Is India Set to The Globe’s New Beacon of Growth?

photo by Scott Jarvie, Creative Commons Attribution

photo by Scott Jarvie, Creative Commons Attribution

Is India Set to The Globe’s New Beacon of Growth?

Although China has a tendency to steal the spotlight as the globe’s second largest economy, India is quickly emerging as a new viable driver of growth. As the focus shifts away from China’s waning growth momentum, investors are quickly looking towards other emerging markets like India that have not yet reached their full potential. Thanks to Prime Minister Narendra Modi’s strong focus on forging new international economic ties with major global powers, India’s growth trajectory is only likely to accelerate over time. However, there are several factors that could rein in blockbuster GDP expansion, the biggest of which are high inflation and rising unemployment. There are also external threats, such disputes with Pakistan and China that could detract from the attention on the economy. Nevertheless, India’s global footprint is only set to grow, leaving other emerging markets in the dust.

Rapid Expansion Signals Optimistic Outlook

The primary efforts of the Modi administration have been to reduce friction in India’s economy. While a major goal of ongoing reforms has been to tackle rampant waste and improve the ease of doing business while increasing tax collection, the focus on harnessing growth and containing inflation have also been at the forefront of Modi’s push. In many respects, the current government has been very effective at producing results. While it is easy to criticize certain aspects of policy, these contentious measures are setting up India for sustainable, long-term growth. According to Modi, India has transformed itself into one of the most open economies, namely by reducing layers of bureaucracy and consolidating the many different laws and regulations of regional governments into one comprehensive system with the indirect taxation push.

Furthermore, more accommodative monetary policy from the Reserve Bank of India will help support economic growth. Under the stewardship of newly installed Governor Urjit Patel and the Monetary Policy Committee, rates have continued to fall, with the repo-rate hitting a six-year low of 6.25%. While lower rates may hurt the Rupee over time and put additional upward pressure on inflation across the country, it has created support for sustained medium-term economic expansion. Even though the Rupee generally reacts negatively to accommodative policies, it has largely remained flat against the US dollar over the last year. The one area of activity has been helped by the monetary policy tailwinds is the BSE Sensex equity index, which has risen 5.96% year-to-date after bottoming out in February. Nevertheless, there are still major risks despite the optimistic outlook.

Creeping Inflation and Unemployment Raise Concerns

Headline numbers may look exceeding positive based on developments in the underlying Indian economy, however, inflation and unemployment remain major points of concern. After falling to a record low 3.80% from 2011-2012, unemployment has been back on the rise, climbing to a five year high of 5.00% according to data from the Labour Bureau. However, while still significantly below the 2009-2010 reading of 9.30%, survey data shows that 77.00% of households have no steady wage earner, indicating the sheer scale of the problem. Even with the increased attention on the “Make in India” initiative to help focus on domestic job creation, the recent uptick has left the government scrambling to fight the tide of rising joblessness.

Outside of employment, inflation remains a larger long-term sticking point as the Central Bank works to stay within its 2.00% to 6.00% consumer price index target. India has struggled with chronic inflation issues, with the rapid devaluation of the Rupee over the last several years contributing to the longstanding woes. Still, 2016 has already shown significant improvements on the inflation front. The RBI still maintains the potential for an additional rate cut before the end of 2016 thanks to deceleration in consumer prices. The disinflationary environment is helping the Central Bank meet its 4.00% target which was expected to be hit in 2018, with headline CPI currently trending at a 4.31% annualized pace as of September. However, should the Rupee weaken further, the MPC might be forced to postpone further rate cuts as the Central Bank attempts to wrangle in inflation that still exceeds the longer-term 4.00% target.

The Outlook

While there are many bright spots in India’s economy, many officials have recently warned on external factors that could derail the ongoing high pace of economic expansion. For one, Central Bank Governor Patel has cautioned on risks that may materialize thanks to the European political environment shifting more to the right, the repercussions of the “Brexit” referendum, and the upcoming election in the US. However, as the Central Bank focuses intently on lowering interest rates despite inflation in an effort to help provide financing, growth is set to outperform nearly all peers over the longer-term as the Government and Central Bank set the foundation for a robust period of expansion. Furthermore, strategic moves including strengthening ties with Russia with relation to energy will help the nation supply its burgeoning needs for decades to come. With this backdrop in place, India is set for a substantial period of prosperity despite some hurdles.