India is in an unusually sweet spot. Its economy is projected by the finance ministry to grow at 6.5% in real terms in the financial year to March 2024, the government’s bonds will be admitted to JP Morgan’s emerging markets index next year and the nation is benefitting plenty from China’s geopolitical tensions.
Domestically, the atmosphere is exuberant. India’s banks have posted solid results so far this financial year, the wealth of high and ultra-high net worth citizens has been steadily growing and prime minister Narendra Modi managed to pull off a successful G20 summit in New Delhi in September — despite the absence of Russian president Vladimir Putin and Chinese leader Xi Jinping.
All these factors have led to a surge in investor interest in India and plenty of optimism about the country’s prospects.
However, we have been here before. Over the years, India has ridden waves of positivity towards its investment opportunities and future potential, only to end up disappointing, tripped up either by domestic factors or external circumstances.
Can this time be different? Market participants say the tide may be turning for the Indian economy — but to keep the momentum going strong, the authorities will have their work cut out for them.
“India has a positive story, but some of the bullishness goes beyond reality,” says Kunal Kundu, India economist at Société Générale in Bangalore. “India is growing but investors are ignoring the fact that India isn’t creating jobs, and that real wages are still low.”
Creating enough jobs for India’s 1.4bn people is critical for Modi, who will be seeking a third term in office at national elections next April.
Unemployment stood at 5.3% in 2019 but spiked to 8% the following year as the Covid-19 pandemic devastated the country. While the proportion dipped to 6% in 2021, it had risen back to 8.4% by August 2023, according to the thinktank the Centre for Monitoring Indian Economy — even worse than during Covid.
Balancing act
On the plus side, India’s current account deficit is likely to narrow to $10bn or 1% of GDP in the April to June quarter, from $18bn or 2.1% in the same period last year, according to India Ratings.
But there are graver threats. Severe weather conditions, including a heatwave and drought, have hurt agriculture, sparking a sharp rise in food prices. Headline annual inflation rose from 4.9% in June to 7.4% in July.
The Reserve Bank of India has had to walk a tightrope this year, juggling imperatives to combat stubbornly high inflation, prop up the rupee and keep a handle on capital flows, without killing the economy’s vitality.
It has imposed multiple rate hikes, adding up to 250bp, and RBI governor Shaktikanta Das has repeated many times that more tightening may be needed if inflation goes higher.
The government has also tried a variety of policies to contain prices, including restricting rice exports, boosting imports of pulses and cutting the cost of cooking gas. Amid rising inflation in July, the authorities tried to raise the supply of vegetables, release stocks of wheat and rice into the open market and expand some export bans.
Everyone’s friend
On the global stage, India is walking tall, and its presidency of the G20 this year has given it a stage on which to show this to advantage.
Modi has worried the US and its Western allies by his refusal to distance India sufficiently from Russia since it invaded Ukraine — but he has still got plenty of room, as China is taking a much harder anti-Western line. Right now, everyone wants India on their side, and it does not have to commit itself to any camp.
India has become an important foreign partner for the US, which has accelerated investments in everything from defence and high tech manufacturing to artificial intelligence projects in India over the past year. Other nations, too, are betting on India to counter China’s growing clout.
In September during the G20 summit in New Delhi, the India-Middle East-Europe Economic Corridor was unveiled, a bid to bolster economic growth and collaboration.
Sources in India say many see this as a rival to China’s Belt and Road Initiative. IMEC’s focus is on linking the regions better through railway projects, a hydrogen pipeline and optical fibre cables.
There is optimism around this — but for India’s international influence to keep expanding optimally, it must keep its economy healthy.
“India is playing the right geopolitical game, which is a definite plus, especially in this kind of environment where everybody is looking at China with a different lens,” says Kundu. “But India still needs to do things domestically to show that things are different this time. It needs rules for better ease of doing business and improving the overall business climate, so companies feel comfortable to come to India and do business here.”
He points to onerous regulations on goods and services tax. Small and medium sized companies in particular are shackled by the high cost of complying.
A strategist at a securities firm in Mumbai says India needs to lose its “protectionist” attitude, as this weakens its competitiveness in the global landscape. He, too, points to the GST as an impediment, saying the rules need to be simplified to improve the business environment.
“There are things people should keep in mind,” adds Kundu. “India has an absolutely fantastic story — no other G20 country is growing as fast and is as well placed geopolitically. But there are worries: it’s also a story where India isn’t investing as much in health and education and isn’t doing enough to improve the business climate. So there are positives and negatives.”
Bond boost
In capital markets, a notable lift will come from the long sought-after inclusion of Indian government bonds in JP Morgan’s emerging market index, in a staggered process over 10 months from June 2024.
Lee Collins, head of index fixed income at Legal & General Investment Management in London, says the inclusion was a “significant event” for foreign investors and that India can expect “sustained inflows” to its bonds once the inclusion begins.
They will come in handy. India’s central government debt is projected to hit Rp169tr ($2tr) next March, up 10% in a year.
Thanks to the index inclusion, the share of Indian government bonds held overseas is predicted to rise from 2% now to as much as 10%, which could trigger a much-needed bond price rise in the domestic market.
The government’s borrowing costs have spiked this year due to the RBI’s rate hikes and an increase in borrowing to make up for falling fiscal revenues.
“The index inclusion will bring a diversity of investors to the market,” says Collins. “There will be a combination of stickier money, so institutional passive investments, as well as active managers.”
Finding a path
Observers say the door is open for India to capitalise on its inexorably growing population and economic power, and establish itself globally as a still more important player than it already is. But it needs to be astute in how it goes about this.
While the G20 summit, for example, showcased India’s ascent globally as a diplomatic powerbroker, only days later an ugly row broke out, when Canada’s prime minister Justin Trudeau announced that Canada’s intelligence service had found “credible allegations” that Indian agents were involved in the assassination of Sikh separatist Hardeep Singh Nijjar in Vancouver in June.
The Indian authorities have long said there are Sikh separatists in Canada trying to gain support to create an independent Sikh state in India.
This has created tension between the two countries and cast doubt on India’s relationships with the West’s major powers.
Whether the episode will have long term implications remains to be seen, but either way, economists think India still has some way to go to cement its position in the global architecture.
“India is in a sweet spot, but you can become spoilt if you’re in a sweet spot,” says Alicia Garcia Herrero, chief Asia Pacific economist at Natixis CIB in Hong Kong. “India is very much on the fence on global affairs, which is OK, but it needs a strategy.”
Herrero reckons the strategy should be “an alliance of democratic emerging countries that India should be pushing”.
She added: “Forgetting about India being the largest democracy in the world is not the way to go. That would end up with India looking like a China [to] the rest of the world, whether it’s the emerging world or the developed world.”
At the G20, Modi said his country was “becoming the voice of the Global South”. The term is defined differently by different groups but broadly refers to the developing countries of Asia Pacific, Africa and Latin America.
But Herrero reckons this approach would be “confrontational” with the West and would be “exactly what China is doing”.
“They need to think of different types of alliances, alliances for resilience, alliances for decarbonisation, alliances to eradicate poverty,” she added. “That’s much smarter than Global South against the West. That would just be a copy of China.”