China, Europe and the Netherlands: Opportunity Is Knocking at Our Doors

Macro Economy 
028 
  Apr. 2015
Anticipated reforms of new government
A favorable turn in India’s business cycle arrives 
just in time, before the presentation of the first annual 
budget on 28 February, by the new government. The 
government, led by Prime Minister Narendra Modi, 
was elected to office in May 2014 with a landmark 
single party majority. This was the first such decisive 
electoral outcome in the past three decades, leading 
to expectations of wide ranging pro-growth economic 
reforms. The average growth rate in the past 14 quar-
ters has been a tepid 5.5 percent compared to about 9 
percent achieved in the previous three years. This drop 
was mainly because of the collapse of private sector 
investment spending. The investment slowdown was 
aggravated due to infrastructure issues of electricity, 
delays in regulatory clearances and approvals and 
perhaps also policy gridlock. The last was particularly 
evident in projects which needed environmental con-
siderations to be balanced against growth imperatives.
The Modi led government is expected to cut through 
many such Gordian knots, push economic legislation 
and help rapid scaling up of investments. This has 
been already anticipated by the stock market which 
performed spectacularly in the past 12 months. Modi 
has announced a goal of improving India’s rank in the 
World Bank’s ranking of Ease of Doing Business, aim-
ing to be among the top 50 in the world. Furthermore, 
increasing the share of manufacturing in GDP to 25 
percent is key to future growth. 
One of the biggest anticipated reforms is the rollout 
of a nationwide goods and services tax (GST), which 
will bring all Indian states into a common economic 
market. This requires consensus of all the state govern-
ments in the federal setup and is slated to be flagged 
off in 2016. GST holds the promise of raising GDP by 
at least one percent on a sustained basis. It will also 
reduce tax leakage, due to interlocking incentives for 
compliance. India has one of the lowest tax-to-GDP 
ratios among its peers, so any measure that enhances 
tax collection in a painless fashion is always welcome. 
Investor sentiment is very positive as manifested by the 
buoyant stock market, which has also benefited from 
huge inflows from abroad. The government will also 
undertake selective privatization, and use that money 
to shore up physical and social infrastructure. There is 
a publicly announced commitment to fiscal discipline, 
with numerical targets for the deficit for the next three 
years, which will keep the rating agencies at bay.
Demographic dividends
India’s demography is its big strength. It directly 
translates into growing consumption demand, savings, 
taxpayers and productive workers. Further, since the 
average age of the workforce will remain young, the 
economy can sustain a larger deficit for a longer pe-
riod. So long as deficit spending is growth inducing—
meaning producing infrastructure and public goods—it 
produces a virtuous cycle of growth, taxes and eventu-
ally lower deficit. If all the government’s initiatives on 
large-scale skilling of the workforce, financial inclusion 
of all households, and digital connectivity progress as 
planned, we are likely to see a sustained growth phase 
for India. Economic growth and consequent tax re-
sources are essential to meet the persisting challenges 
of poverty, malnourishment, low human development 
indices, especially in backward districts, and social 
security. Additionally, a big challenge is to chart out 
a growth path that will reduce the stress on the envi-
ronment, use resources like water frugally and enrich 
ecology. 
Closer ties with the world
India’s engagement with the world is also deepen-
ing. It has more than a dozen free trade agreements 
in the pipeline, and to be concluded soon. Its trade-
to-GDP ratio has gone up from 10 to 50 percent in 
the past three decades. Its export of IT services will 
triple in the next 10 years. India’s ‘Look East’ policy 
has been upgraded to an ‘Act East’ policy. India is an 
active participant in the ASEAN + 6 i.e. RCEP nego-
tiations. 
The India-China trade relationship is one of the 
most dynamic and fast-growing bilateral relationships 
in the world. This is likely to be expanded to investment 
flows as well. There is a large unexploited strategic 
complementarity between the two countries, especially 
when it comes to investible funds and profitable pro-
jects.
In conclusion, one can safely predict that the march 
of the EMs will continue. The world’s balance will tilt to 
the east. India and China’s share in the global economy 
will increasingly mirror their population share. And at 
least in the near term, India will provide much of the 
growth impetus in Asia.
The views expressed by the author in this article are personal.
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