Innovation and Indigenization - Unlocking India's Growth Potential

Powered by a GDP of $3.4 trillion, India is currently the world’s sixth largest economy and has one of the highest GDP growth rates globally. Estimates show that India will likely clock a 6.8%-7.1% growth rate in FY22-23. However, global economic uncertainties and inflation are looming large and might result in an economic slowdown. Moreover, US-Fed rate hikes, steep tax cuts in the UK, and a slowdown in China, add to this volatile economic environment.

Recently, to discuss the current state of the economy, CNBC-TV18’s Shereen Bhan was joined by N. Venkatram, CEO, Deloitte India. Shereen started the conversation by discussing the current domestic and global corporate mood, especially in light of the Russia-Ukraine war and commodity inflation. While these were major topics of discussion in the beginning of the year at the World Economic Forum held at Davos, India has emerged relatively resilient through these storms. Venkatram also spoke along similar lines and said, “As far as the general mood goes, I think services are doing extremely well. While people are talking about recession, be it in Europe or America, as far as India is concerned, we shouldn’t be talking ourselves into it. There is still a lot of growth left in India for many years to come.” However, he added that the manufacturing and MSME sectors in India have been struggling a little, while we do have exports in pharma and engineering.

 

The conversation then steered towards the demand picture in the current economy. Shereen pointed out that while the demand for two-wheelers and entry level passenger cars seems to have gone down, luxury cars and real estate sales have soared. N. Venkatram, CEO, Deloitte India addressed this and said, “While on the luxury side we’re not seeing abate, the reality is that no one is insulated from the shocks that hit the rest of the world. We were a very connected economy and prices and inflation have been persistent for us even through the pandemic.” This, he opined, has slowed down demand, especially for the mid-sized sector that is contemplating if increasing prices would just result in a piled-up inventory. He further added that in his opinion, inflation might only last till the end of the year and a core price increase could be damaging to businesses.

 

Globally, central banks, including the RBI, have promoted moving rates higher up and India has seen a decent chunk of inflows with FDIs. In the wake of the economic conflicts between nations, especially with the way China is engaging with the world and vice-versa, India could potentially benefit from the situation. In this regard, Venkatram talked about a recent study carried out by Deloitte which had speculated that when India hits the 5 trillion economy mark, we would require a capital formation of about 8 trillion and at least 400-450 billion dollars of FDI. This doesn’t seem unlikely considering that India has continued to perform well in terms of FDIs. However, we might have taken a slight setback when it comes to becoming ‘China plus one’. While a lot will still get done in India, we might miss some opportunities such as on the currency or Forex side. “I think currency is a strength to us on the services side. So, the 1 trillion that comes from services will become easier. However, if I look at manufacturing in India, we must first build it for internal usage before we build it for the world. We must use this period of recession in other countries to strengthen ourselves and look at import substitution. The large companies that come to India are for the domestic market, which is our strength, rather than for exports”; Venkatram added. Indigenization and import substitution will not only bring down costs, but also de-risk us from the fluctuating rupee, the Deloitte CEO said.

Shereen voiced an important concern next, that despite many advantages, too much indigenization might choke imports and affect the economy negatively. To this, Venkatram reiterated his mantra of playing by our strengths and said that we must focus on in-house research and development. Almost 700 MNCs have their R&D centres in India and it’s time Indian companies also focus on innovations that can cut costs and make us more self-reliant. He gave an example of the automotive sector where India has shown tremendous advancement in recent years and components manufactured in India are being used internationally. The same can be done for, say, the semiconductors sector where there is a gap and a huge potential for growth. “The fundamental premise is if you’re good at R&D and design, the next piece is to make your products of international quality”; he went on to say.

We hadn't anticipated the recovery process to take as long as it has. The forecast is too clouded by several factors, but as we evaluate the energy crisis in Europe and the slowdown in China over the coming months, we should start to gain some clarity. Considering demand-supply chains for core price hikes, increasing impetus on in-house manufacturing and R&D with indigenization could be the key takeaways from this riveting conversation.