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India’s macro-economic rise: Accidental or Structural?

By Himanshu Khandelwal, Investment Director, Asas Capital.


Milton Friedman once said, “Only a crisis, actual or perceived – produces real change”. This is very true in an Indian context. The Indian economy, one of Morgan Stanley’s “fragile five” in 2013, mired in a balance of payment crises with a rupee in free fall, now boasts 7.6% GDP growth and a slight current account surplus.  Ever since the end of India’s License Raj era in 1991, foreign investors have pinpointed India’s growth performance as accidental and not structural. This is no longer true. India’s growth momentum is domestic and secular, not dependent on bullish global market cycles alone.


Emerging markets have been facing difficult times especially with the rising dollar and collapse in commodities. Uncertainties from the Chinese economy have increased with manufacturing burdened by overcapacity albeit cushioned by a strong consumer. From Latin America to the Middle East, productivity gains can only be achieved through improving business environment and infrastructure led growth to diversify away from the vagaries of commodity markets.


The distinctly visible direction of global politics has triggered a new era of de-globalisation and closed economic policies. Emerging economies in this era cannot export their way to prosperity. They have to rely on domestic markets which would focus on services led growth diverging away from manufacturing where automation will reduce jobs.


India’s top down story could stand out as a key differentiating factor in a world starving for domestic demand led growth uncorrelated to cyclical commodities. The government along with the central bank is addressing some key structural problems which make economy more resilient and low risk even at the cost of short term pain like rural stress and a delayed recovery in private investment. Few areas which stand out:


Crushing crony capitalism: For most of India’s independent history, crony capitalists have cornered key resources in large sectors of the economy. Modi led government which made tall promises during election rhetoric has been addressing this issue through transparent, policy oriented approach and even draconian legislation. Corruption in India is now a more bottom up problem than a top down problem.


Focus on financial stability: Indian policymakers have been complacent with high growth often at the cost of high inflation and financial stability. Since 2013, with relentless focus and help from commodity crash, the sticky consumer price inflation has come down from 10% to below 6% which coupled with lower fiscal deficit has allowed the interest rates to fall 150 bps. A relatively stable currency attracts investments.


Financial inclusion: Considerable progress has been made in the last two years with over 220 million new bank accounts covering over 90% of unbanked families. This would further help reduce the $40 billion subsidy bill through direct benefit transfers. With Indian corporate reeling under a balance sheet recession, the retail credit is clocking growth of over 18% which emphasises the consumption recovery.


Lowering the cost of capital: India despite having a high savings rate is burdened by a high cost of capital as over 50% of India’s household savings are in locked in land or gold. The orderly real estate correction and measures to curb gold demand has meant more savings into the financial system. This means India’s cost of debt capital is coming down structurally.


Note that Indian capital markets reflect these new macro realities while Dalal Street falls on global risk aversion, these declines are a buying opportunity. Its implied volatility has fallen dramatically over last two years as it attracts more sticky long term investors. At 16 times earnings, India is not cheap but its valuation is anchored by the tail wind of earnings recovery and structural reform.


In 2015, India attracted $63 billion in green-field FDI, a global record that beat even the US & China. India is unquestionably the world’s most attractive consumption driven growth story with macro-economic stability. As a parliamentary democracy with a demographic dividend of 1.2 billion people and an entrepreneurial tradition that preceded the East India Company by centuries, India is on a roll on the global economic stage. Brexit trauma only reinforces the Indian story since it precludes a traumatic rise in US dollar interest rates and places a premium on secular growth story. This is India’s new tryst with economic destiny.




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