India watch issue 5 - India’s global economic position

Monday, July 13, 2009 | Posted by: Grant Thornton
Categories: | Tags: India, investment, global, infrastructure, South Asia Group, GDP, Capital Markets, Alex Wright, Indian Economy, Robert Beenstock, India elections

The second quarter of 2009 saw a flurry of activity in India on both the political and economical stages. On 16 May 2009, India announced the results of its 15th Lok Sabha national elections and the historic re-election of the Congress-led United Progressive Alliance (UPA) party. The unexpected result was seen as a very positive development by Indian investors, who consequently piled into the stock market, sending the Bombay Stock Exchange Sensex Index soaring by 17%. Unfortunately, the rally was cut short after unprecedented trading volatility led regulators to shut the Exchange down for the remainder of the day, but the underlying cause of this rally was not lost - many people throughout India and abroad saw the re-election of the UPA party as a significant long term benefit to the country.

Although a large amount of uncertainty still remains within the global marketplace, the re-election of the UPA party brings a much needed level of stability and confidence back to India and a high level of expectation lies on the shoulders of this re-elected government to try and rectify the country’s economic woes.

At the top of the government’s agenda must be the improvement of the Indian economy, which whilst not suffering to the same extent as other developed or emerging markets, has nevertheless diminished significantly. With a substantial government deficit of over 6.8% of GDP (as highlighted in the recent 2009-2010 Budget) and essential infrastructural improvements needed, this task will not be easy. However, reducing the government deficit in these economic conditions would be an unproductive and unbeneficial task. India needs investment and, if it is to attain long-term growth, vast resources will need to be expended on the development of its infrastructure. Foreign investment is likely to play a key role in this development and, after the success of the elections and the reduced influence of political opposition, new reforms governing measures such as investments limits are now more likely to be passed.

The potential of India as a destination for foreign investment continues to be highlighted in data reports and news articles. A Financial Times article from June details how emerging market equities have outperformed Western equities since the start of 2009. The report goes on to say that, since the beginning of the year, the FTSE emerging markets index has risen 41.1% and by 60.8% since the beginning of March, which compares to a rise in the FTSE All World developed markets index of 7.2% since the start of the year and 31.4% since the start of March.

However, there are still numerous signs that the economic uncertainty is continuing to restrain India’s growth rate. Data from the Economist Intelligence Unit (EIU) shows that in the first quarter of the year, India’s economy expanded by 4.1%, down 0.7% from the final quarter of 2008 and significantly lower than the 9% growth recorded over the same period in 2008. Imports and exports are also reported to have declined, by 5.7% and 0.8%, respectively. For the Financial Year 2008/2009, the EIU estimates that exports grew by only 3.6% - their worst performance in 7 years - falling short of even the revised target of US$175bn.

Although, bearing in mind the factors such as those above, the continued growth in India’s economy as a whole is still outperforming expectations. Increased government spending and steady demand has resulted in the continued growth of various service industries at over 8%, albeit lower than the previous quarters 9.5% rate, but still tremendous growth given the global financial environment.

The recent 2009-2010 Budget states that GDP growth dipped to 6.7% in the Financial Year 2009 and details the government’s plans to bring the economic growth level back to 9%. Seemingly undermining this, an EIU report from May, states that they are still expecting further declines in GDP growth in the Financial Year 2009/2010. However, on a positive note, the EIU are now more confident that the figure will not fall to their previously forecasted level of 5% and that GDP for 2010/2011 will reach 6.4%. The EIU’s forecast would seem to be more realistic than that of the Indian Government, being backed up by similar estimates from the Reserve Bank of India (6%), Goldman Sachs (5.8%) and most recently the IMF at 5.4%.

With India’s GDP and trade growth levels very much dependent on the revival of the global economy, -particularly the US economy - India is likely to be hindered by the global climate in the short term. However, with the elections now over, the Indian government is now well-positioned to minimise these external effects through purposeful policy making and the implementation of some long delayed economic reforms - reforms which will hopefully stimulate growth and investment and allow India’s government to reaffirm stability throughout the country, albeit poor monsoons could play a key dampening role in growth rates.

Alex Wright
Executive, Capital Markets, South Asia Group
Grant Thornton UK LLP