For the next few days, you won’t find many Indians worrying about either their flagging economy or Mumbai’s soar-away stock market. Having topped the table in the group stage, beating New Zealand is the first priority for this cricket-mad nation, on the way, it hopes, to picking up a third World Cup next Sunday.
Re-elected in an unexpected landslide in May, Prime Minister Narendra Modi will be hoping a win at Lord’s at the weekend can add to the political momentum that swept him so decisively to a second term. He knows that at some point soon he will need all the help he can get to distract attention from the deep-seated economic problems that threaten both his popularity and the nose-bleed-inducing level of the Bombay Stock Exchange’s Sensex index.
India’s new finance minister, Nirmala Sitharaman, presented the country’s budget on Friday, to grow the world’s sixth-largest economy from $3trn to $5trn (£4trn) over five years. Increased infrastructure spending, easier foreign investment, better living conditions in rural areas and support for a creaking financial system are some of the key measures.
Between January and March, India’s growth rate fell to 5.8%, the slowest rate in 20 quarters. That dragged down the annual growth rate in the 2018-19 fiscal year to 6.8%, back on a par with China, which India had overtaken to become the world’s fastest-growing major economy. A series of recent indicators, from industrial output to car sales, point to a significant deterioration in India’s economic outlook. Unemployment is at a 45-year high.
Modi was elected in 2014 on promises to accelerate India’s faltering economic growth and create millions of jobs for a young, well-educated workforce frustrated by a graduate jobless rate of 15%. He has largely failed to deliver on those promises and the economy was absent from a re-election campaign dominated by national security and identity politics. He was given a second chance by the electorate, but India’s patience will be tested by a continuing failure to live up to its potential.
There is a long-list of economic challenges in addition to the slowing growth rate. At the heart of the recent deceleration is a financial system in crisis, with a state-dominated banking system weighed down by bad debts and liquidity problems in non-bank financial companies. A recapitalisation of banks in Modi’s first term now looks too half-hearted. Even more worrying are question marks over the growth numbers themselves.
Arvind Subramaniam, chief economic adviser to the government until last year, recently warned that the official estimates of growth over the past five years may have been significantly over-stated. He said the actual expansion might have been closer to 4.5% than 7%.
Not an encouraging starting point for an emerging economy faced with a worsening global economic picture. Failure to deliver the “Make in India” growth plan for the manufacturing sector means India is unlikely to be a beneficiary of the ongoing trade tensions between the US and China. With manufacturing representing a smaller slice of the economy than it did in 2006, India is not well-placed to fill any gap created by American tariffs.
A big importer of oil, India is also vulnerable to a deterioration in the geo-political climate in the Middle East. The oil price has so far been held in check by abundant production, from North American Shale in particular, but war in the Gulf region would quickly change the balance of supply and demand and push the cost of crude much higher.
It is not all bad news, however. India’s services sector, which accounts for 60pc of the economy, is competitive. Consumer spending is also growing rapidly, much faster than the global average, and India is on track to become the world’s third largest consumer market after the US and China. If Modi can deliver much-needed reforms of labour laws and regulations, make it easier to purchase farm land for other uses and rebuild trust in India’s institutions the world could come knocking at the door of a country with a young, large, cheap and well-educated workforce.
It is this potential that is reflected in the performance of the Indian stock market, which has massively outperformed its Chinese counterpart over the past 10 years. Since 2009, the Sensex index has risen from under 15,000 to 40,000 today.
The rapid rise in the stock market has seen Indians start to question their traditional love affair with real estate and precious metals. Physical assets have fallen from 59% of household savings in 2012 to 49% today and gold is no longer the default asset of choice for storing personal wealth and handing it on to the next generation. Assets under management by mutual funds have grown at a rate of 25% a year since 2013, boosted by online investment platforms and mobile technology.
The industry is starting from a very low base. Around 20 million Indians currently invest in mutual funds and it is easy to imagine this growing many times over. Assets held in mutual funds in India represent just 9% of GDP compared with 60% in the Britain and more than 100% in America.
So, while the India stock market looks fully valued when compared with its counterparts in both the developed and emerging worlds, the potential for both economic growth and maturing investment markets is significant. Wins on Thursday and Sunday would provide a springboard for a transformative second Modi term - although as the sole England supporter in my Anglo-Indian house, it’s not the result I’m hoping for.
|Tom Stevenson’s Investment Outlook webcast – 10 July 2019 at 12pm|
|Tomorrow, Tom Stevenson will be giving his outlook on world markets in a lunchtime webcast.
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