India’s Sensex recently tanked along with other Asian exchanges due to global turmoil due to a slowing Chinese economy. Investors are also starting to become sceptical about the Indian growth story as major reforms are either stalled or scrapped.
However, despite all the negative news, there still plenty of positives for India compared to its Asian peers. GDP grew at 7% in the April to June quarter, which is a good base to aim for higher growth (keeping aside questions on the methodology). Firstly, India is not dependent on exports to boost the economy which is still consumption based. Similar to many developing nations, Indian exports have faltered as key markets in Europe and USA have slowed down.
However, there has been a surge in FDI and a fall in global commodity prices (which India imports in large numbers) to keep the macroeconomic situation in check and crucially keep inflation in check. With the monsoon not as bad as previously feared and Forex reserves steadily building up, there is plenty of scope for India’s central banker to aggressively cut rates to spur growth without adversely affecting the rupee. With the repo rate at 7.25% there is plenty of scope for the reserve bank of India to make an aggressive 50 basis points cut signal their intent to the markets this month. During the financial crisis of 2008 rates did touch 4.5% and cushioned a great deal of the economy. The fall in the country’s currency has also spurred growth in remittances which should further boost growth and reduce the current account deficit, further shoring up India’s macroeconomic situation.
The government on its part can do a lot to keep investors in good humour. In this regard the move scrap the move to retrospectively tax foreign investors is seen as a wise move when stalled reforms can have investors searching for better alternatives. There are also numerous minor reforms the government could pass via a money bill route which could sideline the upper house where the government lacks the numbers. While investors will be disappointed with the lack of structural reform, even minor reforms will eventually add to growth.
In addition the numbers for the government will gradually increase in the upper house on the back of series of wins in state assemblies in recent times making passing reforms much easier. It just could be that investors have to think long term and wait for the political strength of the government to improve in a years time. It makes sense for investors to enter the market now and go long on the Indian growth story as rate cuts and reforms though delayed will eventually come.