The plus and minus of India's economy and why it matters to you

In this article, we will be looking at several key indicators to paint both a positive and negative picture of India’s current and future economy. Hopefully, it will help you make better decisions towards investing in India.

Positive - strong structural macro drivers

1. Increasing population with higher spending power

2. Armed with a high proportion of the working-age population (15-64 years old)

3. Increasing urbanization rate among total population

In short, as we move forward into the future, it is clear that Indian growth will be driven by structural rather than cyclical factors.

We can expect India to experience higher levels of business activities driven by:

1. Higher levels of demand supported by the higher purchasing power of locals

2. A healthy level of working-age population to support the human resource needs

3. Improving infrastructure within India to support an efficient business environment

Negative – weak economic structure and short-term outlook

1. Persistent fiscal deficit and low government spending capabilities

It is evident that India has been experiencing a prolonged fiscal deficit.

Thankfully, the differences between government revenue and expenditure are minute and surprisingly well maintained and hence there impact on the Indian government reserves are minute.

However, the combination of low government revenue and a need to balance their fiscal budget has discouraged the government to spend enough to develop adequate infrastructure, making the country's supply side of the economy so fragile.

Moving forward should India wish to sustainably develop their infrastructure; they must first fix the problem of not collecting enough tax revenue.

2. Persistent current account deficit [CAD]

It is evident that India has been experiencing persistent Current Account Deficit [CAD].

A persistent CAD is always problematic, regardless of what’s driving the cause. This is because of the costly macroeconomic adjustments that are the consequences of a persistent CAD.

In the case of India, this comes in the form of a weakening currency.

Moving forward, India may need to figure out a way to improve their current account situation or risk the following situation:

1. Depleting in national foreign exchange reserves, resulting in the inability to maintain government liquidity to finance for imports and maintain the strength of the local currency.
   

2. Ballooning debt payments to the rest of the world, resulting in burden to the economy having to meet its debt serving repayments.
   

3. Reliance on capital flows from foreign direct investments and foreign portfolio investments, making the economy very susceptible to external shocks.

3. Weakening business and consumer confidence

Supply and demand side is expected to slow down in the short-run thereby resulting in lower corporate earnings. This may come at the back of all the global uncertainty driven by trade wars, coronaviruses, etc.

SBI composite Index (46 to 50 = low decline in manufacturing activities)

RBI consumer confidence index (trending down = consuming less)

Long story short

While India’s near-term economic growth is chilled by global uncertainty, its long-term growth potential is unquestionable.

Driven by strong structural macro drivers, we can expect the Indian corporations to benefit from these drivers as the short-term pessimism subsides.

Granted, during this process, the Indian government may have to conduct major reforms to support the growth of a sustainable economy – that includes addressing the persistent fiscal and current account deficit.

That being said, whether the Indian markets is the right consideration for your investment portfolio will depend largely on your

1. Investment goals

2. Financial plans

Should you need someone to talk to pertaining to your retirement and investment plans, you can get in touch with me here.

In the next article, we will look at the performance of Indian equities followed by an analysis on their valuations.

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Sources:

1. Bloomberg Terminal

2. World Bank

Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

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