Despite the current economic gloom, India’s future is bright indeed: HSBC report


Whether you are an investor or an analyst, or a professional who needs deeper knowledge and insights about India, you absolutely must read the recently released report by HSBC Global Research, Unfolding The Tapestry – A Guide To India’s States.

 UNITED STATES OF INDIA HSBC RESEARCH“Observing India through the state lens,” says the cover-page intro to the report, “opens up a range of opportunities for investors and provides lessons for policymakers.”

This useful document, authored by Dr Frederic Neumann and Prithviraj Srinivas, offers several insights. Here’s an important excerpt from the authors’ introduction to the report on their research: “What emerges from our research,” they write, “is a far more complex picture of India and its states than we first assumed.

“From an investor perspective, it underscores the importance of looking at India on a state-by-state basis. It also suggests that, despite all the current economic gloom, India’s future is bright indeed. Its demographic dividend, emerging middle class, army of skilled technology workers, and vibrant corporate sector are all significant plusses.”

(Check the download link for the complete report at the end of this story.  And do remember to read it in tandem with the disclosures and analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it.)

But before you delve into the complete document, here, verbatim, is the complete intro that promises and delivers valuable insights in the complete report document:

In late 2010, HSBC Global Research published a major report titled Inside The Growth Engine, A guide to China’s Regions, Provinces And Cities; a follow-up called Re-Tuning The Growth Engine was released in September 2013. One of the most important themes was how much local officials can achieve with little supervision from (or in defiance of) the central government.

We now turn our attention to India, the world’s largest democracy that is expected to soon overtake China to become the most populous nation.

India is typically looked at as one homogenous country, with its policies viewed through the prism of the central government in New Delhi. This ignores important differences across the Indian states. For example, some are opening up their economies, cutting red tape and introducing reforms based on what works for them. In turn, this has delivered impressive growth rates. Others are not making much progress in these areas and are struggling to deal with significant poverty. A top-down, one-size-fits-all perspective  does not work for a country as vast and diverse as India.


This report looks at the changing relationship between the central government and the states and how this  is reshaping the country’s economy. It examines how the 36 states and territories are increasingly taking  charge of their own destinies, the significant differences in their pace of development and what lessons can be learned from the success stories. We also give investors essential demographic, developmental,  economic, and policy insights for each state and discuss the opportunities and challenges they face.

Significantly, these changes are taking place at a time when the near double-digit growth of 2004-08 seems like a distant memory. India’s economy has slowed, inflation remains high, and the government  has only recently re-ignited the structural reform agenda, a must to revive growth. What’s more, India experienced a tumultuous summer last year as talk of tapering quantitative easing by the US Federal Reserve exposed the country’s economic vulnerabilities and spelled trouble for the currency. It has since stabilised, partly in response to policy measures, although vulnerabilities remain.

But as the central government in Delhi was dragging its feet, some states and union territories have taken  the initiative. They are attracting manufacturing and service industries – both domestic and from overseas – helping to create jobs and adding value to local economies. While India’s national GDP growth rate fell to 4.7% in 2013-14, down from 9% a few years earlier, a number of the states have been recording double-digit growth.

Although the states are becoming a larger part of the India narrative, progress has been uneven. The richer  ones are reaping the benefits of making it considerably easier to do business in their own backyards, but at the same time they are leaving poorer states behind.

The western state of Gujarat is often held up as a shining example of how to get things done. Narendra Modi, the former Chief Minister of Gujarat state for 11 years, is now the 15th Prime Minister of India. On  his watch the state’s economy expanded at an average growth rate of around 10%, more than quadrupling  GDP per capita in nominal terms and doubling it when adjusted for inflation.

Then there’s the largest state economy, Maharastra, known for its Mumbai billionaires, Bollywood movie stars and thriving services sector. It is the second most populous and third largest state by area; if it was a nation in its own right, Maharashtra would be the world’s 10th most populous country. Mumbai, the state capital and financial centre of India, is home to the headquarters of all major banks and insurance companies, as well as India’s largest stock market, the Bombay Stock Exchange, the oldest in Asia.

There have also been success stories among the poorer states. The economy of Bihar, with income per person on par with impoverished African countries, has experienced a revival as law and order has been established and more business friendly policies introduced.

States Map HSBC But it’s been a long journey for all concerned. After gaining independence from Britain in 1947, India suffered under a planned economy for more than 40 years. Almost every aspect of business was controlled by the state through an elaborate system of licences, regulations and other red tape. Approval was needed from scores of government agencies before private companies could start to operate.

It couldn’t last and, as the economy festered, reform was the only option. China had Deng Xiaoping, the man who transformed China in the late 1970s and early 1980s. India had Manmohan Singh, the former Prime Minister who as Finance Minister played a major part in introducing the reforms in the 1990s that changed the economy beyond all recognition. The results were dramatic. ‘The tortoise became a hare’ as growth rates began to match those of the Asian tigers like Korea, Hong Kong, Singapore and Taiwan. Poverty retreated and entrepreneurs started to build world-class businesses.

But the job is only half done. The reform process is far from complete and lack of progress in recent years has weighed heavily on growth. In the latest World Bank and International Finance Corporation ease of doing business survey, India ranked 134th out of 189 economies (China is 96th). It was ranked 179th for starting a business, 182nd for dealing with construction permits, and 186th for enforcing contracts. Together with weak infrastructure, skill gaps and rigid labour laws, this has put a lid on India’s growth potential.

Central and state governments need to get reforms back up to speed and draw lessons from the success stories delivered by the most progressive states. Our analysis shows that this could lift growth to double-digit levels for many over the next decade.

Against this diverse backdrop, our research on Indian states has thrown up some fascinating statistics:

  • A country of countries: Many states are the size of countries. Uttar Pradesh, the largest state, would be world’s fifth most populous country if it was a separate nation; matching Brazil.
  • So young: In some Indian states (Bihar, Rajasthan and Uttar Pradesh) more than 50% of the people are younger than 24. The average in India is around 50% vs. 36% in China and 42% in Brazil.
  • A large gap: There is significant difference in levels of development. Some states have income per capita levels on par with poor African countries, while others match Southeast Asian levels.
  • Thinking hard: Knowledge-based industries are gaining ground. This has made Bangalore City the fourth largest technology cluster in the world after Silicon Valley, Boston, and London.
  • Industry power houses: While the services sector has been a tour de force, some India states such as Gujarat, Orissa, and Punjab are as industrialised as South Korea and Singapore.
  • Still growing strongly: Despite the slowdown in recent years, 10 state economies expanded at an average rate of 9-12% over the past few years.
  • Significant potential: If the least reformist states adopted the business environment of the most reformist states, they could crank up their potential growth by another 1.5-2.5ppts.
  • Large global players: Growth is set to rise in coming years as structural reforms are rolled out, which could give at least five states membership to the trillion dollar GDP club 10 years from now.

What emerges from our research is a far more complex picture of India and its states than we first assumed.

From an investor perspective, it underscores the importance of looking at India on a state-by-state basis.

It also suggests that, despite all the current economic gloom, India’s future is bright indeed. Its demographic dividend, emerging middle class, army of skilled technology workers, and vibrant corporate sector are all significant plusses.

Fortunately, the last general election broke the long-standing political deadlock by delivering a decisive mandate for the Bharatiya Janata Party (BJP). The party’s leader, the reform minded Prime Minister Modi, knows that maintaining the status quo is not the solution – India’s slowest economic growth in a decade demands action. We believe this report shows that the spirit of the 1991 reforms is alive and well in some of India’s more dynamic states. The country as a whole can draw lessons from what these states have achieved.

Whether you are an expert on India or a relative newcomer, we hope you find what follows useful.”


That’s the end of the intro to the report. You can download this extremely useful report here)

About the authors of this report:

Prithviraj Srinivas, Economist – HSBC Securities and Capital Markets (India) Private Limited. Prithviraj Srinivas joined HSBC in July 2009 as an economist covering India and Sri Lanka. He has over five years of experience in covering the region and nearly 10 years in finance. Prithviraj holds a master’s degree in international economics and finance from the University of Queensland, Australia. 

Frederic Neumann, Co-head of Asian Economics Research – The Hongkong and Shanghai Banking Corporation Limited. Frederic Neumann, PhD, is Managing Director and Co-Head of Asian Economic Research, based in Hong Kong. Before joining HSBC in 2006, Frederic was an adjunct professor at a number of US universities, including Johns Hopkins University, teaching graduate courses on Asian sovereign risk analysis, financial markets, monetary policy, and Southeast Asian political culture. He also served as a consultant to international organizations and governments, and as a research associate of the Institute for International Economics in Washington, DC. A former Fulbright scholar, Frederic holds a PhD in international economics and Asian studies.

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