Will India continue to be a good investment bet in 2017?

Sanjay KumarPNB MetLifeThe Indian economy has seen significant improvement over the last few years. India, from being one of the ‘fragile five’ economies a few years back, has now become one of the fastest growing emerging economies. Positive global cues (particularly decline in commodity prices), a decisive and pro-growth government and RBI’s monetary policies have facilitated this much-needed transition. All this has facilitated improvement in business confidence and provided boost to economic growth. India’s GDP growth has improved from 5.6% in FY13 to 7.6% in FY16 led by resilient consumption demand and higher government spending amid weak private-sector investments. CPI inflation, which was hovering around 10% in FY14, has more than halved to current levels of sub-5%. This, in turn, enabled the central bank to reduce policy rates by 175bps over last two years, thereby providing further impetus to economic growth.India’s external vulnerability has reduced significantly over last three years, with current account deficit (CAD) falling from 4.8% of GDP in FY13 to nine-year low levels of 0.1% of GDP in Q1 FY17. While part of this is attributable to sharp decline in commodity prices, particularly crude oil, the government has also taken several steps to curtail gold imports which was a major cause of India’s high import bill. A lower CAD has partly made India immune to volatile foreign portfolio flows. A meaningful jump in foreign direct investments (FDI), facilitated by steps taken by the government to relax norms and open it for more sectors, has also helped in reducing India’s dependence on foreign portfolio investments. This, coupled with a sharp increase in forex reserves, has significantly reduced India’s external vulnerability, thereby providing stability to Indian Rupee (INR) amid rising global uncertainty. Diesel price deregulation in 2014 has led to a meaningful reduction in spending on subsidies by the government over last two years. This, in turn, has facilitated fiscal consolidation, with fiscal deficit declining for the fourth consecutive year from 5.9% of GDP in FY12 to 3.9% in FY16. The government has budgeted for a fiscal deficit of 3.5% in FY17. Despite strong commitment to fiscal consolidation, government’s spending on infrastructure, particularly roads and railways, has risen meaningfully over last couple of years. This, in turn, has facilitated economic growth recovery. Lastly, reform momentum has picked up meaningfully. The government has announced several structural flagship schemes such as Make in India, Jan Dhan Yojana, Digital India, Housing for all and Smart Cities over last two years. While impact of these would be visible over medium-term, a lot of government’s initiatives have already started showing results, which include reviving state DISCOMs via Uday Scheme, controlling NPAs, speeding up project clearances and opening more sectors to foreign direct investment. Moreover, given the pace of decision-making, government seems committed to implement the much-awaited game-changing reform, GST, by April 1, 2017. Improved eased of doing business and efficiency and productivity gains post GST implementation are likely to significantly improve India’s competitiveness and add to investment and economic growth. While global multi-lateral agencies have been downgrading global growth forecasts, they remain upbeat on India’s growth prospects and expect it to remain one of the fastest growing economies. According to IMF, India is likely to continue to benefit from improved terms of trade, effective policy actions and strong external buffers.With increase in commodity prices this year, outlook for some of the emerging economies have improved slightly. However, given bleak global growth outlook, commodity prices are unlikely to increase meaningfully, as highlighted by World Bank in its recent Commodity Outlook report. India, being a net importer, would stand to continue to benefit from this. We expect consumption to remain buoyant and drive economic growth. This would be supported by higher urban consumption demand on account of Seventh Pay Commission awards as well as revival in rural demand following a normal monsoon. This is likely to improve utilisation levels and eventually enable private sector to kick-start investments, further supported by declining interest rates. Meanwhile, infrastructure spending by the government is likely to continue, thereby supporting economic recovery. Overall, India should remain one of the fastest growing economies in the world, facilitated by 1) economic reforms, 2) lower interest rates, 3) improving corporate profitability, 4) continued consumption revival and 5) sustained infrastructure spending by the government.