India Growth Will Beat China This Year
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India’s growth rate will surpass that of China’s this year, if theInternational Monetary Fund’s forecast is right.
The IMF said on Wednesday that India will grow 7.2% this year, rising to 7.5% next year. That has India going in the opposite direction of China. The Red Dragon economy is supposed to grow 7% this year, around 7.2% next year, according to some market estimates.
Wisdom Tree’s India exchange traded fund beat the MSCI EmergingMarkets Index today. It also beat China via the way of the iShares FTSE China (FXI) fund.
India’s economic profile got a lift thanks to the new and improved way in which it measures economic output. The revised national accounts series, announced last month, uses new methods that make India’s GDP count more inline with international norms.
Typical street seen in Mumbai: street vendors, traffic, diversity. India’s economy will need a lot of new jobs if it wants to consistently beat China growth in the next few years. (Photo by Jackie O. Cruz/FORBES)
Much of the IMFs growth forecast is due to those changes in accounting and not necessarily a boom in India earnings. However, stronger corporate investment is expected under new Prime Minister Narendra Modi.
“The revised growth figures support our view that economic recovery in India is under way, albeit pointing to a somewhat faster pace than we, and others, previously believed,” says Paul Cashin, IMF Mission Chief for India. “These GDP revisions portray a more resilient performance of the services and manufacturing sectors of the economy.” He said in a press release that investment activity continues to be held back by structural and supply-side constraints.
Investors love India. Morgan Stanley took it off its Fragile Five list today, putting Mexico there in its place. The list is for emerging markets expected to underperform or face credit downgrades due to a number of factors linked to higher interest rates in the U.S.
“India is the best out of the former fragile five,” says Gaurav Mallik, managing director for emerging markets at State Street Global Advisors in Boston. The phrase was first coined by Morgan in the second half of 2013 following the May sell-off in emerging market assets.
“Cheaper commodities are hugely positive, but I like the Reserve Bank of India even more. It’s still a market that has a reasonable carry trade, and some more cuts likely this year,” says Mallik. “Reformers will be the performers. This is why all eyes are on India.”
Within the next 15 years, India will have the largest, and one of the youngest workforces in the world. Demographics bode well for India, but only if it can generate the jobs to keep them all employed.
Raising India’s growth rate and ensuring it begins to generate sufficient jobs requires structural reforms. Modi’s efforts to improve the business climate has gained momentum since his budget last month. His “Make in India” campaign, designed to attract investment into local manufacturing, is one of many positives investors hope to see come to fruition, the IMF report notes.
“India will be a good place to invest,” says DMS Funds CEO Peter Kohli. “I expect it to be in a bull market for the next three to five years.”
