Growth of labour-intensive manufacturing key to Indian economy

 Jayarama Emani | The Dollar Business “Increasing the contribution of labour-intensive manufacturing to the Indian economy will be essential if India is to employ its booming population,” said, Martin Haythorne, Deputy Global Head of Banking and Co-Head of Banking, Asia-Pacific, HSBC. He also added that according to HSBC Global Research, India’s workforce will expand by 1.5 per cent annually over the next five years, meaning the economy will need to grow by 7.5 per cent a year just to generate enough new jobs for the young. Stating that Japan will be funding India’s next growth phase, Martin said that Japanese institutional investors are seeking to export more capital to create the wealth required to fund the country’s ageing society. “But to convince investors and businesses that the country is a suitable location for factories, India needs to improve its infrastructure,” he said and added India’s Planning Commission believes the country needs to invest around USD 1 trillion in infrastructure during its current five-year plan – raising its investment rate from 30 per cent to 35-36 per cent of GDP.” The challenge lies in financing. India’s national savings rate was just under 30 per cent of GDP in 2013 and it cannot make up the shortfall on its own. Instead, it will need to look beyond its borders for funding – and Japan looks like a natural partner. Faced with depressed yields at home, Japanese institutional investors are seeking to export more capital to create the wealth required to fund the country’s ageing society. In October, Japan’s Government Pension Investment Fund – the world’s largest state investor – announced portfolio reforms that will increase its holdings of overseas bonds and equities. HSBC analysts estimate that more than USD 100 billion could flow onto the international bond market as a result. Other Japanese investors have already begun to look abroad. In the first ten months of 2014, bond investment in emerging markets by Japanese investors reached USD 10 billion, compared with USD 4 billion in 2013. But while India is attracting increased interest from Japanese and other international investors, it must also develop a more mature financial system to avoid becoming over-reliant on foreign capital for financing. Especially for long-term funding, India needs to move from a bank-dominated framework to a market-based one. Although India’s stock market is very open, its corporate bond market is tiny: only 3% of GDP versus 9% in China, 16% in Japan and 36% in the US, according to the Asia Securities Industry and Financial Markets Association. The investment needs of India and Japan are increasingly complementary. Asia’s second and third largest economies should look to embrace each other – much like their prime ministers did back in August, he concluded.    

This article was published on April 6, 2015.