- These are nervous times for emerging markets in general.
- But beyond external issues, India’s domestic slowdown needs to be addressed.
- February brought in growth supporting measures both on the fiscal and monetary side.
- A nascent China-India thaw in the movement of capital, tech, and people is welcome.
- India is also signalling cooperation with the Trump administration on immigration and trade.
Related Insights
Commentary: India’s macro strategy
After an exuberant summer, India’s economy and markets ended 2024 on a soft patch. Three years of a robust post-pandemic recovery lost some momentum as growth slowed to 5.4% in 3Q 24, below par by India’s high aspirations. Spiking food prices spoilt the inflation picture, while the financial markets took a breather. India’s high flying stock market has given up about 10% of its valuation since hitting its peak in 3Q. The rupee has slid by 4.5% over the last four months, reflecting unease about the external outlook.
The need to do something is apparent. India’s post pandemic recovery has been robust yet leaves room for improvement. On a real per capita GDP basis, the slide from the pandemic shock is yet to be made up, with projections suggesting the gap between pre-pandemic trend and post-pandemic path to persist through the end of this decade.
Of course, these are nervous times for emerging markets in general. Trade war intensification risks and unpredictability of US policy have spooked market sentiments, with the USD soaring and EM investors paring back their positions. India’s soft patch should be seen in that context.
We see three strategies in motion to address the cyclical weakening:
First, fiscal-monetary easing. The FY25-26 budget, presented earlier this month, contained measures to support producers by improving the ease of doing business and lowering regulatory impediments, along with tax relief for consumers and measures to boost employment in the medium-term. Last week, the Reserve Bank of India carried out its first rate cut in nearly five years. There may not be room for substantial additional stimulus, but the reforms and measures are going in the right direction, in our view.
The second strategy is vis-à-vis China. The two nations have had a challenging relationship, with border disputes, unbalanced trade, and investment access issues creating friction. But India appears lately to be displaying a degree of pragmatism that was absent for a number of years. The movement of capital, technology, and people has gained some momentum lately. We welcome this.
Finally, India has taken a pre-emptive and constructive stance in its dealing with the mercurial Trump administration. By cooperating on undocumented migrant repatriation and reducing tariff on some US goods in the latest budget, it is clearly signalling its willingness to play ball with the US. Domestic and external challenges may be cause for concern, but India has a clear playbook in place, in our view.
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