India resilient to Global Economic shocks

In the current era of globalisation, it is not possible for any economy in the world to function in isolation which also makes them capable of driving changes in other economies of the world. In 2008, US economic crisis turned into the Global Economic Crisis which was led by low interest rate over several years and the subsequent crash in the real estate market. Experts explained the situation as – ‘US sneezes, world catches cold’. Therefore, it is imperative that we read and analyse global cues to assess economic condition of a country.

Currently, US is again experiencing low interest rates and while investors are sceptic about investing in the equity market, stock pricing continue to climb. The World Bank has reiterated the statement by saying that current policies of US are pushing it towards economic crisis similar to that of in 2008. Furthermore, emerging markets such as India, China and Pakistan, among others are expected to be worst hit. 

From the trade perspective, one of the biggest driving forces for investment decisions in US is the current political administration of the country. Under President Donald Trump, the country has taken steps against other economies such as China and European Union who are playing ‘unfair’ on trade levels. This is pushing US towards adopting protectionism measures which could lead to drop in global trade levels. This trade war among world economies is also disturbing the stock markets. 

However, it must that noted that with the ongoing trade war between US and China, investors who seeks to invest in Asian markets will now prefer India over China, which improves prospects for the Indian markets.

Currently, the rally in US stock markets is led by positive sentiment with big internet and technology stocks driving the upward movement (Apple Inc breached $ 1 trillion in valuation). This has caused renewed enthusiasm amid economic tension due to turmoil in Turkey and concerns that bull-market is in the final stages. But there are signs of weakness too, as we see bearish concerns in the market.

Market pundits believe that such weakness in the stocks market can setup a chain reaction which may lead to market selloff in the following months, a condition synonymous with the global economic crisis of 2008. Experts have described the current situation as to that of exhaustion with only a few stocks driving the market rally and market correction that could taper the top 10% of the recent gains. 

Following the Lehman Brothers debacle in 2008, one of the biggest changes in the stock market was investors shifting to value stocks from growth stocks. Though growth stocks offer better upside but if investors want to be risk-averse ahead of a market correction, they view value stocks as a better market bet.    

In addition, the US Federal Reserve can also be attributed as one of the biggest driving forces for the stocks market. Fed Reserve is moving towards raising interest rates which could reverse the market rally which is led by low rates and the Fed Reserve’s bond-buying programme. Therefore, the market rally is not reflected in the corporate earnings of the companies. 

Furthermore, rising interest rates have also contributed to fear about rising inflation which can cause further correction in the market. It must be noted that a bull-run in the market does not last forever and every market has to go through cyclical changes. The Indian equity market too has matured by leaps and bounds over the last decade to handle global shocks. Political changes in India since 2014 and subsequent economic growth of the country have led investors to maintain a long-term view in the stock market. 

Not just domestic but Foreign Institutional Investors (FIIs) have also placed greater faith in the Indian growth story. As a market matures, volatility reduces and investors play on strong market cues rather than speculation. Securitise Exchange Board of India has also rolled out policies to safeguard the interest of domestics and as well as foreign investors. 

The positive sentiment in Indian market will continue unperturbed by the stock market correction in US. More than global economic conditions, the US stocks prices were more responsive to the monetary policy by the Fed Reserve. This may have distorted the broader view of the economy (corporate earnings and economic growth). 

Since the global economic crisis of 2008, the last 10 years have helped the Indian economy develop more resilience to unforeseen blows in world markets. Additionally, the Reserve Bank of India is also keeping a close watch on the inflation levels and economic conditions and adjusting the repo rate accordingly. In the current scenario, regulatory bodies in India (RBI and SEBI) are better placed to tackle tough economic conditions and minimise market volatility.

I also believe that the emerging economies are better equipped to tackle economic situation before they led to an economic meltdown. Following the global economic crisis of 2008, markets across the world have taken a lesson that they need to build on strong fundamentals in order to protect themselves against international crisis. Though a tough economic condition is eminent in the US market, it is unlikely that India will suffer the brunt this time because over the last decade India has made efforts to remain protected against such economic crisis.  

Why Indian banking sector is under criticism and how can it be made better

The Indian government has implemented Centralized Online Real-time Exchange (Core) banking but majority of the Indian population still prefers traditional form of managing their investments. 

Under the NDA government regime, financial inclusion was one of the key focus areas for the government. However, private banking operation in the rural areas accounts for less than 2% of their total operations. Furthermore, loopholes in the banking systems keep these efforts of public sector banks from making any significant difference in the rural banking system. 

Currently, public sector banks form the lion’s share of the banking industry and their key area of focus continues to be priority sector lending in agriculture but in light of the evolving landscape, we can expect private sector banks also expanding their focus to the area. 

Recently, the ICICI Bank and Chanda Kochhar debacle bought the private sector banking under heavy scrutiny by the regulatory bodies and raised concerns about the integrity of the banking system. This sure has tarnished the image of the banking sector and coupled with poor quarterly earnings and rising NPAs only make the conditions worse. Going forward, government will have to make sincere efforts towards financial education to improve the health of the Indian banking industry.

Better awareness among the Indian population is expected to resolve issues related to instability in the Indian financial markets as investments will shift from assets such as gold and real estate to stock markets. This also speaks volume about the financial maturity of a country. 

India to stand as a middle-income economy by 2030

Investors inside and outside India are closely tracking the economic growth of the country and one of the clear indicator to evaluate its potential is the Gross National Income per capita. Estimate show that India will become a middle-income economy with GNI per capita of $1,005-$12,235, making it a middle-income economy, according to World Bank’s definition. But India must post strong GDP growth of 8% or higher to ensure the growth story. This is imperative to maintain inventor interest in the country.

Nevertheless, the journey is not going to be an easy one for India. Challenges such as low infrastructural growth, slow pace of labour reforms due to inefficiencies in the regulatory framework puts country’s economic development in jeopardy. The government should be able to strike a right balance between the growth and inflationary pressure. A strong banking and financial is also critical to ensure growth but it remain largely unorganized and recent surge in non-performing assets of bank are raising concerns for priority sector lending. India needs to become more conducive for public-private partnership. 

The government in India is not overlooking the challenges and is making focused efforts to resolve these issues. The NDA government launched programs such as Make in India and Digital India which have greatly improved the status of manufacturing sector in India and digital footprint of the country. Digital empowerment will ensure that companies are able to exploit the potential of the vast rural market. One such instance is of the e-commerce economy of India which has made it possible to rural India to access opportunities in other parts of the country.  According to India Brand Equity Foundation, e-commerce in India is expected to grow to $200 billion by 2026 from $38.5 billion as of 2017.

The condition is only set to improve further. One of the trait that sets India different from economies such as China is the growth of working population of India.  By 2020, the median age of India will be 28 which will increase the demand of jobs exponentially. Furthermore, the watershed event of 2019 will be the General election and India will witness a slew of initiatives which can be exploited for better economic growth.