Economists agree that the macro-economic climate looks likely to support emerging economies, which, according to Bloomberg, will expand 3% more quickly than developed nations in the coming three years. Looking at July 2023, we see the MSCI Emerging Markets Index surged a healthy 6%, with investments of $2.6 billion arriving in emerging market ETFs. The two main economies looked to for anticipated growth are China and India, which “are expected to contribute around half of global growth this year”, in the words of the IMF back in May. By contrast, the more developed economies seem to be slowing down as we progress into the latter part of 2023, dragged down by hawkish monetary policy and ongoing hostilities in Ukraine.
As of August, the number one economy of all the EMs (emerging markets), in Morgan Stanley’s estimation, was India. The three main drivers, as far as they are concerned, of India’s imminent boom are the stability of the macro business environment, robust foreign cash inflows, and a nice-looking earnings outlook. China, in their view, may be reaching the end of their own boom cycle.
We’ve seen the optimism about India’s economy for the last ten years in the volumes of FDI (foreign direct investment) flows that have been coming in. These have arrived chiefly from American tech firms like Google, who, in 2020, launched the “Google for India Digitization Fund”, with plans to invest $10 billion in the country over a seven-year period. In the same year, Facebook said they would send $5.7 billion into India’s Jio Platforms. Indian start-ups have found favour in the eyes of heavyweight asset managers like Blackstone and Sequoia Capital. And the government is fixing up their infrastructure too.
Join us as we delve into the reasons for analysts’ optimism about India, as well as the potential headwinds their economy could face down the road.
A Dynamic Middle Class
“Yes, the country has demographics on its side”, explains Santanu Sengupta of Goldman Sachs Research, “but that’s not going to be the only driver of GDP. Innovation and increasing worker productivity are going to be important” too. Starting with demographics, it’s indeed true that domestic consumption has, until this point, been the main powerhouse behind the economy. Much of FDI flows in recent years have been encouraged by “a youthful demographic profile and rapidly rising urban household incomes”, in the view of S&P Global Market Intelligence. The nation is seeing its middle class expand rapidly, and this means there is a lot more spending going on. The other notable thing about India’s population in this regard is its sheer size: 1.4 billion as of July this year.
In the fiscal year of 2021-22, a full quarter of all the FDI travelling into the country went into computer software and hardware firms. India’s technology sector has proven itself to be a magnet for international funds in the last several years. As of 2022, India boasted as many as 107 unicorns – not fictitious animals, but startups with valuations exceeding $1 billion.
Headwinds
One headwind for growth has been India’s current account deficit, which means it imports more than it exports, but there’s been some recent progress in this area. The country has to import most of the commodities it needs, which makes it vulnerable to surges in commodity prices too. “The main downside risk”, in Sengupta’s view “would be if the labour force participation rate does not increase”. Turning to Deloitte, we see they expect food price inflation to be a big obstacle.
2022 saw a massive $5.7 trillion selloff in emerging market shares, which leaves about $600 billion of corrective buying to be done by those readying to invest in stocks, in the opinion of GW&K Investment Management. Investors’ growing convictions about India’s economic comeback are already drawing funds back into Indian equities.
The Terrain Ahead
S&P Global see the steady FDI inflows into India as a solid foundation for an economic boom, because they prove the strength of the nation’s relationships with “global financial hubs in emerging markets, in addition to strong ties with advanced economies like the U.S.A., Japan, EU and UK”. In particular, they anticipate rapid growth in the e-commerce sector, but also in automobiles, health care, banking, and insurance.
If you have plans to invest in stocks in emerging markets, stay alert to the fact that any easing in Fed policy could be good news for India, whose central bank would then feel less anxiety “to maintain an interest differential needed… to attract foreign investment”, in Deloitte’s view.
Using iFOREX’s signature trading platform, you can invest in stocks from various markets and industries in CFD form, through trading in their price movements, whether up or down. Visit the iFOREX website to find out more about what makes the brokerage special.
ThePrint ValueAd Initiative content is a paid-for, sponsored article. Journalists of ThePrint are not involved in reporting or writing it.