As published in the Atradius analysis, India's economic growth momentum has slowed markedly since 2011 after rates of over 8% were recorded in the two-year period 2009-2010. The regions are to be sought mainly on low levels of infrastructure and training, a cumbersome bureaucracy and an ineffective judicial system. Furthermore, in recent years, the demand for consumer goods and investment has been inhibited by stubbornly high levels of inflation (over 9%) and high interest rates. High consumer prices are a serious concern in the country, undermining the purchasing power of the poorest families: according to the World Bank, more than three-quarters of the population still live on less than $2 a day. However, inflation started to decline during 2014 and is expected to decline further this year (to around 7%), thanks to the decrease in the global prices of raw materials, first of all oil. India's real economic growth is expected to increase by 6,0% in 2014 and reach 6,5% this year. The rebound is expected to be led by recovery of infrastructure projects still stalled and, in the medium term, strengthened by the growth of the middle class, thanks to high investments, urbanization processes and improvement of the business and structural environment. But timely and profound reforms are needed.
India's public debt is traditionally very high, but it has decreased significantly over the past two years. It currently stands at 50% of GDP, while the central budget deficit stands at 4,5% of GDP for 2014, with the total deficit, including those of the federal states, standing at around 10% of GDP. The main reasons are the small tax base and high spending on fuel, food and fertilizer subsidies. However, these deficits can be financed by national loans. Corporate debt persists at elevated levels, with the average debt-to-equity ratio of Indian firms at 87%, the highest of all emerging markets. And while this largely translates into domestic debt, India's banking sector, which was still a net creditor in 2006, currently has more than $150 billion in external obligations. The concern, in this scenario, is that banks are unable and/or unwilling to finance new business investment and this would hinder the achievement of higher rates of economic growth.
To aggravate the picture, the very implementation of measures to reform these structural deficiencies has been too slow. In fact, the most important factors hindering foreign investment flows are: underdevelopment of the agricultural sector, poor quality of infrastructure, rigidity in the labor market, excessive bureaucracy, inefficiencies in land distribution and a shortage of skilled labor due to the poor level of education. The most important challenges to face come from energy, infrastructure and the education system. Private sector participation has so far focused mainly on the telecommunications sector, with investments in sanitation, electricity, roads and railways much lower than expected even in the main cities of the country. The dependence on oil imports is, in this sense, one of the major structural weaknesses. India is the world's largest producer of coal, providing over 50% of its energy consumption, while 66% of its oil and gas is imported. However, lower oil prices are helping, alongside reductions in the general price level and the current account deficit.
India remains a relatively closed economy, with export levels of goods and services equal to 26% of GDP. Foreign capital inflows are mainly represented by portfolio investment and bank loans. Country risk and sovereign risk remain low, since external debt amounts to 20% of GDP, while the liquidity situation is comfortable and the current account deficit is quite small. Therefore, despite the shortcomings India remains a large market with high growth potential. With a growing population, a middle class of more than 70 million people entails undoubted opportunities for domestic and foreign investment in the demand for consumer goods. A factor that companies active on international markets cannot afford to ignore.
