Today’s blog follows yesterday’s on Russia and Monday’s blog on Brazil. It is the third in Key Note’s series of blogs on the five BRICS economies and focuses on India. If you’ve taken the time to read Key Note’s previous wittering on the BRICS economies, then on top of earning a salute for your dogged persistence, you’ll also have noted the pervading air of gloom. But gloom be gone! For this blog is about India, which appears to have escaped the fate of its BRICS bedfellows.

Circumstances which proved toxic to other economies have favoured the Indian economy. Hints that a Federal Reserve interest rate rise is nearing on a strengthening US dollar and expanding American economy has leeched capital from developing markets. Investors, who piled in for better returns during the period of ultra-low rates in the developed world, are returning to the US, but India — where it’s been hard for foreign investors to enter bond markets and foreign ownership of companies is capped at 49% — has barely blinked.

The oil price crash that sank Russia’s economy was a boon for India, a thirsty oil importer. As hydrocarbon prices fell, so did inflation, prompting the central bank to cut interest rates. Old disputes with the PRC, particularly over its Himalayan border, have meant an historically frosty relationship, including on trade. As the PRC’s economy slows and it imports fewer commodities as it shifts from manufacturing, India, unlike Brazil, is largely unconcerned, never having been the PRC’s trading bosom buddy. India’s export strengths lie in services over goods and commodities, allowing it to brush off dwindling European demand for the latter as the Eurozone veers back towards crisis.

India has the demographic blessing of a big population. At around 1.25 billion, it’s growing faster than the PRC’s, where the one-child policy has cut both population growth and people in the workforce. India’s population is largely young, unlike aged developed economies, while low gross domestic product (GDP) per person leaves plenty of room for rapid improvement.

Readers won’t be surprised, then, to hear India enjoyed 7.5% growth in GDP in 2014, outpacing even the PRC. In many ways, it is a country on the up.

And Yet...

For there is always a but. Despite strong growth last year, the economy is held back from achieving its full potential.

Industrial, commercial and infrastructure projects find it hard to acquire land due to sclerotic land acquisition laws. Even when compensating landowners, legal wrangling over land ties up new projects. In Mumbai, finding space for a much-needed second international airport has made the UK’s deliberations about runway capacity in the South East seem a breeze.

These projects certainly need land, because in India it’s often not enough to find room for ‘just’ a factory — you’ll often need space for a mini private power plant to run the machines as well. This compensates for what can amount to hours of blackouts each week as the country’s electricity network moans under strain.

While India doesn’t lack workers, not all are healthy enough to work productively. As in any country, a sickly population limits potential GDP growth. A number of health issues abound in certain parts of India, partly due to poor sanitation. The Government has promised to build toilets, but these have been slow in coming and many poor rural Indians still unfortunately lack access to them. Though urban Indians generally enjoy better access to sanitation facilities than those living in rural areas, cities in India, just as in many places around the world, are heavily polluted. Industry, power plants and sulphurous fuel in motor vehicles coalesce into severe smog; Delhi is now one of the most polluted cities on earth (although London’s Oxford Street doesn’t fair much better). This also costs the health of workers.

Improving the health of workers would positively affect their productivity, but infrastructure investment would boost overall productivity. Better, wider roads, new and modernised ports, and airport expansion would all be a boon.

The scream for railway overhaul though, is shriller than a train’s whistle. India’s railways were never really built for ferrying around its native population. Tracks were laid when India was run largely for the gain of the British Empire, designed to carry around important colonials and ferry India’s natural resources to ports for export. Limited new tracks have been laid since (those pesky land acquisition laws again) and today’s railway doesn’t serve the people and economy as well as it could, despite carrying huge volumes of passengers and freight daily. The state monopoly subsidises passenger journeys with high charges on freight; manufacturers have shrugged and shifted to a slower method instead — the diesel lorries that clog the road network and choke cities.

Modi’s Marvellous Medicine

The Government is addressing India’s issues. Reforms under new Prime Minister, Narendra Modi, have cut red tape and are kicking a slow-moving bureaucracy into touch. Appalled by India’s lowly place in the World Bank’s ease of doing business ranking — 142nd — the Government has plans for a single portal for new businesses to apply for the necessary permits across governmental departments and other measures to boost ease of doing business. Legislation is also tabled to overhaul land acquisition laws, even if the most ambitious parts of the plan have had to be scaled back due to difficulty in mustering up parliamentary support.

India has taken giant leaps forward, supplying the unbanked with accounts linked to biometric identity cards. 125 million of these accounts were opened between August 2014 and January 2015 and are now ready to receive wages or cash benefits, the latter of which will begin to replace India’s system of subsidies for the poor on food and fuel, to cut waste and improve efficiency.

To clean up its dirty air, India’s lawmakers have demanded less polluting vehicles, the monitoring of thousands of industrial chimneys, and a clampdown on sulphur in fuel. Gone are subsidies for petrol and diesel, making it more expensive to run smoky electricity generators. (Although a better way for cutting the use of generators, along with paraffin stoves, lamps and indoor cooking fires, would be a larger and more reliable electricity network.) Trading schemes for carbon emissions are common worldwide, but India is leading the world by setting up a scheme between three of its most industrialised states that trade in particulate matter.

At a time where emerging market currencies are falling — most notably Russia’s rouble, but also in other increasingly sluggish emerging markets such as Brazil and South Africa — and economies are threatening contraction, India stokes the fires of optimism. With a booming stock market, a stable rupee and the IMF’s glowing forecasts for future economic growth, India has become the jewel in the BRICS crown.

Michael joined the company in October 2010 and works as Key Note's Lead Writer. He specialises in producing our range of financial services and insurance titles.