Equity: The Long-term Growth of Indian Economy - Axis Direct
Sep 23, 2019 | Source: AxisDirect
India is still a long-term growth story despite current headwinds
India’s economy has been growing steadily and in a rapid manner. In the first quarter of FY19 ending June 30, the Indian economy grew at an impressive rate of 8.2% on the back of strong core performance and a healthy base. If we look back, India's GDP has risen by an average 7.3% over the last decade and is showcasing a positive upward trend. Comparatively, the world’s second largest economy, China, reported a 6.7% growth for the quarter ending June 2018 and an average of 13% over the last decade but the trend has been declining. Our $2.6 trillion economy has surpassed France's in 2017 to be the world's sixth largest, and we shall soon be fifth as we are not far behind the United Kingdom. We are one of the world’s fastest growing economies and it is expected to accelerate further as our economy is expected to double to $5 trillion over the next decade. In addition to the demographic advantages, economic reforms such as GST, IBC, DBT etc. have helped the economy to pick up the pace on the growth path.
However, in the recent past, there have been some short-term headwinds, such as the current account deficit widening to $15.8 billion, which is around 2.4% of GDP, for the quarter ended June 2018. The weakening of the Indian Rupee against the US dollar and high crude oil prices in the international market led to a rise in current account deficit in the first quarter. Persistent high oil prices may lead to high CAD number ($75 bn (approx.) in FY19 vs $49 bn in FY18). But this would be a transitory phase, as with the implementation of structural reforms like GST and demonetization, the receipt side of the economy is growing. The net direct tax collections increased by 17% YoY in FY18, to Rs. 9.95 lakh crores; GST collection is rising and is set to improve further as more checks and balances are put in place.
INR has been on a downward trend majorly due to gradual US Fed monetary policy tightening, which has resulted in USD appreciation against many other currencies globally. Another knee-jerk reaction for the Indian Rupee has been the global crises in various emerging countries like Argentina, Venezuela and Turkey, which has made global investors more cautious about emerging markets currencies and equities. However, compared to these nations, we have been much better placed as compared to 2013, when India was categorized amongst Fragile 5 when CAD was around 6% and the economy was weaker wicket than today. The Turkish lira has fallen by over 40% against the USD since the start of 2018, compared to which INR has depreciated by around 10%.
India’s GDP growth saw a temporary dip in 2016-17 and the first quarter of 2017-18 due to demonetization and initial implementation of GST. Economic activity has begun to stabilize since August 2017. And we expect the trend to continue.
Notwithstanding the short-term volatility, India continues to be a long-term growth story. The growth rate is expected to be 7.3% in the year 2018-2019 and 7.5% 2019-2020, which solidifies India’s position as one of the world’s fastest growing economy. The government’s focus on rural growth will increase employment and enhance demand, thereby contributing more to the economic growth. The per capita income of India is around $1900 which is expected to go beyond $2000 in FY19. With an increase in income, the long-term consumption story becomes more stable. The consumers shift to spend beyond the basic needs of food, clothing and shelter which has been proven in other developed nations, time and again. The resolution of non-performing assets will help to improve the banking sector which will further enable corporate capital spends driven by the demand mechanics. Moreover, earnings of the companies have started to pick up post the structural reforms. We believe that India will continue with its growth despite the current short-term global factors. Under such circumstances, for longer-term investors, a short-term correction is considered to be a good opportunity to invest into Indian equity at a reasonable price with an investment horizon of not less than 3 years.