Among the many challenges being faced by India, topping the list is the fact that the economy is fast losing steam. After expanding as much as 12.6% year-on-year (YoY) in Q1 of 2010, India’s gross domestic product (GDP) increased by only 6.1% YoY in Q4 of 2011, marking the slowest growth since Q4 of 2008, when the international financial crisis broke out. Besides, the Indian rupee declined by 17% against the US dollar in 2011, making it the worst performing currency in Asia. The Indian stock market was hardly constructive either, declining by 24.6% to rank among the worst performing bourses in Asia.

In addition, the current account deficits are deteriorating, while inbound foreign direct investment (FDI) is also slowing. India's FDI inflows declined by over 50% YoY to US$1.16 billion in October 2011 for the second month in a row, following the drop of 16.7% to US$1.76 billion in September, which reflected in part the economic slowdown in major developed economies.

One of the culprits behind India’s lacklustre economic performance would be the continued anti-inflation measures adopted by the Reserve Bank of India (RBI). In a bid to arrest rampant food-led inflation, the RBI started to step on the monetary brake as early as January 2010, pushing the policy rate up from 4.75% by 13 consecutive times to 8.5% at the end of 2011. While inflation eased from the peak of 16.2% to 9.4% over the same period, the economy slowed considerably with the downside risks to growth increasing.

BRIC countries continue to shine

Despite the short-term hiccups, India’s medium-term prospects remain bright. Back in 2001, Goldman Sachs coined the term BRIC, which started to arouse great interest in the tremendous growth potential of the four countries comprising Brazil, Russia, China and India. The BRIC countries were estimated to account for 8.3% of global GDP in 2001, with the share expected by the IMF to reach 18.9% in 2011. A decade ago, Goldman expected the BRIC share would rise to some 14% in 2011.

For India, its share of global GDP climbed from 1.5% in 2001 to an expected 2.6% in 2011. In 2010, India’s GDP growth hit 10.1% despite the international financial crisis, just shy of China’s 10.3%, surpassing Brazil’s 7.5% and Russia’s 4%. While the Indian economy lost momentum in the second half of 2011, the Indian government expects a full-year growth of around 7%, which is high relative to other Asian economies, not to mention the developed economies, and is hopeful of a recovery in the growth trajectory to 9-10% over the medium term.

Surge in middle-class population helps India’s medium-term prospects:

Private consumption has been underpinning India’s persistent growth over the past decade. India has the highest private domestic consumption as share of GDP among the major economies of the Asia-Pacific region, estimated at around 57% in 2010.

India’s middle class has been fast expanding amid the country’s information technology export boom as well as rapid urbanisation over the past decade. According to India’s National Council for Applied Economic Research (NCAER), India had some 160 million middle-class individuals in 2010, representing about 13% of the country’s population. India’s middle class is expected to grow at an annual average rate of 8.5% from 2010 to 2025 to reach 547 million or 37% of India’s population, more than triple the current levels.

On average, India’s saving rates are roughly one-third of their income, which is not low. However, a typical Indian middle-class household’s saving ratio is even higher as estimated by the NCAER, standing at roughly half of their income. Unleashing further spending by Indian middle-class households will contribute further to the country’s retail boom. Meanwhile, the NCAER noted that while the middle class represents some 13% of India’s population, they own 49% of the cars in India, 21% of televisions, 53% of computers and air-conditioners, 38% of microwaves and 46% of credit cards. In 2015, the middle-income class is expected to account for some 20% of the population, yet holding 44% of the total income. The expected surge in middle-class population, along with their strong spending power, readily helps India’s medium-term prospects.

Retail modernisation continues despite reversal in multi-brand FDI:

India’s retail market is estimated to have a size of some US$450 billion and is growing fast amid the continued rise in middle-class income and the number of well-off consumers. The level of organised or chain-store retailing in India is estimated to be some 7%, less than half of around 20% as estimated by McKinsey in China, and 30% or more in either Brazil and Russia. Further liberalising the retail market for foreign investors will accelerate the growth of organised retail with the effect of spurring retail sales.

After more than a decade of discussion, Indian prime minister granted access for foreign retailers to establish multi-brand retail outlets on 24 November 2011. Allowing multi-brand FDI is widely expected to raise the efficiency of India’s distribution system, as foreign retailers will bring in retail logistics technology and infrastructure to help reduce food wastage, which is estimated at some 40% and seen as a culprit behind high food-led inflation. However, facing a full-scale parliamentary revolt, the Indian government reversed its multi-brand FDI policy in less than one week. With the multi-brand FDI venue remaining shut, foreign retailers, including Hong Kong’s Mannings, Watson’s and PARKnSHOP, may have to wait.

Nonetheless, retail market liberalisation continued apace despite the government’s setback in multi-brand FDI policy. On 10 January 2011, the cap on single-brand FDI, which had been kept at 51% since 2006, was lifted to allow foreign investors to have complete ownership of their Indian operations. This was music to the ears of foreign retailers operating in India’s retail market, including Nike, Reebok, Calvin Klein, Estee Lauder, Levi’s and Starbucks. While some existing players opt for conversion to wholly foreign-owned operations, more newcomers are arriving too, including Swedish furniture maker IKEA, French luxury shoemaker Christian Louboutin, and Swiss leatherwear brand Bally. The US-India Business Council estimated that the single-brand retail market is valued at US$7 billion and expected it to more than triple over the next five years.

Aside from the single-brand retailing route, other entry modes are also available for foreign companies to gain access to the Indian market, including franchising (examples include Marks & Spencer, and Pizza Hut), cash and carry/wholesale (examples include France’s Metro and the US-based ShopRite, where full foreign ownership is allowed), and other joint-venture and distribution routes. Meanwhile, Hong Kong’s Giordano and Bossini have made their presence felt in India too.

Bright prospects of Hong Kong exports targeting the Indian market:

India is Hong Kong’s fourth largest export destination (trailing the Chinese mainland, the US and Japan). Hong Kong exports to India have grown at an annual pace of close to 30% since 2005 despite the negative fallouts due to the international financial crisis of 2008-09 and sluggish growth of developed economies in 2010-2011 amid the sovereign debt concerns. Close to half of the Hong Kong exports to India consist of jewellery and gems (mostly diamonds), surging by around 25% YoY in the first 11 months of 2011. While jewellery accounted for just over 2% of total exports to India, it increased by 460% YoY over the same period, reflecting the brisk demand for gold jewellery, while silver and platinum also recorded growth of more than 200%.

With global demand for diamonds expected to grow twice as fast as supply through 2020, industry sources expect continued growth in the prices of rough and uncut diamonds over the next few years. In this context, Hong Kong’s bilateral trade in diamond with India looks set to continue its brisk pace of growth. Of Hong Kong’s re-exports of India-origin diamonds, some 60% of them were exported back to India with a value of US$5.1 billion in 2011.

Source: Hong Kong Census and Statistics Department

While India is a big exporter of IT services, it is a big buyer of imported telecom products and consumer electronics. The country’s retail boom has led to the emergence of a large number of Indian specialty store chains, such as E-zone, Croma (of the Infiniti Group), NEXT (subsidiary of Videocon) and Viveks. Korean brands such as LG and Samsung are top players in the Indian market, followed by Japanese and local brands. Indian retail giants, such as Croma, are keen to introduce their private labels, boding well for Hong Kong’s exports of mid-priced, quality electronic items and electrical appliances.

Developments aforementioned have been a boon to Hong Kong’s exports of consumer electronics and telecom products, rising by around 20% in 2011 to continue their hefty exports increase in recent years. Specifically, Hong Kong exports of camera, radios and television receptors surged, respectively, by 35%, 115% and 208% in 2011, presumably helped in part by the growing “use-and-throw” mentality of Indian consumers.

India may not look “all is well” for the time being, while the economy is losing some steam, quite unlike the theme song “Aal izz well” of recent Indian movie hit “Three Idiots”. Nonetheless, the world’s second most-populated market and Hong Kong’s fourth-largest export destination is expected to be expanding sturdily over the medium-term, thanks to sustained middle-class spending.  Further, with inflationary pressures likely to be subdued further in upcoming months, the prospects of the RBI relaxing its monetary stance and the economy picking up again remain.