Indian stocks have had a disappointing year so far, losing 10% in dollar terms. Growth is likely to fall to around 8% year-on-year over the next few months following a series of interest-rate hikes. And there is more tightening to come.
Prices “have continued to increase more than expected”, says Capital Economics. Wholesale prices rose by an annual 9.1% in May and “inflationary pressures are quite broad-based”.
Core inflation is running at 8% and the FT notes that hotel managers’ salaries are forecast to rise by 50% this year. Higher labour costs are denting corporate profitability. The government is also likely to exceed its spending target for this year, while a rising current-account deficit also points to continued overheating, says The Economist. Given all this, the market is likely to struggle over the next few months. Capital Economics sees the benchmark Sensex index finishing the year at its current level.
But for all the likely near-term turbulence, the longer-term picture remains compelling. “India’s growth potential is huge,” says a Standard Chartered report. India’s demographic profile bodes well – it has 1.2 billion people, half of whom are under 25. Its working-age population will increase by 117 million over the next decade, compared with four million in China. In the subsequent decade, it will rise by 98 million, but China’s will shrink by 51 million.
The economy also looks well balanced, which is good for sustainable growth, says Standard Chartered. Private consumption comprises 60% of GDP. With a high savings rate there is ample scope for investment to rise further. China is “heavily skewed” towards investment and exports. Further plus points are a “strong record of macroeconomic management”, along with a strong presence in global services. It is already “an IT superpower”, for instance.
India could grow by more than 9% a year, outpacing China until 2030, when it will be the world’s third-largest economy, reckons Standard Chartered. A good play on India is Aberdeen’s New India investment trust. It is currently on a discount of 8.4% to its net asset value.