Although India’s fundamentals appear strong, the country’s façade is beginning to show early signs of stress in today’s volatile environment.
The Reserve Bank of India’s recent 50 basis point cut – largely viewed as giving global funds increased access to bonds – raises growth concerns. While the central government is maintaining its forecast of 8.1% growth, other indicators suggest that headline growth could be a lot weaker.
Standard Life Investments noted this week that India’s growth momentum remains disappointing.
“Growth worries, ranging from the potential effects of a poor monsoon on the agricultural sector and rural demand, to uneven growth in the manufacturing sector are preventing a robust recovery,” Alex Wolf, emerging markets economist for Standard Life, said.
Wolf cited India’s weak housing and construction sectors as his primary concern.
“Real estate accounts for approximately half of India’s capital formation and 30% of its job creation. The property sector is under pressure with prices falling in most tier one and tier two cities alongside sharp declines in sales and new starts,” Wolf added.
Wolf forecasted that this will result in a drop in property investment and sustained pressure on wages – these two factors will ultimately lead to lower growth numbers.
HSBC Global Asset Management (HSBCGAM) shares the same view as Wolf. It said in a research note that “India has had its own domestic challenges in the form of weak profit growth reported for the recently concluded financial year and tepid credit growth”.
“The reform process has been delayed and the government seems to be embattled on many fronts sapping the enthusiasm further,” HSBCGAM said.
However, given the fragile state of other emerging economies, India will still remain as one of the industry’s top defensive plays.
HSBCGAM conceded that with more volatility looming in the near-term, it would build a case for a longer term exposure to India equities on a strategic basis. Standard Life noted that there is still reason for industry players to stay vested in India, but the country needs to quickly implement structural reforms to ensure sustainable growth.