India’s Financial System And Its Growth Potential For International Trade And Commerce

Overview of India’s Financial System

India, the world’s largest democracy recently has taken into consideration its full proficiency as a leading global financial system. The rapid economic development which India has observed since mid 1990s emerges through various noteworthy reforms. Reports by Jorgenson and Vu (2016) have revealed that after receiving several criticisms by economists for its stagnant financial system India has finally attained a prominent position among the world’s leading emerging markets. Shahbaz et al. (2017) are of the opinion that further transformations could result India to attain important achievements among countries such as China, South Africa, Brazil and Russia. Recently, the Indian financial system has been observed to be more incorporated and dependable on worldwide economy by reducing their chances of exchange rate fluctuations, inactive economic progress and irregular financial crises. The reforms which initiated during the 1990s have catalysed exceptional growth rates which were further stimulated by a significant and young work force along with an expanding consumption class (Jorgenson & Vu 2016).

The rise of the Indian middle class has been observed to grow more than 260 million with a major decline in poverty levels from 37 % to 21% over the last decade. These factors however have been identified as constructive outcome of these reforms alongside the attendant growth (Vashneya & Gupta, 2017). The purpose of the following paper is to evaluate the financial analysis of India as an emerging market for international trade and commerce. In addition to this the paper will further analyse political, economic, technological as well as social factors which can be identified to be constructive and unconstructive to the country’s financial development along with the role of national resource in creating India as a competitive feeling advantages nation among the other leading global economies.

India has achieved rapid economic growth through advanced technologies and innovation and further by giving opportunities of financial system to overseas technologies. Jorgenson and Vu (2016) have posited that India has reinforced its intellectual property IP rights, norms and policy and further maintain overseas investors who are exporting new technologies to Indian market. This strengthened intellectual property right has stimulated expansion and innovation for the Indian economy and further has invited vital foreign direct investment (FDI). Rangarajan and Srivastava (2017) has noted one of the potentially feasible aspects of India’s current innovation ecosystem known as the R&D centres which are established primarily by western multinationals with government assistance.

                                       

                                                                           GDP of India 2012-2022 

                                                                      Source: (Shahbaz et al., 2017)

The Rise of the Indian Middle Class

The economic reforms of India have been consequential to industrial restructuring with focus on competitiveness as well as global economic integration. According to Rangarajan and Srivastava (2017), the increasing economic integration of the Indian financial system signifies the mounting share of trade in the financial system and also changed structure and course of overseas business within increasing magnitudes. Furthermore Shahbaz et al. (2017) have focused on one of the dynamic factors of India’s integration with the overseas economy is through the elevated level of international business in services. These factors however has helped India to emerge as a leading outsourcing centre for software as well as other business services related to business process outsourcing (BPO) (Shahbaz et al., 2017). In addition to this, India is further attaining importance from major Multinational Enterprises (MNEs) across the world with the intention of making the country an important centre for information based services focused on the accessibility of advanced quality cost effective trained human resources and scientific and technological infrastructure (Narula, 2015). Buckley et al. (2016) have noted another factor of increasing overseas integration of India which is through FDI with both inward and outward investments. With a liberal FDI policy and an increasing domestic market with other advantages the country has been magnetising rising importance of MNEs even as Indian business enterprises further raise international intentions and have been undertaking outward investments in heightened numbers and magnitudes (Vashneya & Gupta, 2017).

In order to evaluate current business operations in India, a Pestle Analysis has been conducted.

• Political-Being one of the largest democratic nations of the world, the democratic inclination of the people reflected in local and national elections are mostly dignified and approved by the political parties and citizens in general. Buckley et al. (2016) have stated that such political culture of acceptance adeptly maintains a stabilized political environment which is one of the critical factors to attract FDI. Meanwhile Rangarajan and Srivastava (2017) has highlighted the mounting rate of corruption which India is facing has been consequential to the country’s trade and commerce and poses challenge to its economic growth. Corruption further raises the cost of business operations and tends to affect the FDI. However with rising public understanding along with government initiatives corruption activities are gradually being combated.
• Economic-Reports of IMF 2017 on economic forecast have revealed, India’s GDP to be worth $2.5 trillion further receiving position of the 7th largest economy in the world by nominal GDP (IMF Annual Report 2017, 2018). However Athreye, Batsakis and Singh (2016) have anticipated that the GDP will achieve by 7% in FY2018 that is expected to have a raise around 7.5% by FY20 (World Bank, 2018).  Furthermore Athreye, Batsakis and Singh (2016) have noted that India is one of the leading countries in several industries such as it has attained the position of the 7th largest coffee and agribusiness producers in the world. Some of the country’s chief exports are petroleum products, readymade garments, transport equipment, equipment, jewellery as well as pharmaceutical products. However on the other hand reports of Rao and Dhar (2018) have mentioned some of the leading trading partners of India namely USA, UAE, China, Qatar, Switzerland and Saudi Arabia.
• Social- India is identified to constitute a huge consumer market comprising around 1.2 billion of population. According to Athreye, Batsakis and Singh (2016) such an enormous consumer market serves as a contributory role for overseas investors. Furthermore as India offers cost effective labour, the workforce is anticipated to reach around 160- 180 million by 2020. It is a highly available and affordable labour force which has supported several International investors to successfully outsource sum of their business operations to India (Rao & Dhar, 2018).
• Technological- Athreye, Batsakis and Singh (2016) highlighted India as the 3^rdmost technologically developed country in the world. Due to its mounting technological development increasing number of tech giants namely Microsoft, Apple, Facebook and other overseas companies are investing in the India. According to Jha,  Dhanaraj and Krishan (2015), with an highly developed IT infrastructure along with proficient IT personnel, India offers huge opportunities for industrialists to successfully embark upon IT projects based on software development, digital applications, e-commerce and other business solutions.  
• Legal-As India has gradually emerged as one of the leading destination for FDI, overseas traders can establish companies or subsidiaries relying on the scope and business requirements of the country. Deresky (2017) have identified several laws which aim to regulate employment relations in India such as Employees’ State Insurance Act 1948 (ESI Act), Payment of Bonus Act 1965 (PBA), Industrial Disputes Act 1947 (ID Act) and Maternity Benefit Act 1961 (MBA).
• Environmental-Though India has developed as a highly progressive country, several environmental challenges pose tend to pose threats to the country such as failure of biodiversity, diversion of consumer waste into rivers along with air and water pollution (Vashneya & Gupta, 2017).

                                       

                                                                                     India’s FY 2018

                                                                             Source: (World Bank, 2018)

The study of competitive advantage of India in retail is crucial part of Industrial analysis specifically for investment decision. As the Indian Government has been showing great inclination towards passing FDI bill in single brand as well as multi-brand retail industries, several international entrepreneurs such as have been considering India as an emerging market (Ghosh & Roy, 2018). As several global retailers like Wal-Mart, Spar, Carrefour, Best Buys, IKEA, Tesco have been inclining towards India it is essential to study its market environment to understand its competitiveness through Porter’s National Diamond (Vashneya & Gupta, 2017).

Determinants of National advantage:

• Government and chance
• Factor conditions
• Demand condition
• Connected and supporting industries
• Company strategy, structure and competition.

                                     

                                                                     Michael Porter’s National Diamond

Factors Promoting India’s Integration with the Global Economy

                                                                              Source:  (Deresky, 2017)

• Government and Chance- As the Indian Government has approved in single as well as multibrand retailer based on specific norms and policies, inflow of international entrepreneurs can be observed into the India through direct investment route. Kordalska and Olczyk (2016) have highlighted joint undertakings of global industrialists namely Walmart with Bharti enterprises and on the other hand Spencer’s with RPG group. According to Deresky (2017) as debt crises circumstances tend to be critical for ventures and resulting India to be advantageous of financial crises in Europe. There can be observed several reasons to expand such trade in India related to government assessment Eurozone debt crises and demand provision of India.
• Factor Condition- According to Kordalska and Olczyk( 2016), India’s populace has been rising over 500 billion in the next 40 years thus signifying a rise in labour efficiency where cost effectiveness is feasible through working conditions. Furthermore, as infrastructure is an important sector in India it boosts generalized growth of the Indian financial economy (Bhattacharjee & Chakrabarti, 2015). The Secretariat for infrastructure investments in the development order is implicated in instigating policies that would guarantee time-bound establishment of excellent infrastructure in the country.
• Demand condition- Bhattacharjee and Chakrabarti (2015) have mentioned that economic growth of India over the last decade has been highly significant with its real GDP growth estimated to be around 11% annually, determined by an arrangement of growing venture and utilization demand with superior efficiency development. Furthermore to this as per the reports of Kordalska and Olczyk (2016)unsurprising in census 2016 the urban populace of India remains at 36.36% previously recorded to  be 25.61 in 2013. Thus urbanisation of state is identified as an accurate sign of development and it is expansion locomotive of market.
• Related and supporting industries-Reports of Bhattacharjee and Chakrabarti (2015) mentioned India to have attained position of 2^nd major manufacturer of wheat and rice among other global chief food staples. Furthermore, India is positioned within the world’s 5 major manufacturers of more than 82% of agricultural products along with other cash crops such as coffee and cotton. These factors have led leading industrialists namely Future Group, Aditya Birla, Reliance, Shopper Stop to make huge investments in the Indian market. Thus in the view of Deresky (2017) India comprises related and merchant retail business and has been proficient in attaining competitive advantage.
• Company strategy, structure and competition- According to the Jha,  Dhanaraj and Krishan  (2015), regarding national competitive advantage, India comprise enormous advantage in relation to cost effective labour, raw material cost availability along with overseas investors namely Arrow, Levis, JC Penny, Wal-Mart, and Gap have been supplying their products from India with elevating labour cost in developed nations.

Since 1990, the Indian government has set up several Software Technology parks (STPs) with allied tax incentives, outstanding subsidies along with other managerial preferences in order to support foreign investment in Indian software industry. Reports of Athreye, Batsakis and  Singh (2016) have revealed that since the last decade over 350 foreign based MNCs have successfully established R&D facilities in India. Furthermore the Indian consultancies have estimated over 1100foreign R&D centres which have significantly concentrated chiefly in and around Bangalore, Chennai, Mumbai, Delhi and Hyderabad. However according to Prasad et al. (2017) the major desirability of these foreign R&D centres rely on cost effective labour along with India’s potentially extended market. Meanwhile, authors have speculated the significant proportion of these R&D centres incorporate software and variations on innovations proficiently setup by MNCs in their home countries.

Jha,  Dhanaraj and Krishan (2015)have revealed that of 40,7865 patent applications which have been registered in 2014 to 2016, around 78% appliances came from overseas applicants with the vast majority aiming for inventions developed in other countries, whereas only 25% from Indian innovators. Furthermore, these foreign centres have introduced improved innovation research methods along with proficient workforce from the United States with other increasingly developed economies into India’s financial system (Kordalska & Olczyk, 2016). Such a collaboration with Western overseas investors have been identified as an important characteristic of the unanticipated rapid and achievable transformation procedure seen in countries such as China and India. However in the view of Deresky (2017) these dynamics tend to reflect great reliance on extensive FDI which furthermore shows inclination upon countries value towards IP rights of companies in providing the FDI.

Conclusion:

On a concluding note, India has attained competitive advantage in overseas industry; India has vast potential for national and international businesses. The growing GDP invites several major overseas players to deploy FDI in Indian business sector. However, India must create demands on the obtainable businesses and practices in order to result to increased rate of productivity. Furthermore, if India aims to diversify overseas investments such as government decisions it would attain greater success in attaining leading place in FDI. The Indian Government must further promote venture policies in multi-brand business and prepared to supply infrastructure as well as government support to empower the economic status of India. In addition to this, India can attain greater amount of benefits of high market stipulations, major market dimension, economy of scale, reduced access of retail and international sourcing for business sector. Thus from the above discussion it can be concluded that India has been showing immense favourability towards overseas business players to successfully invest in Indian markets.  

References: 

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