Prospects for a revival of India’s economy are unclear. It appears that the measures being taken by India’s government are geared toward keeping the economy afloat, but deep-rooted reforms will have to wait until after the elections in 2014.
The prospect of economic revival in India appears to be low because the government seems hesitant to introduce significant reforms with elections looming in May 2014. But key indicators, including external debt levels as a percentage of GDP, do not indicate that there is a cause for much concern.
How Is This Article Useful to Practitioners?
The vital economic indicators of India’s economy do not show too much cause for concern, even though a revival led by an increase in economic growth is not occurring yet. It seems that the fundamental reforms may have to wait until after the May 2014 elections. The sharply devalued currency may help exports become more competitive, although fuel imports will cost more. Consumption may also improve if recent spending cuts help lower inflation and increase consumer spending power.
But there are some concerns. One is that although gross domestic savings is high, at 30% of GDP, a closer look reveals that the savings is being directed toward investments that do not boost economic growth, such as gold or home construction. The lack of productive investment does not bode well for future economic activity. Other areas of concern include sluggish growth, declining exports, and stalled liberal reforms.
Investment professionals should carefully consider the potential further devaluation of India’s currency, which could affect the total return on their investments (current or future) regardless of whether they are invested in the stock market or fixed income.
The challenge for an investment professional trying to form a global investment outlook is evaluating the prospects of both her home country and the targeted country. The relative movement of exchange rates has become an important factor as economic growth in the world economies is facing considerable challenges. In such a scenario, investments in an economy weaker than that of the home country could mean a loss of investment value and vice versa.