This is testing times for Indian economy, market and the growth story. Some of the leading economists, market experts and industrialists have written off India growth story and its potential to become a super economic power in next few decades. These experts who had been so bullish about Indian growth story till yesterday have suddenly started giving very bearish and gloomy forecasts about India GDP for next few quarters and few years – talking about sub 5% growth rates . Some of the experts have proposed that India in BRIC should be replaced by Indonesia as India story is over. It has been declared that 8-9% GDP achieved for many years, before 2008 is not sustainable, was just a flash in the pan and the real potential of Indian GDP growth rate is about 5%.
Most of these experts and doom day predictors of Indian economy are Indian or Indian origin scholars and industrialists. There is a widespread gloom in the country because of the lack of economic growth and investment opportunities. Though I understand the frustration to a large extent and am equally frustrated with the will power deficit and lethargy shown by our political ruling class as well as babus, I don’t understand the extreme pall of gloom as if everything is over for the India story. Are we over-reacting to a short term down? Have we become a nation of self -critical and over pessimistic people who can’t see the long term strong fundamentals of this economy which can’t be damaged by any political dispensation? Have we become a nation of ever-green cynics who like to shoot their own foot by crying hoarse to the world about our “demise” when the whole world is in a bigger mess? While countries like US and Japan which are in a bigger mess (with 1.8% and 1.4% GDP growth rate in 2013) can see green shoots in their fading economy, why can’t we see the recent green shoots in our economy(E.g. Current account deficit for Jan-Mar 2013 coming down to 3.6% from 6.7% of earlier quarter, inflation(WPI) coming down to 4.7% in May from 9-10% last year , Fiscal deficit for 2012-13 coming down to <5% and Govt. finally showing some action in terms of recent approval for FDI in Retail, aviation and Insurance, RBI starting to reduce the Repo rates).
We keep on harping about 5% GDP growth as a very dismal growth rate. Do we really understand that even with 5% GDP growth rate , we are the second fastest growing economy(behind Indonesia) among all the major nations with >$500 Billion GDP size and fastest growing economy among nations >$1 Trillion GDP including China, Brazil or any other nation?
Are you surprised? But this is true.
The reported GDP growth rates are the Real GDP growth rates after adjusting the Nominal GDP growth rates with inflation rate. The nominal growth rates are the actual GDP growth rates in INR or Dollar terms. We reduce the inflation rate from Nominal growth rates to come out with reported and published GDP growth rates. As per the latest forecast, India is the fastest growing mega economy(among nations with >$1 Trillion GDP) in terms of Nominal GDP growth rates. Even at current 5.7% GDP growth rate, Indian economy is growing at 11.6% Nominal rate(as our WPI inflation rates are very high at 5.9% than other countries like US, Europe or China). China will grow at 11.1% nominal rates(7.8% Real GDP rate +3.3% Inflation). Other BRIC countries like Brazil and Russia are growing at 8.8%(3%+5.8%) and 9.2%(2.8%+6.4%) respectively. US would be growing at 3.2% only(1.8%+1.4%), Japan at 2.1% and Euro region would grow at paltry 0.7%.The only major country which is growing faster than India is Indonesia at 13.5% Nominal growth rate(6.2%+7.3%). The only other major nation growing at double digit Nominal rates is Turkey at 10.1%(3.8%+6.3%). Hence, we have only 4 major national economies (India, China, Turkey and Indonesia) with GDP size>$500 Billion growing at double digit Nominal rates and only 2 mega national economies (>$1 Trillion GDP size) with double digit Nominal growth rates(India and China).
(Source of information: 2013 Global GDP forecast of a leading Canadian Bank)
Why are we still shedding so much of crocodile tears at 5% growth rates? Do we really appreciate that we still are the fastest growing mega economy? Do we appreciate that we still are growing faster than any other BRIC or major emerging economies? Do we appreciate that at 11.6% nominal growth rate(for $2 Trillion GDP size economy), we will add $230 Billion to our economy size in 2013(as big as Iraq, Nigeria or Philippines economy)? Do we understand that with 11-12% Nominal growth rates, the Indian economy with still double up every 6-7 years? Do we understand that global liquidity (FDI + FII investments) is waiting at the sidelines to invest in India story as they don’t have too many such stable, big size and consistently growing economy options? Would they invest in China which is going through a major churn like credit squeeze and slowing down economy (not to speak of non-independent judiciary and unaccountable political regime)? Would they invest in Japan or Euro region with dismal or negative GDP growth rates? Would they invest in Brazil and Russia with 3% GDP growth rates and very heavily dependent on commodities? Where would they go?
Just to prove my point, in May 2013 itself, FIIs poured a record $5.2 Billion into Indian equity and debt market with respect to $25 Billion in entire 2012. They poured this much liquidity as they were desperately waiting for some positive signal from Indian Govt. which finally came when FDI reforms were notified by Indian Govt on Retail, Insurance and Aviation. Similarly, we had a big ticket FDI investment from Unilever in HLL(Hindustan Lever) of > $5 Billion this month. Now there might be some sudden variations in these flows in short term due to global events, e.g. recent US Fed bank announcements about tapering off Quantitative easing led to FII outflows out of India and other emerging economies in June. But the point is that in medium and long run , there are very few options available for Global money. No other economy has so many long term fundamentals going for it like stable political and democratic set up, independent judiciary and regulators, rapid and consistently growing economy, sizable economy($2 Trillion GDP) with 200 Million strong middle class, strong demographics with major proportion of youth hungry for prosperity and better life, sizable English speaking population , huge local entrepreneurship talent and very high savings and investment rates(32%of GDP).
Implications for the Indian retail investors
Is there any permanent dent in the Indian long term growth story? Not at all. The Indian Tiger has been freed and it will run fast irrespective of the governments. Indian growth story will continue to remain the key growth story of the 21st century. You have to shut your ears from the pessimistic noise around “demise” of the Indian story, keep your conviction and keep investing with a long term perspective.
The current economic woes of low growth rate are not going to last long with Indian Govt. desperately trying to re-start the economic engine by policy and legislative reforms and trying to cut the fiscal and current deficit. With fresh elections in 2014, the new Govt. would have the will power, urgency and resolve to carry out project approvals and policy/ legislative reforms to attract investments. With inflation coming down, Reserve bank would be having further space to cut down interest rates.
Markets may see a lot of churn and variation in short term because of global and domestic factors in 2013. It may not show a significant upside for many months till we have a new Govt at New Delhi with 2014 elections, ready to take key and crucial decisions on key reforms and project clearances/ approvals. However, we may see some good and quick upside in 2013 if the current Govt. suddenly wakes up and carries out urgent actions and reforms to create public goodwill for the 2014 elections.
One should use these times of fear and uncertainty to invest in staggered manner with every fall in the market in the next few months/quarters to build up a long term portfolio of strong businesses at discounted prices. The market prices for most of the blue chip stocks/ businesses are attractive and are available at good “margin of safety” to their intrinsic values. These investments should be made only with a horizon of atleast 3 years so that we will get handsome returns of 20-30% annualized.