India has been rightly celebrated as one of the ‘BRIC’ group of leading emerging markets nations over recent years. Strong growth in Gross Domestic Product (GDP), driven by a rapidly developing domestic economy as well as export growth has catapulted the sub-continent up the global economic rankings.

But the theory that emerging economies such as India and China had ‘decoupled’ their dependence on the developed world came unstuck during the global economic crisis of 2008 and 2009. And of late, as America’s recovery has threatened to stall and the eurozone crisis has rumbled on, so India’s growth rate has slowed. Wider global economic woes have been exacerbated by domestic issues including stubbornly high inflation levels which prompted the Reserve Bank of India to tighten interest rates over a prolonged period of time, and served to dampen domestic growth.

As a result, GDP growth, which averaged 8.5 per cent between 2003/04 and 2010/11, has cooled. The latest International Monetary Fund prediction for the current fiscal year is for GDP growth of 6.1 per cent, the slowest for Asia’s third largest economy since 2002-2003. India has also found itself hampered by a significant decline in the value of the rupee against other currencies. The general investor flight from risk assets over the past year has seen the rupee’s value against the dollar slide by 20 per cent. India has also found itself challenged by slow progress of economic reforms. Such reforms would ease and encourage further inward investment into the country which is required to sustain its growth.

But all is certainly not lost. India’s growth may have slowed but it remains the envy of many developed countries and even other members of the BRIC club, Brazil and Russia. And India has a major advantage over many of its Asian peers in the form of its huge domestic economy. Unlike the early years of the Chinese growth phenomenon and the economic growth strategies of other Asian countries, India is not reliant on an export-led strategy. Exports are an important part of the Indian economic story but domestic consumption is also a huge factor.

India’s population of 1.1 billion continues to grow fast, indeed within 15 years it is projected to become the most populous country in the world, leapfrogging China in the process. India is at an earlier stage of urbanisation than China and the coming years will see the development of its cities and the urbanisation of its population continue at breakneck speed. Over the long term, India’s ‘demographic dividend’ should feed through to sustained strength in its domestic economy. India’s population is a young population, certainly compared to China where the one-child policy has produced a rapidly ageing population.

Furthermore, the recent move by Prime Minister Manmohan Singh to take direct control over the finance ministry which he ran to great acclaim in the 1990’s promises to oil the wheels of regulatory change which will bolster foreign investor confidence in India. A period of slightly more subdued growth is not necessarily a bad thing and inflation has shown signs of easing a little of late allowing the central bank scope to ease monetary policy. What we could be seeing, if India is lucky, is a soft landing for India’s economy after several years of rapid growth. This, coupled with the correct economic reforms and a pick up in the wider global economy, could allow a further prolonged period of economic growth to establish itself on more solid foundations. Thus India could set itself up for elevation into one of the world’s most significant economies over the next 10-20 years.

 

Graeme Davies is News Editor of Investors Chronicle. He has more than a decade of experience writing about finance, first with Citywire and most recently with Investors Chronicle, part of the FT Group. His specialisms include emerging markets, smaller companies and renewable energy.