Of all the fast-growing BRICS countries, only India stands strong right now according to an article in Business Insider. It says “While much of the world is in a 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? 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. In the annual budget, which came out in July, 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.
Six months into power, Modi’s government has made important strides toward economic growth, and it has already started to boost investor confidence. 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. Right now the deficit is just 1 percent of GDP.
Other factors that help the picture are:
- Favorable demographics: India’s dependency ratio is declining and almost 30 percent of the population is under the age of 14
- Consumer confidence is growing
- 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 rising:
- last month India was the only country in Asia with positive PMI growth, at 51.6, up from 51.0 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
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.
However, the economy is still not out of the woods yet. 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. 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.
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. The winter parliamentary session kicked off this week, and reforms in finance, infrastructure, taxation, labor, and land acquisition will be top of the agenda.
