Indian Economy accelerates even as the Global Economy weakens

There are some interesting economic developments happening in India. The Reserve Bank of India (RBI), cut interest rates by 125 basis points during the last year, while the Nikkie India manufacturing PMI index showed a sharp increase to 52.4. There was a sharp rise in new orders, as the manufacturing index rose to an eight month high. Even as the global economic outlook continues to be gloomy, India is going through a good phase with strong economic growth. Though exports have declined sharply, the fall in commodity prices has helped compensate. Good fiscal management by the central government has brought persistently high inflation under control and allowed the central bank to cut interest rates to a five year low. The stock market has not reacted positively to these developments, as the interest rate cut was built into expectations and the corporate earnings are expected to remain subdued over the coming quarter. However, the government continues to make slow and steady progress in reforming the economy. While big bang reforms such as GST continues to be stuck because of opposition intransigence, the central government has implemented some important changes, such as liberalizing gas prices for deep water fields and allowing FDI in e-commerce marketplaces.

India is growing strongly…

The composite survey of Indian services and manufacturing PMI increased to a more than 3 year high, with the PMI level increasing to 54.3 from 51.2 in February.  While a one month PMI does not indicate a sustainable change in trend, the sharp surge points to the fact that Indian growth may be increasing to a higher new level. The main factors behind the growth would be the continuous efforts being made to improve the economy by the central government. The power situation in the country has improved dramatically, even as massive investments are being made into infrastructure. While the private sector has not participated strongly due to strained balance sheets, the government has made up by increasing the capital expenditure. Foreign direct investment (FDI) has increased to a new high, with more than $3 billion poured into India in January. The “Ease of doing Business” and emphasis on the “Make in India” policies are finally starting to show results. Ratings agency Moody’s thinks that strong FDI inflows will lead to a low current account deficit going forward and insulate India from external shocks.

Private sector activity in the country registered a significant uptrend and surged to a 37-month high in March, driven by marked increase in new business orders, a monthly survey said today. The Nikkei India Composite PMI Output Index, which maps both manufacturing and services sectors, climbed from 51.2 in February to a 37-month high of 54.3 last month.

Source – PTI

Even as the world is slowing down

While India continues to grow strongly, the world is looking at depressed economic conditions. JP Morgan global PMI showed that the world economy was growing at its weakest pace in the last 3 years. While Europe and Japan were already falling behind, even USA economy has started to stall due to global weakness. India should try to capitalize on the global weakness through a faster implementation of reforms. It should use its low cost labour workforce to attract industries from around the world. While India has become a major force in the services sector using the advantage of its English speaking skilled workers, it has failed to replicate this in the manufacturing domain. The country has one of the lowest cost worker base in the world, along with a large domestic market. It can use both these advantages to become a manufacturing powerhouse.

Reforms continue to be implemented while Foreign Investment starts flooding in

Some analysts have criticized PM Modi for making too many foreign trips and not focusing his time on domestic issues. However these analysts are now being proved wrong, as FDI has hit a record level. Wooing of foreign investors has started to pay dividends, as net FDI inflow hit a record $3 billion in January. President Obama recently said that USA foreign investment into India now exceeds that of China. Modi has been successful in attracting massive investments from all over the world. Japan is building a super-fast train in India, while China is investing in building large industrial parks. Lockheed Martin and Boeing plan to build their latest fighter jets F16 and F18 in India, to take advantage of India’s massive defence procurements. BJP led state governments are making important land and labor reforms, which will further accelerate economic developments. While GST reform has remain frozen for the last one year, the government is making strong efforts to get it passed. It has been estimated that the GST reform will add another 1-2% growth to India’s GDP every year, as it removes inefficiencies in the system.

Some of the ETFs that you could look to invest to take advantage of the growing India story are:

1. Wisdom Tree India Earnings ETF (EPI)
2. iShares S&P India Nifty Fifty Index Fund (INDY)
3. PowerShares India Portfolio (PIN)
4. EGShares India Small Cap ETF (SCIN)

Risks

1. a) Rural Distress – The last two years have seen a drought in India’s agricultural sector. Poor irrigation coverage and small land holdings amongst farmers have led to a situation of extreme rural distress. Large part of the country’s population remain dependent on the agriculture sector, which is facing adverse times. The government has recognized the problem and the last Budget made significant allocations towards the rural sector, such as irrigation. This year should see good rains and allow the rural economy also to return to its growth path.
2. b) External Shocks and Bad Debt Issue – The global financial sector remains fragile, with most developed economies having very low interest rates. Lack of growth has forced some countries to experiment with negative interest rates. Emergi markets are also facing headwinds due to the commodity price crash, while China faces a severe debt issue. India will not go unscathed, if the global economy goes through a further slowdown. The Indian banking sector has also been a cause of concern because of the high level of debt. A large part of India’s infrastructure debt has turned bad, due to mismanagement and corruption earlier. While the Indian government and central bank have tried to sort this problem through strong action, the banking sector is still not out of the woods.

Conclusion

The news from the Indian economy continues to be good as important reforms continue to be implemented, while economic data points towards higher economic growth. India continues to be a bright spot in a gloomy global economy. While there are some risks due to external financial shocks and rural distress, these risks are not big enough to derail India’s growth story. While the stock markets have started stagnating due to poor earnings growth, I think it may be a good time to buy given that a solid foundation is being laid for strong long term growth of the economy. Most analysts and research organizations are becoming positive on India’s economy, based on the reforms being implemented and the country’s massive potential. While the short term may see ups and downs in the market, the longer term remains extremely promising.