There’s been a great deal of talk about the “India story” over the past few years – the “epic tale of a youthful nation throwing off its shackles to fulfil its destiny as an economic superpower”, says The Economist. Market reforms of recent years have helped boost India’s sustainable growth rate from less than 6% to around 8%.
The demographic outlook is better than China’s, with 50% of the workforce under 21, while Indian firms’ return on equity averages 18.1% compared to 11.3% for emerging markets overall, says HSBC. As for India’s consumption boom, Ted Pulling of the JPMorgan Indian Investment trust notes that there are 20 million credit cards in circulation, but the market potential is estimated to be nine times that figure. McKinsey sees the middle class expanding sixfold to 300 million by 2025.
Nonetheless, recently India has gone from “hero to zero”, says Merrill Lynch’s Andrew Holland. Foreign investors have turned tail, selling a net $455m of Indian shares in July; last year they poured in a record total of $17bn. The Sensex index is now 30% off its January record peak. One worry is the budget deficit, which, due to fuel subsidies and a series of handouts, could hit 10% of GDP this year. The rupee and the stockmarket are also under pressure, due to the trade deficit, which, owing to slowing export growth and pricey oil imports (set to reach double last year’s figure of $69bn) hit a record in May.
But the key issue is that India looks set to become “another unhappy member of the post-inflation global slowdown club”, says Ian Campbell on Breakingviews. The central bank has hiked its main interest rate to 9% and further tightening appears on the cards, as inflation is at a 13-year high of 12% and the contribution of non-energy and non-food components to the overall figure is at a multi-year high, says Capital Economics.
Moreover, the money supply was rising by an annual 20% in July. Previous rate hikes have already hit industrial production – up by just 3.8% in the year to May – and slowed investment in infrastructure by raising financing costs. Now banks are upping their lending rates further after the central bank’s move, which will make home and personal loans more expensive, casting a cloud over consumption. Goldman Sachs is forecasting growth of just 7.5% this year.
Higher input prices and interest rates portend falling margins and declining profit growth; the 16% earnings growth pencilled in for the year to April 2009 “might be hard to achieve”, as India’s Business Standard points out, so the index may not be as reasonably-priced as it looks on a p/e of around 14.5. Garry Evans of HSBC expects negative earnings revisions to weigh on sentiment over the next few months.
Evans also highlights another element of the India story that may dent confidence: India’s fractious democracy. The recent emergence of a ‘Third Front’, a left-wing grouping not committed to further reforms, is worrying investors in view of national elections due by May.
Meanwhile, only last week the government had to fight off a no-confidence vote. Evans sees scant scope for further gains in the index this year and expects the bear market to endure until after the election in 2009 – although the long-term story remains “compelling”. Those riding the Indian elephant, as Ryhs Blakely puts in The Times, “should expect a bumpy ride”.