With a GDP over $4 trillion, a population of over 1 billion, a black market ranging from $500 billion to $1.4 trillion and an inflation rate of 10.75%, India has an intriguing economy.[i] Recently, it has been featured in the news for all the wrong reasons. The Current Account Deficit (CAD)[ii] has been widening, the Rupee has been falling, investor confidence is plummeting and Parliamentary deadlock, stalling business projects, has become rampant. In light of all of this, it is but natural to think that India, as an economy, has lost its sheen. But is it really so?
The litany of woes for emerging markets reached its peak this past June when Fed Chairman Ben Bernanke signaled the Fed will soon begin tapering its bond buyback program. By mid-August, the Brazilian Real had already fallen 17%. The Turkish Lira, the Thai Baht, the South Korean Won and the Indonesian Rupiah also experienced similar fates. Does this mean that all is over for emerging markets? Perhaps not. It is common knowledge that China has historically maintained low exchange rates to boost exports. Similarly, by stimulating exports, India can also take advantage of its low exchange rate. However, one might point out that the low exchange rate does more harm than good, especially since India is a large importer of oil. A higher price paid for fuel translates into inflation and widening CAD. But is a widening CAD really something to worry too much about? Considering that the Reserve Bank of India currently holds foreign reserves to the tune of 281.12 billion dollars, probably not.
Moreover, India’s population demographics are cause for cautious excitement. 65% of its population is below the age of 35, with a median age of 26.7.[iii] With such a young, booming work force, there is a significant possibility of India gaining a demographic advantage over China and Japan. On the other hand, as the labor force in China ages, it is reasonable to speculate that organized labor will be emboldened. Soon enough, labor unions might lobby for higher wages weakening China’s competitive edge in manufacturing. Does this indicate the emergence of India as a dominant manufacturing economy? Keeping the above facts in mind, yes.
Additionally, as incomes in India are rising and real estate investing is becoming unaffordable, it is plausible to hypothesize that progressively more Indians will be allocating their savings to the Indian capital market. This trend may herald in an age of self-reliance for India, as opposed to its earlier dependence on predominantly foreign investment.
The Indian economy has a much brighter future than that which meets the eye today. I do pose one caveat, though. How the activist government approaches the issues will certainly affect the economy’s trajectory. But with people clamoring for change and elections fast approaching, things will hopefully improve soon!