When Ratan Tata, chairman of the Tata Group, unveiled the Nano at a motor show in Delhi this month, he captured the imagination of the automotive world with the "one-lakh car".
Billed as the cheapest new car on the planet at Rs100,000 pre-tax (a lakh is 100,000), the surprisingly spacious four-seater did more than set a new floor for global automobile prices. Its launch may come to be seen as the moment when India became a serious manufacturing rival to China and the other export-oriented economies of east Asia.
"It's a revolution," says Tarun Das, Chief Mentor to the Confederation of Indian Industry, noting the complexity of a project that involved 100 suppliers and spawned 34 patent applications. Tata Motors, which built India's first indigenously-developed car barely a decade ago, expects to sell the Nano to "bottom of the pyramid" consumers in emerging markets across the world.
The Nano is just part of a larger story of a resurging international competitiveness in the country's once moribund manufacturing sector.
Indian industrial companies now rank among the top 10 producers worldwide in range of sectors, including Tata Motors in commercial vehicles, Ranbaxy in pharmaceuticals, Reliance Industries in petrochemicals, Moses Baer in optical storage devices, Videocon in picture tubes, Bharat Forge in forgings and Hero Honda in two-wheelers.
The significance is hard to miss for an economy whose development has been led - unlike most Asian countries - by growth in a services sector that accounts for 55 per cent of GDP.
After years of stagnation, the industrial sector's share in India's GDP has risen to 27 per centfrom 25 per cent in 2000. In the year to March 2007, industry recorded 11.5 per cent growth, its highest since 1995-6.
Higher interest rates hitting the consumer durables market have led to slower industrial growth in recent months.
But the global ambitions of India's manufacturers, trade's rising share of GDP and the number of companies seeking overseas listings and acquisitions, all show India intertwining with the world as never before.
At the heart of this trend is a reappraisal of India's potential after decades of miserly growth. GDP has expanded on average by more than 8.5 per cent over the past three years, making India the second fastest-growing leading economy in the world.
- Regional relations: Indian interests lie with a stable Pakistan
- Global impact: A waking giant tugging hard at its chains
Even before last week's tremors in the equity markets, slowing external demand prompted economists to trim growth forecasts for the year to March 2009. Goldman Sachs lowered its estimate from 8 to 7.8 per cent.
Confidence has been checked, but it is expected that the relatively closed nature of the economy will shield it from the full brunt of any US recession or sustained slowdown.
India has weaker global linkages than the rest of Asia, with exports representing 17 per cent of GDP compared to the non-Japan Asia average of over 40 per cent. The country's Planning Commission believes India can achieve an average 9 per cent growth up to 2012.
This confidence has triggered a surge in capital inflows, which in turn have presented the Reserve Bank of India, the central bank, with the headache of trying to reconcile a targeted exchange rate and independent monetary policy with a partially open capital account.
With capital inflows far in excess of the amount needed to finance the current account deficit, a record balance of payments surplus left the central bank with reserves of over $272bn in early January. By mid-January, the rupee was up 12.6 per cent against the dollar since the start of 2007.
To address the rupee's rise, the central bank re-imposed some controls on capital inflows, notably by tightening rules governing Indian companies borrowing overseas. It has also allowed greater capital outflows, raising limits on funds citizens can take out of the country.
While government reformers are broadly committed to opening up the capital account further, the central bank is anxious to ensure the timing and scope of such liberalisation does not destabilise monetary management. The surge in capital inflows also created a worrying bubble in asset prices. This is most evident in the BSE Sensex, which rose 47.2 per cent in 2007.
India ended the year as the third best-performing emerging market, adding further lustre to its performance in 2006 (up 46.7 per cent) and 2005 (up 42.3 per cent). But corporate valuations have, to some minds, become disconnected both from fundamentals and also from the slow progress of structural reform.
Equity strategists note the market looks far from cheap, having started 2007 with a trailing price-earnings (p/e) ratio of 23 and ended it with one of 30.
Presciently, Ridham Desai, a Morgan Stanley strategist, wrote in the report 2008: A Bumpy Road Ahead: "The relative p/e versus emerging markets has gone from 1.45 times to 1.70 times compared with India's relative performance of 18 per cent year-to-date ... [The] equity market's relative gains this year have come from a p/e expansion ... it is hard to predict another year of p/e gain ... "
The strong rupee and high corporate valuations have encouraged a boom in outbound mergers and acquisitions, whose value rose to $30bn in 2007 from $2.6bn in 2005, according to McKinsey. "We didn't see a single $1bn-plus deal until late 2006 and then had eight in the last 12-15 months," says Kuldeep Jain, an associate partner.
The trend continues in 2008, with the Tata Group, fresh from Tata Steel's acquisition of Corus, bidding, through Tata Motors for Jaguar and Land Rover, two brands put up for sale by Ford.
Economists believe the pace of reform will need to quicken for India to sustain the growth rates on which corporate valuations are based. As foreign ownership restrictions progressively disappear and the relative size of the public sector shrinks, India's physical and social infrastructure presents the biggest barrier to integration with the global economy.
Clogged roads, dismal airports and inefficient ports prevent India from realising its potential, as does a shortage of skilled labour and decent healthcare.
The government's current five-year plan calls for infrastructure spending of $492bn up to 2012. Around 30 per cent, some $150bn, would go on new power plants to tackle electricity shortages. Roads and bridges would receive the next largest amount, $76bn, followed by telecommunications, sanitation, irrigation and railways.
The outlay is beyond the means of the government, which continues to expend scarce resources on subsidising fuel and fertiliser. The state's contribution is just 30 per cent of planned infrastructure funding.
The private sector is expected to finance the rest, a tall order given undeveloped local debt markets and the risk of long-term projects in an uncertain regulatory and political environment.
More generally, there is no question that the business environment still needs to become friendlier for India to integrate fully with the global economy. The World Bank this year ranked India 120th out of 178 countries for ease of doing business.
This was an improvement on 134th in 2007. But foreign companies still struggle in many ways, from enforcing contracts to compensating managers nervous about their families breathing dangerous levels of air pollution in a country that, with the Nano, is about to enter an era of mass motorisation.
© 2025