Table of Contents

Two opportunities have arisen for India as a result of recent global developments. One of those developments, the rapid decline in the price of crude oil, is relatively tactical and might be short term in nature. The other is the peaking and decline of China’s economic growth and the challenges Beijing faces in its economic transformation. China is seeking to transition to a middle-income country by de-emphasizing low-cost manufacturing and relying on high-value-added manufacturing and services to drive economic growth in the future. At the same time, it is grappling with a huge mountain of debt accumulated especially rapidly since the global economic crisis of 2008–2009. Its labor costs are no longer low. That presents some opportunities for India, provided New Delhi is prepared to take advantage of them.

Post–Peak Oil Opportunity

The weak global growth environment has managed to create some opportunities for India through lower oil prices and possibly a prolonged period of low returns in Western countries owing to lower growth, higher debt, and saturated investment opportunities or burst bubbles. Clearly, these are short-term opportunities. For example, the low oil price may not be permanent. While domestic and external headwinds appear structural and long term in nature, the opportunities could be ephemeral. That is why India should capitalize on these situations quickly before they vanish.

In a meeting held in December 2015, the Organization of the Petroleum Exporting Countries (OPEC) could not agree on a production ceiling.117 OPEC expected demand to pick up. That seems unrealistic in light of where world economic growth is likely heading. In other words, the OPEC meeting held out the possibility of the price of oil not rising from the level of around $40 per barrel of oil that prevailed at the time. By February 2016 the price had declined to around $30 per barrel. The low price of oil will help India keep its fiscal deficit in check in 2016–2017 as it grapples with the fallout of the implementation of the recommendations of the Seventh Central Pay Commission. The recommendations, since accepted by the government, increase the salary of the country’s nearly 10 million central government employees by more than 23 percent. At the same time, it is a reminder that India should build up strategic oil reserves gradually but persistently over the next few years. India correctly argued at the Paris climate change talks that it needed carbon space. The low international price of oil affords India that space. India should take advantage of it.

The China Slowdown Opportunity

Another development that might work in India’s favor is the slowly emerging picture of China’s economic troubles. Of course, it comes with considerable caveats. China’s economic slowdown and its concomitant economic troubles may persuade many foreign direct and portfolio investors to examine the case for India more closely. Chinese businesses might consider investing in India, too. Furthermore, the economic slowdown in China should keep the demand for crude oil lower and restrain any future price increase. That is good news for India because of its dependence on imported crude. Quarter after quarter, if India reports a higher economic growth rate than China, the resulting boost to Indian business and self-confidence and to India’s international image would be considerable. Shifts in perception and confidence trigger investment and consumption spending and thus confer economic growth benefits.

However, India shares many of the problems that China faces, including corporate leverage, nonperforming assets in the banking system, and severe environmental and ecological degradation. There are as well unresolved border disputes with China. It is quite possible the shift in perceptions as to the economic prospects of both nations will affect their bilateral relations one way or another.

With regard to trade, a slowing China would be a very serious competitor both to Indian domestic manufacturing and to India’s exports to third countries. After having bottomed in 2011, China’s trade surplus as a share of GDP has been rising. That this has accompanied China’s economic slowdown is no coincidence.

China has a huge trade deficit in services. India has a trade surplus in services with the rest of the world. So do the United States and the United Kingdom. The latter two count financial services among their strengths. That is why they are keen to expand and deepen their ties with China in equities, bonds, and currencies trading. India is a long way away from counting financial services as an area of strength.

China is reportedly keen to boost the share of the services sector in the economy. India should make it a priority to deepen and broaden its service sector offering to China. It is not just about healthcare services, business processes outsourcing, or software coding services. India has some natural advantages in other service areas as well: tourism, including medical tourism, is part of services. Chinese nationals are avid travelers, but so far India is not at the top of their minds as a tourist destination.

Ultimately, the evolution of the Chinese economy in the years ahead is expected to have a critical and significant bearing on economic and other outcomes in India. Only a few specific responses to the emerging economic slowdown plus transformation in China have been discussed. However, long-term economic benefits accruing to India from developments in China are not automatic. Sustained and large improvements in India’s productivity, competitiveness, and economic resilience are needed and should come if India manages to sustain a high growth rate.

Investment Destination Opportunity

India has a history of delivering good returns to investors, both direct and portfolio. Of course, statistics on returns to foreign direct investors are not readily available. But investors’ satisfaction is evident in the amount of funds that flow into India. According to United Nations Conference on Trade and Development data, in 2014 India received gross foreign direct investment inflows of $34.4 billion. Based on figures provided by the Reserve Bank of India, the country’s gross FDI inflow was a little over $59.6 billion in calendar year 2015, while net FDI inflow (after adjusting for FDI by India in other countries) amounted to a little over $37.0 billion. On a financial year basis, for the year ending March 2015, India received a gross FDI inflow of $50.9 billion and a net inflow of $32.6 billion. Figures for the first nine months are available for the year ending March 2016. Comparable figures are $43.9 billion and $27.4 billion, respectively. For the full year 2015–2016, once figures are available, India will have done as well as, if not better than, it did in 2014–2015. These numbers should be seen in the light of indications that FDI inflow of around 4 percent of GDP is the historical high in other countries. That would work out to around $80 billion in the case of India. There is considerable headroom for more FDI.

According to Morgan Stanley Capital International (MSCI), Indian stocks (the MSCI India index) delivered an annualized return of 7.2 percent in U.S. dollar terms from June 1994 to the end of 2015. The corresponding figure for China was 0.6 percent. If India continues to work on improving its investment climate, this amount will get even better since investors are running short of investment destinations that can absorb large amounts of long-term capital. India has some inadequacies in this respect compared to its own needs and compared to China, but other leading emerging economies, including Brazil, Indonesia, South Africa, and Turkey, are far behind India and have challenges of their own.

In addition, the advantage for India is that the challenge of achieving economic growth while dealing with a mountain of debt means that the developed economies are expected to continue to feature historically low interest rates. The experience of Japan in the past quarter century is an indication of the shape of things to come in the developed world in general. This has two benefits for India. One is that global interest rates will continue to exert a benign influence on Indian rates. Second, pension funds and insurance companies in the developed world continue to make unrealistic assumptions about returns on their portfolios. Paring back those assumptions would create a big accounting hole and expose the mismatch between the present value of their liabilities and their assets, with the former substantially exceeding the latter. They would have to turn to countries like India for long-term investments with decent returns to bridge the gap between their liabilities and assets.

Hence the global environment certainly features opportunities for India that did not exist earlier.


117 The agreement reached between Saudi Arabia and Russia in February 2016 to freeze oil production is likely unsustainable.