2023-05-13
By Achin Goel
Recently, India became the 5th largest economy surpassing the United Kingdom and India is “The growth story” of the upcoming decade. There’s an old adage ‘When America sneezes, the world catches cold’ and hence a slowdown in the US economy is impacting Global and Indian markets. Notwithstanding this recessionary phase, the strong domestic fundamentals will help India tackle these headwinds and emerge on top.
The global markets witnessed massive volatility in 2022 as Russia and Ukraine entered into a conflict, inflation reached multi-decade highs and rising concerns of global recession spooked investors. This was visible as the Dow Jones Industrial Average fell by 7.18%. The Indian stock markets also faced volatility as the US Federal Reserve ramped up interest rates to curb inflation resulting in turmoil in the US financial sector. This prompted FII selling of approximately Rs. 1.50 lakh crores in 2022. Despite this selling, the NIFTY50 index managed to squeeze out a 4.33% return, with the help of consistent inflows by Domestic Institutional and Retail Investors. The tide seems to have now changed as FII have been net buyers since the start of March and have bought approximately Rs. 37,000 crores up to 9th May, 2023.
According to the IMF, the global economy is set to grow at 2.8% for 2023 with a recession expected in the US. Despite this slowdown in the global economy, India will continue to be amongst the fastest-growing emerging countries. According to the RBI, India’s GDP growth is expected at 6.5% in FY24 whereas IMF expects India’s growth at 5.9% for FY24. India’s GDP per capita has risen to around $2,256 in 2021. Historically, when the GDP per capita of a country breaks $2,000 mark, significant jump is observed in the GDP growth for the next 5 to 6 years. This would translate to increased demand domestically, particularly for high-value items, as disposable income in the hands of people increases. Hence, many global high-value brands see India as a bastion for growth in high-value products and are inclined to set up manufacturing activities here.
The rural economy has been hit hard during the pandemic and is yet to fully recover from its impact. To protect the marginalized families, the government has been providing staple items of food free to save them from hardships. However, there are early signs of the rural economy getting back on track as major FMCG companies reported significant volume growth and expect rural demand to revive as inflation cools off and consumption habits readjust. The revival of the rural economy will significantly boost the economic outlook.
The world came to a stark realization during the pandemic of its need to diversify manufacturing activities. This gave birth to the China + 1 strategy leading large corporations to shift massive parts of their operations from China to other countries. India is likely to be the direct beneficiary of these decisions. This is already materializing; for example, Samsung is setting up its second largest manufacturing plant in India, Apple exported more than $5 billion worth of iPhones from India, accounting for around 45% of the total mobile exports, which doubled in FY23.
On the crude oil front, India is vulnerable to oil shocks since it imports over three-fourths of its energy requirements which accounts for nearly half of India’s import bill. However, last year, India was able to strike a deal with Russia on account of its healthy relationship. It started importing additional quantities of oil from Russia at reasonable prices compared to the advanced economies, resulting in a 7x increase in trade deficit with Russia mainly attributed to crude oil imports. This deal with Russia also helped alleviate some of inflation concerns that have otherwise troubled almost all of the developed countries last year. A recession in the global economy would push crude oil prices lower as demand weakens, directly benefiting India.
Apart from the above global factors in force, the various reforms at the domestic front have also made India a lucrative destination for investment and growth. India is aptly placed to handle the upcoming challenges and continue to be one of the largest contributors to the world economy. Therefore, amidst current global challenges of high inflation, impending recession, rising environmental issues and much more, the Indian economy is a story of Aatmanirbharta (Self-sufficiency). Investors should look at this situation as an ideal opportunity to allocate capital in themes or sectors and fundamentally strong stocks which will help them build a portfolio for long-term wealth generation.