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 India’s 7.5 percent clip of economic growth has edged out China’s
7.3 rate on the most recent readings, making it the fastest grower
among the 20 major economies, a title somewhat tarnished by
controversy over opaque revisions to how the data is compiled.
The real challenge, and it may come soon: getting through a Federal
Reserve interest rate hike later this year without re-enrolling its
membership in the 'fragile five' group of vulnerable emerging
markets.
Perhaps more than the headline growth figures, which have come in
for criticism, India's putative strength relies more on structural
reforms by the government of Prime Minister Narendra Modi and a
fortuitous drop in energy prices which leaves precious room for
easier monetary policy.
Napoleon had a preference for lucky generals, a title Reserve Bank
of India Governor Raghuram Rajan might warrant: less than a year
into taking a fraught job and the price of India's energy needs, 40
percent of which it must import, tumbled on global markets. This is
a triple boon: reducing the need for foreign cash with which to pay
for it, tamping down inflation (and so giving room for
growth-friendly rate cuts), and lowering the cost of fuel subsidies
which crimp budget spending.
"Eighteen months ago, India was one of the more fragile of the
'fragile five'. Three issues in particular beset both Indian
corporates and foreign investors in Indian asset markets:
structurally high and sticky inflation and slowing economic growth,
or emerging markets stagflation; twin deficits on the current and
fiscal accounts; and stale/poor macroeconomic governance," Maya
Bhandari, an asset allocation specialist at fund house Columbia
Management, wrote in a note to clients.
"With helpful policy, politics and propitiousness, each of these
seems less relevant today."
The fragile five: Brazil, India, Indonesia, South Africa and Turkey,
were marked out in large part for their dependence on foreign
capital flows, money which abruptly repriced in 2013 when investors
became concerned about the impact of the upcoming tapering of bond
buying by the Fed.
If a Fed rate hike comes, as many expect, this summer, it will
almost certainly make waves in global funding markets but, to judge
by recent rises in Indian shares and the rupee, investors are
reasonably confident this time may be different.
REFORM AND PREPARATION
That in part is down to longer-term optimism over reforms brought in
by Modi and his BJP, in office nine months, including steps to cut
the time needed to register a new business from 27 days to one. More
fraught, and yet to be delivered, are full reforms to make it easier
for large industrial developments to buy farmland, now a tortuous
process thought to be holding up hundreds of billions of dollars'
worth of projects.
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To be sure, recent losses by the BJP in regional elections show that
reform is far from a one-way bet, and many will take a critical eye
to a critical budget to be released on Feb. 28.
The RBI, taking advantage of falling inflation, cut rates for the
first time in 20 months in January but held off at the beginning of
February, instead fine-tuning a reserve requirement intended to push
banks to pass along easier money to clients.
Rajan has already curbed foreign purchases of Indian bonds, to try
to limit the kind of 'hot money' flows which drain rapidly in time
of stress, as well as limiting the strength of the rupee, a sore
spot for exporters. India has also piled up an all-time high of $333
billion of foreign currency reserves.
If reforms progress and the RBI is able to continue to trim rates
India is likely to attract increasing notice from global investors.
Given that consumer inflation has more than halved to about 5
percent in two years, this is a reasonable bet.
While about $20 billion of foreign cash has flowed into Indian
shares in the past year, much of that has been as investors
dedicated to emerging markets chose India as one of the best of a
risky lot. So-called global funds, which are nearly triple the size
of dedicated emerging market funds, are still substantially
underweight India, implying room for a re-weighting.
India’s moment, not without dangers, may be arriving.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be an
owner indirectly as an investor in a fund. You can email him at
jamessaft@jamessaft.com and find more columns at http://blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
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