Our Opinion: 2016

India’s auspicious outlook


When India’s prime minister, Narendra Modi, came to power in May 2014, his victory propelled the stock-market to a new record. But now his honeymoon is well and truly over. Hopes that the reform-minded leader could offer protection against a worsening global sell-off have evaporated. Mumbai’s Sensex index dipped below 24,000 in January for the first time since he was elected.

But the gloom looks overdone. After several turbulent years, a gradual recovery is on the cards. The rupee has stabilised as the current-account deficit has fallen. Inflation has been brought under control, giving the central bank scope for recent interest-rate cuts. The government is easing up on its fiscal squeeze. Meanwhile, as the FT points out, “India is not burdened with the large dollar-denominated debts weighing on many emerging markets”, and it imports its energy, so falling oil prices provide a boost. The International Monetary Fund is pencilling in growth of 7.5% this year, the fastest of any large economy.

Investors still worry that structural reforms have stalled. In particular, the attempted replacement of an array of state taxes with a national goods and sales tax (GST) has been blocked in the upper house of parliament. But just as investors were too euphoric when he took power, they are too pessimistic now, says Christopher Wood of CLSA. The fashionable view that nothing is happening under Modi is “very wrong”.

The government has cut food-related subsidies, tempering rural wage growth and inflation. A fiscal federalist, Modi has given states more spending power in a bid to “encourage development politics at the state level” in the hope that more states will emulate the success of Gujarat during his 13-year tenure there. The government also appears to be gearing up to tackle bad loans in banks and the power sector.

Meanwhile, state elections this year could increase the government’s presence in the upper house, allowing it to implement the national GST, says Morgan Stanley. And with its young population, growing middle class and strong foothold in service industries, the long-term outlook looks extremely attractive.