Will India Be the Next Best Performing Economy in 2017?
Date: 8 June 2016 Share on Twitter Share on Facebook
There has been a lot of hype around India lately. First the World Bank declared that it would be the fastest-growing economy of 2017, then Moody’s Investors Service published growth figures of seven and a half per cent for both 2016 and 2017, the UN then pitched in with 2017 growth estimates of 7.3 per cent, and now Deutsche Bank has jumped onto the bandwagon, claiming that India’s economy will reach 7.8 per cent in 2017. By comparison, the global economic forecast is just over three per cent for next year, and the UK’s growth forecast is just 2.6 per cent.
If the experts are right, this time next year India will be one of the top-performing economies in the world, and a great prospect for investment. But before everyone rushes to invest in the National Stock Exchange of India (NSE), it is worth taking a closer look at the figures and India’s current position globally.
It’s all relative
In order to understand India’s forecast growth for 2017, we have to look at its performance in recent years, and its position in the global economic landscape.
First of all, it is important to make the definition between a ‘top economy’ and a ‘top-performing economy’. The world’s strongest economies are not necessarily performing at their peak right now. The UK has been mired in low growth rates ever since the 2008 financial crisis, while the US recently recorded its weakest quarterly growth in two years. Meanwhile China has been battling rumors of a debt crisis as the government has stepped in to underwrite the country’s top banks.
Yet the UK, US and China are still considered to be three of the world’s best economies in terms of GDP, resources, and purchasing power. Even with a seven and a half per cent jump, India is still low on that list.
Furthermore, the world’s top economies have been underpinned by decades (if not centuries) of strong and steady economic growth, so they can afford to withstand a few fallow years. India is still classified as an ‘Emerging Market’, so there is a much smaller margin of error when it comes to economic crises, and India has had more than its fair share of these. This is a country with a huge population and high levels of poverty. When the global economy was on the up, India prospered, registering economic growth of around nine per cent in the pre-2008 years. However, this fell to around five per cent in the years after the financial collapse, and Deutsche Bank says that the country’s economy is now “bottoming out”. When the only way is up, a growth forecast of seven and a half per cent suddenly doesn’t seem all that impressive. But that’s only one reason for India’s expected success in 2017.
What’s behind the figures?
There are a number of factors behind the growth figures. Yes, one of the reasons why the forecast seems so high is because it has been relatively low for the past few years and the country is now entering a period of recovery. But India is also benefiting from low commodity prices, and as a major oil importer these savings can make a huge difference to its GDP. Furthermore, the Reserve Bank of India (RBI) has pledged to keep interest rates low and cap inflation at 5 per cent by March 2017 in an effort to help people to borrow more and spend less. In recent days, the RBI has also announced plans to allow foreign investors to own up to ten per cent of Indian companies, and 40 per cent of supranational companies, a move which is all-but-guaranteed to bring an influx of cash into the country. Foreign investments currently account for around 30 per cent of the country’s GDP. The government has also announced plans to help 75 million Indian families to open their first bank accounts, and ease unemployment figures by investing in apprenticeship schemes and vocational courses for young people. All things considered, it is easy to see why India’s outlook is so buoyant.
2017 and after…
However, India still has a long way to go before it can compete with global big hitters such as China. Although India’s growth is set to outpace China’s next year (at seven and a half vs six and a half per cent, respectively), India still has a fraction of China’s net worth – in 2013, China’s economy was worth $9.2 trillion, while India’s was worth $1.87 trillion.
Nevertheless, in a world where Japan is issuing negative-yield bonds, and UK investors are turning to cash investments, a seven and a half per cent growth forecast will be a tempting prospect for many global investors. The challenge for India will be to avoid a flood of ‘hot money’ coming into the market for a quick turnover, before leaving as soon as the next raft of forecasts comes in.
The NSE and RBI will have to work together to regulate the flow of money, and the government will have to stand by its promises, while continuing to invest in infrastructure, enterprise, education, and families. Only when these elements are all in place can investors feel confident about India’s long-term economic prospects, in 2017 and beyond.