It’s been a long time coming, but India is now growing faster than China.
India’s third quarter GDP — which calculates October to December output — rose 7.5% on the year, compared to 7.3% in China. This follows 8.2% growth in the second quarter and 6.5% in the first, bringing year-to-date growth to 7.4%. By comparison, the Chinese economy is expected to grow by 7.1% this calendar year.
Two years ago, an HSBC analyst called India a “gasping elephant”. Since September of 2013, India has become the darling of emerging market investors. The bull market is now a year and a half old, but this month’s budget announcement will set the tone for a while.
India’s government is forecasting 7.4% growth in fiscal year 2014, which ends on March 31. The current trends in economic activities data likely means another uptick in fiscal year 2015-2016 GDP at 7.8%, Barclays Capital analysts led by Siddhartha Sanyal said Monday from Mumbai.
India’s fiscal calendar begins in April, which is the start of the Hindu new year. For economic data, 2015-16 begins April 1.
India’s economy is firing on all four cylinders.
Manufacturing has now grown 5.4% year to date, versus first half growth of 1.8%. The services sector GDP is up 10.7% year to date ending Dec. 31, relative to the first half estimate of 6.9%. On the expenditure front, government consumption growth and investment growth are both on the rise. Private consumption is expected to improve at a steady pace, BarCap said in its note to clients today.
How high is too high?
The Wisdom Tree India (EPI) exchange traded fund has outperformed the MSCI Emerging Markets Index by over 220 basis points so far this year. It’s also beating the S&P 500, with State Street’s SPDR S&P 500 (SPY) ETF down 0.32%. Even the European Central Bank is no match for the Indian dynamic duo of central banker Raghuram Rajan and prime minister Narendra Modi. The Vanguard FTSE Europe (VGK) ETF is up 2.18%.
Last week, The Reserve Bank of India left policy rates unchanged at 7.75%, but cut its reserve requirements by to 21.5% of deposits. That allows banks to lend more capital, rather than keep it locked away. Rajan is likely awaiting news on the Modi budget, as well as inflation figures, before taking decisions on rates.
Inflation has declined, “but the key variable for Rajan is India’s fiscal outlook,” says Jan Dehn, an economist with the Ashmore Group, a $70 billion emerging markets asset manager in London.
The coming budget for fiscal year 2015, which begins in April, gets revealed to the market on Feb. 28. Investors will see this as a litmus test on Modi’s ability to lead on economic policy and reform.
Fortunately for Modi, India’s economic data has provided him with some lift off. He might not need to provide for extra stimulus this year like many in the government want, especially if commodity prices remain where they are now. He might be able to hold off spending until next year. Modi is pretty religious about cutting taxes and keeping the deficit in check in his first term.
Supply siders might like tax exemptions in this year’s budget. Taxes are expected to be reworked for individuals and the corporate tax rate may get an update, Finance Ministry officials told the Economic Times this week. India’s corporate tax rate has been at 30% since 2008.
Finance Minister Arun Jaitley has expressed concern that some Indian companies were relocating to Mauritius and Dubai because of taxes. He said that making India a “low tax economy” was part of Modi’s “Make in India” agenda. Modi was elected in May. A tight fiscal situation has prevented the government from making the kind of sweeping tax cuts that investors like to see, however.
Moreover, lower oil prices are good news for India from a top-down perspective. India’s deficits are mainly due to oil and gold imports. The fall in oil prices has given Jaitley room to make farm subsidy reforms that could cut government expenditures on fertilizer and food subsidies. These reductions could reduce the fiscal deficit to 3.6% of GDP from an estimated 4.1% in the 2014 fiscal year ending next month. That’s a moving target for Modi and Rajan, but it is one they’d both like to hit this year.
The bottom up view on India is a bit different. How much room does this market have to move higher?
“I think the first leg of the bull market is now complete,” says Nikhil Bhatnagar, a VP of Asian equities at Auerbach Grayson in New York. “We need a show of hands. Valuations have rapidly re-priced to up-cycle earnings and consensus has gotten extremely bullish…there is nothing stocks can do but disappoint.”