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Indian government policy kick starts growth

Indian government policy kick starts growth

Killian Plastow
— 1 minute read

Recent policy initiatives taken by the Indian government look set to increase consumer spending power and kick start a growth "renaissance", says Mirae Asset Global Investments.

The Indian government has been working to improve productivity and improve consumer spending power, especially in rural areas, through the National Rural Employment Guarantee (NREGA), and Mirae notes that these initiatives have already seen a positive response from consumers, despite a recent growth slowdown.

“Consumer product companies tell us they have seen an improvement in demand since last October’s festive season, although the recovery remains volatile,” the company said.

Mirae added that the rise in rural Indian consumption was also significant, with rural income growth rising to a compound annual growth rate of 8.1 per cent between 2007 and 2012 following the implementation of the NREGA, putting rural income growth marginally behind urban growth at 8.5 per cent.

“The rural consumption growth rate was 1.5 to 2.0 times that of urban growth during this period. Since then, rural and urban consumption have grown roughly at the same rate,” Mirae said.

The number of households with an annual income of at least US$3,500 is also set to grow from 33 million households in 2015 to over 60 million by 2020, and Mirae expects consumer growth to be driven not only by per capita consumption, but consumers “trading up” from unbranded goods to branded ones, which currently account for only 12 per cent of consumer purchases.

“The topline story and our in-country channel checks have renewed our conviction that it is a great time for new brands and consumer categories in India,” Mirae added.

India still faces several challenges, however, and Mirae cautioned that the urban economy “is still constrained by weak wage growth due to manufacturing overcapacity”, while the growth of unlisted e-commerce companies was undermining consumer demand for listed company goods. But even here, new policies are having an effect.

“The central government has launched a competitiveness index to rank states on ease of doing business in order to foster healthy competition; it appears to be working, if an anecdote from Maharashtra State is any indication,” Mirae said.

Recent policy changes are having a favourable effect on the economy, and rural consumers are "joining the growth story rather than holding back the country’s progress”, representing an important step.

“India is not without its challenges, but the government has put in place many new initiatives to modernise and improve the economy, and the results have been positive,” Mirae said.   

 

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