India has been a disappointment over the last few months. The Sensex index has slid by over a fifth to around 16,000 since its post-credit-crunch high last autumn. One problem is that the authorities have been “fighting a losing battle against inflation”, says India’s Business Today.
The central bank has raised interest rates 11 times over the past year, with another hike expected on 16 September. But it may yet have to do more: the headline rate is still around 10%. Meanwhile, the widely watched gauge of underlying inflation – non-food manufacturing prices – has increased “dramatically” this year, says Capital Economics.
The tightening so far has certainly “chipped away” at growth, says Firstpost.com. In July, industrial production expanded by a mere 3.3%, the lowest figure in two years. Consumption has also eased. The central bank expects growth to cool to around 8% in the year to March 2012. Corporate earnings are rapidly being revised down, which has dented market confidence, says brokerage CLSA. While the economy looks well insulated against a global slowdown – private consumption comprises 60% of GDP –the stockmarket is more international. Half the Sensex’s earnings come from overseas. Moreover, like all emerging markets, India is vulnerable to flights from risk when the global mood turns ugly.
Corruption scandals have also hit the headlines. A hunger strike by activist Anna Hazare has helped galvanise a surge of public support for measures to end graft. More and more cases are coming to light, with a fourth leading politician recently arrested.
This is good news for investors. There has been an “unprecedented response” from the public, media and courts, says Joe Phelan in The Wall Street Journal. “The old assumption that corruption [is] an inevitable part of life is gone.”
That bodes well for India’s reputation and long-term growth rate. Throw in India’s solid institutions, compelling demographics and its strong presence in global services, and India remains a good long-term bet despite today’s turbulence. Aberdeen’s New India Investment Trust currently looks appealing on a discount of almost 8% to net asset value.