India Is The Last BRIC Standing
A year and a half ago, emerging markets fell into chaos when the Federal Reserve signaled that the American economy had improved enough to end its asset-buying program, and investors began pulling out of foreign markets.
India was in a vulnerable place then - its current account deficit had been at 6.9% in late 2012, and outflows hit the economy hard. Plus, inflation was on the rise and growth was stagnating.
But today, while much of the world is in dark place economically - Brazil is embroiled in a corruption scandal, sanctions continue to constrain Russia's economy, China is slowing down, and unemployment persists in the EU - India stands out as a star performer: the one emerging market perfectly positioned for growth.
So how did massive, decentralized India - home to 1.3 billion people, five major religions, and more than 20 official languages - get to this point?
Let's start with Modi.
In May's general election, Narendra Modi shot to power with a 52 percent majority for his Bharatiya Janata Party (India's first majority government in 30 years) and some serious promises to whip the economy into shape.
He'd campaigned as a pro-business candidate who turned his home state, Gujarat, into a flourishing investment destination. So, with a comfortable cabinet majority, everyone hoped he could pull off reforms at the national level too.
One early challenge was the budget, which came out in July. With it, Finance Minister Arun Jaitley announced plans to reduce the fiscal deficit, cut subsidies, invest in infrastructure, boost domestic savings and investment, and introduce a GST.
The new administration also cut down the number of cabinet members to reduce inefficiencies and began tracking public employees' attendance at work with a video surveillance system.
Six months into power, Modi's government has made important strides toward economic growth, and it has already started to boost investor confidence:
But Modi is not the only reason investors are so confident.
India is also one of the least-exposed emerging markets to China, which is now facing mounting deflation fears, a collapsing housing market, and an economy growing at its slowest rate in decades.
Researchers predict India will focus increasingly on import substitution and domestic demand-led growth going forward. It's better-suited to do this than most countries, because its reliance on external demand is already so low.
Favorable demographics also help the picture: India's dependency ratio is declining and almost 30 percent of the population is under the age of 14. Those people will make up the country's consumers, employers, workers, and taxpayers in the decades to come.
Think of how different that is from China's demographic future where an aging population will eventually make for a high dependency ratio.
Not bad, India. Here's what else is going on:
- Consumer confidence is growing: auto sales grew at 20 percent in September and October and mobile phone subscriptions grew at more than 10 percent YOY last month (India doesn't release retail sales data)
- The rupee has been on a steady decline, making it super-competitive in the region: right now it's trading at 0.016 to the dollar
- Industrial output is on the up and up
- ? Last month, India was the only country in Asia with positive PMI growth, at 51.6, up
from 51.0 in September
- ? In September, industrial production surpassed expectations: factory output jumped
to 2.5 percent YOY, up from 0.5 percent YOY in August
- Inflation is dropping: at 5.5 percent in October, down from 6.5 percent in September, CPI was well below the government's 2016 target
India has made more progress than any other emerging market in lowering its current account deficit - and vulnerability to outflows - since the Fed shocked the markets last year by threatening to stop its bond-buying program. Right now the deficit is just 1 percent of GDP.
With the recent drop in global oil and gold prices - which, together, make up 45 percent of India's imports - researchers at Capital Economics predict India could be running a current account surplus over the coming months.
The Modi government has taken big steps toward reducing debt - cutting diesel subsidies by half, increasing taxes on diesel and petrol, and marketing its stakes in Coal India and the Oil and Natural Gas Corporation.
Despite these efforts, India will probably miss its fiscal target (of 4.1 percent in F2015). That's due in part to a high base-line left behind by the previous administration.
But, according to researchers at Lombard Street Research, it might not be such a bad thing. The economy is running below capacity right now, and a little extra spending could help give it a boost.
So basically India's looking pretty good... but Modi's administration does have its critics.
The new debt-reducing policies are definitely unpopular: in June, protestors around the country took to the streets when the government raised train fares by 14.2 percent. Freight fares jumped 6.5 percent.
(Riots are old news for the 64-year-old Prime Minister, who faced criticism as chief minister of Gujarat for allegedly condoning anti-Muslim violence in 2002. The U.S, UK, and EU boycotted him for a while, and today he's still widely regarded as a Hindu nationalist.)
Now, Modi maintains a steady focus on the economy, which is not yet in the clear.
GDP growth is sliding. Exports were down 5 percent YOY in October and GDP growth weakened to 5.3 percent last quarter from 5.7 percent in Q2.
That's partly a result of slow global demand (hence wanting to boost domestic demand) and partly due to supply-side constraints, like a tight supply of coal.
Structural reforms are needed, but in the world's largest democracy, that will take time. Nobody's holding out for a big bang or sudden change.
But Modi supporters say he's got this.
Also this week, U.S. Trade Representative Michael Froman flew to Delhi for trade talks, and in January, President Obama will come to visit for India's Republic Day celebrations.
Meanwhile, for India, weak export demand could be the biggest obstacle to economic ascent, so the U.S., a major buyer of India's goods, would play an important role in the country's success.
So even if dreary global demand does pull India down, it very likely won't fall as far as everyone else.
That would still be a victory.
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