There is a perception within India that our economy is in shambles. High inflation, a low GDP, a weak currency, and a rising current account deficit (CAD) are some of the usual reasons that come up when one claims that Indian economy is not in a good state. However, can prove it to you that because of the above reasons India is primed more than ever before to boom in the next 12 months?
Before we get to why India is primed for a boom in the near future, let us first look at its past performance.
There is a perception among Indians that, since 2008, India has been in a "recession". Retail stock market participation has gone down; and generally you do not hear the words "booming" and "India" in the same sentence like you used to before 2008, when the global economic meltdown affected nearly every stock market in the world.
Here are 5 charts that show the major stock indices of the USA, India, China, Brazil, and Russia; the last four being the "BRIC" countries, all of which are deemed to be in similar stages of economic development over the past 5 years (from 3rd October, 2008 to 3rd October, 2013).
Lo and behold, India outperformed the US stock market and every single other major index from its BRIC counterparts. You were not expecting this, were you?
Here is the kicker: India was able to do this despite all economic indicators pointing towards the opposite direction. It is no secret that India's GDP, inflation, and current account deficit numbers indicate that the economy is not in a great shape. But if the Nifty was able to sustain weak economic conditions and outperform other major stock indices around the world, what is expected in the future?
A research was conducted to see whether the stock market can been viewed as an indicator or "predictor" of the future economy. The results of this project reveal that the stock market predicts the future an economy.
Let us now focus on the present: where India stands today, and why the situation is only expected to improve in the near future.
Before we get to that, however, it is important for us to understand that inevitably, India and virtually every other country's economy is dependent upon the health of the American economy. The US dollar, due to being the Reserve Currency of the world, holds significant sway over the entire global economy. When the US economic system collapsed in 2008, it was no coincidence that India's economy took a drastic hit.
Therefore, it is important to compare India's economy to other economies in the world since all countries are invariably linked to America's economic status.
GDP
India's GDP no doubt, has been falling over the past 5 years. Its annual GDP growth rate has been steadily declining over the past 5 years, going from 9 per cent in 2008 to the latest reading of 4.4 per cent. This itself shows that we are in the midst of a big turnaround.
The Growth Domestic Product (GDP) is the sum of all products and services produced by a country. One of the best ways for India to bolster its GDP is to attract Foreign Direct Investments (FDI's). FDI's, inevitably, are linked to the health of the US economy- the more funds US investors have lying around, the more they invest into emerging economies like India.
Since we have already shown that India's stock market has outperformed the other BRIC countries' markets over the past 5 years, there is no reason why FDI's would hesitate to invest in India. Seeing how it is widely accepted that the US economy is finally recovering from its 5 year recession, FDI inflows will increase in the coming months.
The Indian government has taken an unprecedented number of steps to make it more attractive for foreign investors to invest in India, such as speeding up the implementation of large scale projects and reducing FDI limits and restrictions to make it more attractive for FDI's to invest.
Secondly, India's domestic economy has shown signs of growth. The IT sector, one of the pillars of India's economy that accounts for 25 per cent of India's exports, has surged this year; with the BSE IT Index having appreciated 38 per cent in 2013 so far.
With the US economy improving, it is a sure bet that US firms will once again turn to India for its IT needs. As much as we would like to complain about the rupee's value against the US dollar, a weaker rupee will make it even more attractive for overseas firms to turn to India for its IT needs.
Finally, we need to look no further than the International Monetary Fund (IMF) for affirmation that India's GDP is going to rebound. In its latest projections, the IMF predicts India's GDP to climb to 5.6 per cent for 2013-14. If the experts are projecting a GDP rise, why should we as Indians be pessimistic?
Inflation
India's inflation level is at a dangerously high level. The RBI has repeatedly stated that its goal is to keep the Wholesale Price Inflation (WPI) below 5 per cent, yet the latest figures came in at 6.1 per cent. With new RBI Governor Raghuram Rajan having taken over the reins, it looks like the RBI will take all steps necessary to bring down inflation.
The RBI began to attack the inflation problem by raising the repo rate on 20th September from 7.25 per cent to 7.5 per cent, and economists are expecting further repo rate hikes. Interest rate hikes inevitably bring down inflation levels due to the fact that it limits the money supply of rupee available in the market. Needless to say, one issue that all can probably agree on is that inflation levels will likely be brought down in next months.
Current Account Deficit
Last Monday, the Current Account Deficit (CAD) numbers for Q1 (April-June 2013) was released at $21.8 billion, or 4.9 per cent of GDP. India's current account deficit has exploded 1125 per cent since 2007, going from $8 billion to $90 billion; however, the government's goal for this financial year is to bring that number down to $70 billion and to 3.9 per cent of GDP. Since the IMF is expecting India's GDP to rise to 5.6 per cent, we could very well see a CAD of below $70 billion and significantly lower than 3.9 per cent of GDP if the IMF forecasts stay put.
Furthermore, as I stated in last week's column, India will not need to worry about the record high current account deficit (CAD) as much since the price that crude oil is imported at will be more predictable. The RBI is confident that India would be able to finance this year's CAD comfortably.
India is in for a big turnaround. It is fundamentally important for us to realize that the Indian economy is highly interlinked to the American economy. When the American economy completely collapsed in 2008, its impact was also seen in Indian economy, just like every other major economy in the world. Despite that, Indian stock markets outperformed India's counterparts.
Now, we have reached a point where the American economy is picking up. All signs are pointing towards a new direction, one in which GDP will be bolstered, inflation will be kept under control, and the rupee will be stabilised. As a result markets would surge and go on a bullish run in the foreseeable future. Take advantage of this unique opportunity and invest wisely.
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