by Achin Goyal
Recently, India has overtaken the United Kingdom to become the 5th largest economy and India is the “growth story” of the coming decade. There is an old saying ‘when America sneezes, the world catches cold’ and hence the slowdown in the US economy is affecting the global and Indian markets. Despite this bearish phase, strong domestic fundamentals will help India weather these headwinds and emerge on top.
2022 saw severe volatility in global markets as conflict between Russia and Ukraine escalated, inflation reached multi-decade highs and growing concerns of a global recession spooked investors. This was reflected in the Dow Jones Industrial Average as a decline of 7.18%. Indian stock markets also faced volatility as the US Federal Reserve raised interest rates to curb inflation resulting in turmoil in the US financial sector. This attracted FIIs to the tune of about Rs. motivated to sell. 1.50 lakh crore in 2022. Despite this selloff, the NIFTY50 index managed to extract 4.33% return, helped by steady inflows by domestic institutional and retail investors. The tide seems to have turned now as FIIs have been net buyers since early March and bought around Rs. 37,000 crores by May 9, 2023.
According to the IMF, the global economy is set to grow at 2.8% for 2023 with recession expected in the US. Despite this slowdown in the global economy, India will continue to be among the fastest growing emerging economies. According to reserve Bank of IndiaIndia’s GDP growth in FY24 is expected to be 6.5% while IMF expects India’s growth rate to be 5.9% for FY24. India’s per capita GDP has increased to about $2,256 in 2021. Historically, when a country’s per capita GDP breaks the $2,000 mark, it sees a significant jump in GDP growth for the next 5 to 6 years. This will translate to an increase in demand domestically, especially for high-value goods, as disposable income in the hands of people increases. Therefore, many global high-value brands see India as a growth hub in high-value products and are keen to set up manufacturing activities here.
The rural economy has been badly affected during the pandemic and is yet to fully recover from its impact. To protect the marginalized families, the government has been providing food items free of cost to save them from hardships. However, there are early signs of rural economy getting back on track as major FMCG companies have posted significant volume growth and rural demand is expected to improve as inflation cools and consumption habits revive. Revival of rural economy will give a big boost to the economic outlook.
During the pandemic the world realized the need to diversify manufacturing activities. This gave rise to the China+1 strategy, to which large corporations moved large parts of their operations China to other countries. India is likely to be a direct beneficiary of these decisions. It is already being realized; For example, Samsung is setting up its second largest manufacturing plant in India, Apple exported over $5 billion worth of iPhones from India, which is about 45% of total mobile exports, which doubled in FY23.
But crude oil Up front, India is vulnerable to oil shocks as it imports more than three-quarters of its energy requirements which accounts for nearly half of India’s import bill. However, last year, India managed to strike a deal with Russia owing to its healthy ties. It started importing oil in excess from Russia at a reasonable price compared to advanced economies, resulting in a 7-fold increase in the trade deficit with Russia, mainly due to crude imports. The deal with Russia also helped ease some of the inflation concerns that plagued nearly all developed countries last year. A slowdown in the global economy will lower crude oil prices as demand will be weak, which will directly benefit India.
Apart from the above global factors, various reforms on the domestic front have also made India an attractive destination for investment and development. India is well positioned to meet the challenges ahead and continues to be one of the largest contributors to the world economy. Hence, amidst the current global challenges of high inflation, impending recession, rising environmental issues and much more, the Indian economy is a story of Atmanirbharta (self-reliance). Investors should view this situation as an ideal opportunity to allocate capital across themes or sectors and fundamentally strong stocks which will help them build a portfolio for long-term wealth creation.
(Achin Goyal, Vice President, Bonanza Portfolio. Views expressed are the author’s own.)