India’s economy set to overtake UK – knocking it from The Commonwealth’s top spot

This week Britain is playing host to the leaders of The Commonwealth nations. As the event takes place, the UK will still hold the crown as the largest economy out of the 53 countries included in the lineup, but by the time of the next meeting in Malaysia in 2020, it’s almost guaranteed that India’s economy will have surpassed Britain’s in size. It will be a change that symbolises the tectonic shifts in the world economy, as Asia’s booming nations continue to challenge the economic dominance of the West.

Currently India stands at number 6 on the International Monetary Fund (IMF) world GDP rankings, with a GDP of over $2.26 trillion behind Britain’s $2.61 trillion, but bullish forecasts from both the World Bank (WB) and IMF suggest India will cruise comfortably into 5th place behind Germany in the next 2 years. The WB forecasts 7.3% growth this year for India’s booming economy, up from 6.7% last year, while IMF pegs it at a slightly more upbeat 7.4%. This will make India the world’s fastest growing economy in 2018, surpassing China.

But it’s not only India’s current shorter-term (1-2 year) growth prospects that should be cause for excitement, not least for investors in Indian equity markets. The longer-term equation looks equally lucrative. The Indian economy has plenty of room for future growth. Putting aside any external tailwinds from problems elsewhere in the world which could affect global trade and investment, India has the recipe for success including:

– A rising middle class which is spending and investing more.

– A young population (more than 65% below the age of 35) with more and more people entering the workforce, growing the pool of labor available for companies.

– A massive rural population that currently has low access to digital services and infrastructure, but with a government that is pushing to create a digital revolution in India, ecommerce companies like Amazon and Flipkart will be able to grow quickly as people who once never had access to internet start buying goods online.

– A stable government that has launched a flagship health insurance scheme to cover over 100 million families, while also pledging to invest large sums in the agricultural sector (the most important sector of the Indian economy accounting for 18% of India’s GDP which employs 50% of the nations workforce).

The IMF said today that India needs to address weaker aspects of its labour market and reform issues in its financial sector. With these issues solved, more jobs will be created and banks will feel more comfortable lending, both adding yet another stimulus to an already rapidly expanding economy.

Britain will now be looking to secure an even closer partnership with India, (which was referred to the ‘crown jewel’ of its empire in the colonial period), especially given the need it has to establish new trading relationships post-Brexit. It is likely that trade will be a key factor of discussion as representatives from both nations, and all other members of the Commonwealth community representing over a quarter of the world’s population, meet in London this week.

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The world economy is stronger but tensions are rising – a look at the OECD’s latest report

The OECD says the global economy will see its strongest growth in seven years in 2018 thanks to a rebound in trade and investment, though it also warned today that a trade war could threaten the recovery.

In its March 2018 interim economic outlook which used the subtitle ‘Getting stronger, but tensions are rising’, the organisation updated its outlook for G20 economies and raised its global growth forecast for 2018 and 2019 to 3.9 percent – the highest since 2011, from previous forecasts of 3.6 percent for both years.

The raised forecast is partly due to expectations that U.S. tax cuts will boost the American economy.

Here were the key positive takeaways from the report:

– Growth is improving or steady in most G20 economies

– Trade and private investment are bouncing back

– New fiscal stimulus in the United States and Germany will further boost short-term growth

– Inflation (a concern for Central Banks) is set to rise slowly

– Consumer confidence, particularly in BRIICS nations (Brazil, Russia, India, Indonesia, China and South Africa) has risen sharply

The key negatives and risks were as follows:

– Income gains, particularly for median and low income households have barely improved over the last decade

– Public and private debt in G20 nations is very high, with China leading the way at over 200 percent of GDP

– The pace of structural reform is slow, in emerging market countries especially

– An escalation of trade tensions would be damaging for growth and jobs

Regardless, the overall picture is healthier. Acting OECD Chief Economist Alvaro Pereira said: “We think that the stronger economy is here to stay for the next couple years,” He added, “We are getting back to more normal circumstances than what we’ve seen in the last 10 years.”

This is good news for investors the world over, as a more robust global economy will create a better environment in which companies can grow and expand more easily, boosting corporate results and shareholder returns.

Foreign investors move out of Indian stocks for now but future is brighter than ever for India’s economy

Indian stocks fell out of favor with overseas investors last month, with markets cooling slightly after a stellar 2017 performance. New data showed foreign institutional investors pulled out $1.5 billion from Indian shares in February, following the market correction in the U.S. which hurt global indices, on top of fears concerning the Punjab National Bank, which is at the centre of a $1.8 billion fraud case.

Gautam Chhaochharia, head of research at UBS Securities India said: “Our global strategists like Korea, Indonesia and Brazil the most.” He added: “A year ago, India was the market with least hassles in its path, but now, other emerging markets look better off in comparison.” Indeed, Brazilian and even Russian indices rode out the last month far better than their Indian counterparts. This Monday the NIFTY50 made a small recovery heading back to the 10,600 mark.

However these figures don’t tell the full story. Regardless of the recent blip in the equity market, India’s economy is still powering ahead as one of the fastest growing in the world, with plenty of praise being handed to the nations leader Narendra Modi for his implemented economic reforms which are making India more business friendly.

Indeed, India has plenty of reasons for positivity on the economic front. The country has vast supplies of natural resources which are relatively unexplored, and also has a huge need for new infrastructure projects, not only physical, but also in terms of digitisation due to its massive rural population. This presents major opportunities to foreign investors seeking to take advantage of a rapidly developing emerging economy. As digitisation expands it will bring benefits not least to these more isolated communities but also to foreign companies, because more access to the internet will draw in more and more e-commerce customers, a trend which Walmart has already taken an interest in. In 2013, India had 30 to 40 million internet users, while today the number is estimated to be over 400 million. Once again, these shifts will undoubtedly be a major pull for overseas investors.

On top of this, India has a flourishing middle class. By 2020, India is projected to be the world’s third largest middle class consumer market behind China and North America. By 2030, India is likely to surpass both countries with consumer spending of nearly $13 trillion. The Indian population’s interest in investing in stocks has also grown exponentially – domestic mutual funds got a whopping $20 billion in 2017, around double from the year before, mostly due to average (non-institutional) investors, who were looking to take advantage of the awesome stock market rally during the year, instead of sticking with more traditional choices like gold or real estate to put their cash into.

All signs point to a thriving economy in the long term. Indeed, the latest set of economic data for Q4 2017 showed India’s economy expanded 7.2 percent year-on-year for the period. That is well above the upwardly revised 6.5 percent advanced in the previous period and above market expectations of 6.9 percent.

Overall, whether foreign institutional investors are confident on Indian equity markets or not right now, the future looks bright. All of the fundamentals are in place which make India one of the hottest places on earth to invest.

India has a problem with its banking sector and it’s beating down equities

India is suffering from contagion in its banking system, with a mounting pile of non-performing loans, poor accounting standards and growing evidence of major banking fraud, unearthed over the last few weeks by government agencies.

India’s ratio of bad loans (as a percentage of total loans) is among the worst in the G20, just behind Russia and ahead of Brazil, Turkey and Indonesia, according to the IMF, though back in 2009 it was among the best in the world in this regard.

Standard & Poors Global Ratings said the recently detected fraud at Punjab National Bank underscores and urgent need for reforms in public sector institutions, with further losses for these banks being expected. Banking stocks were among the biggest fallers on the NIFTY50 last week, on top of significant monthly losses.

It’s an issue that the Narendra Modi’s Union government is taking steps to address. In October last year, the government unveiled a massive bailout plan to inject Rs2.11 lakh crore (equivalent to around $32.43 billion) into banks over the next 2 years to improve their capital positions. Stress tests conducted by the IMF last year on India’s 15 largest banks showed Indian lenders fell behind their emerging market peers including Indonesia, China and Russia in this regard. However it wasn’t all bad news – the IMF described 64 percent of the assets of the top 15 banks as ‘resilient’.

There are reasons to suspect that many more bad loans have not yet been accounted for. The latest corporate results from India’s largest lender (State Bank of India) showed the bank posted surprise losses of higher-than-anticipated bad loans, though officials from the bank claimed the worst is over.

The problems in banking have crept into the stock market too, unnerving foreign investors. If India wants to realise its true potential as an economy then the authorities will need to take a firm stance on the matter.