
https://mole.portal.gov.bd/sites/default/files/files/mole.portal.gov.bd/policies/7e663ccb_2413_4768_ba8d_ee99091661a4/National%20Child%20Lab
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IV. Equity challenge: India is clearly developing at a faster rate presently than it was earlier, but it is clear that progress has
been uneven. This means that although the more affluent areas have been tapped, the less affluent areas have been
underutilized. To gain a complete picture of development, it's critical to make sure that the rural areas are improving at
roughly the same rate as the urbanized areas. In this vein, supporting social conformity while maintaining a respectable
level of financial progress.

V. Federal Challenge: The need to accelerate the adoption of policies, rules, and regulations is one of the most significant
problems facing bigger FDI. It is critical that policies be implemented consistently across all the states in India. As a result, it
is critical to demand that all Indian states implement policies at the same time.
CONCLUSION AND FUTURE OUTLOOK FOR INDIA AS AN EMERGING ECONOMY FOR INVESTMENTS
India is a front runner among the emerging markets with its business‐friendly reforms, growth in manufacturing and
infrastructural development, and political stability. The country has remarkable global rankings: 11th in consumer markets,
17th in financial market sophistication, 24th in banking, 39th in innovation, 44th in business sophistication, 51st in global
competitiveness. In an effort to attain its ambitious economic goals, India has made key strategic partnerships with other
countries such as with USA as part of the Next Steps in Strategic Partnership, with the G4 ﴾Germany, Brazil, Japan and India﴿
in hopes of getting a permanent seat in the United Nations Security Council and with the Association of Southeast Asian
Nation in the framework of the Look East Policy. The current reforms by the government are giving a boost to the growth
of the country. These positive reforms are the reason that India has moved up 12 places in the World Bank’s Ease of Doing
Business ranking and have resulted in the increasing foreign investments in India.

Despite the impact of the deadly Covid‐19 induced pandemic, key macroeconomic variables like private consumption,
fixed investments, exports, and public spending increased by 2.7%, 10.9%, 8.8% and 28.3% respectively. Despite GDP
contraction in FY 2020, India’s economic growth is expected to increase in the coming financial year due to pent‐up
demand for various consumer and investment goods. This presents India as an important destination for foreign and
domestic investment, as India hopes to shift from consumption‐focused model to an investment‐focused one to ensure
sustainability of growth patterns.
Some key sectors that present investment opportunities in real terms are the BFSI, Infrastructure, Automobiles ﴾emergence
of EVs and increasing public expenditure on infrastructure to complement the sector﴿, Information Technology, and
Consumer Electronics ﴾increased penetration in rural markets﴿. For example, the SaaS industry to expected to grow by 5
times over the coming five years as the sector continues to growth at an average CAGR of 51%, creating over 2 lakh+ jobs.
From India’s perspective, structural changes to the current labor market scenario, continued restructuring of PSUs, effective
mobilization of savings, etc. need to be driven to enhance the economy’s attractiveness for investment.

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