This “Indian Stocks Forecast: Is India’s economy stable?” article was written by Zhou He – Financial Analyst at I Know First.

Highlights

• India is expected to overtake the UK to become the world’s fifth-largest economy.
• India’s growth has helped it become the fastest-growing economy among the G20 countries.
• Economic growth is overly dependent on government spending.

Overview

The global economy has experienced some challenges, including the conflict between Russia and Ukraine, the impact of the epidemic, economic slowdown, persistently high inflation, and tightening financial conditions, but India remains one of the fastest-growing economies in the world. India’s economic growth rate in the second quarter of 2022 will reach 13.5%, and it is expected to overtake the UK to become the world’s fifth-largest economy this year. Previously, India’s nominal GDP surpassed France in 2020 to become the sixth-largest economy in the world. Recently, the United Nations predicted that India’s population would overtake China in April of next year to become the most populous country in the world. This also draws our attention to India’s macroeconomic development.

India’s economic development direction

India’s economic growth is mainly driven by consumption rather than investment, driven by the service industry and domestic capital. This economic growth model has strong sustainability. The past economic development and characteristics of India are as follows. First, the industrial structure is unique. India is a country with a large rural population, and agriculture accounts for a relatively high proportion of the total economy. Due to the large impact of climate, agricultural growth fluctuates greatly, and the fluctuation of agricultural growth directly leads to the fluctuation of the macroeconomy. The second is the rapid growth of foreign trade. Contrary to China, India’s import growth is faster than export growth, and its foreign trade deficit is expanding year by year, which shows that India has strong domestic consumption. Third, the inflation rate is relatively high. On the one hand, India’s inflationary pressure comes from strong domestic consumption demand, and on the other hand, it comes from rising international raw material prices. Finally, foreign exchange reserves continue to increase. The large inflow of funds from foreign institutional investors into the Indian capital market is the main reason for the rapid increase in India’s foreign exchange reserves in recent years. However, under the influence of the global environment, is India’s economic development stable? Can it continue to grow?

In the second quarter of 2022, India’s GDP will increase by 13.5% compared with the same period in 2021, creating the highest growth rate since 2021. In the context of the global economy being deeply affected by the Ukraine crisis, the spread of the epidemic, and abnormal weather, India’s growth has helped it become the fastest-growing economy among the G20 countries. But it is worth noting that although 13.5% seems high, the reference factors behind it cannot be ignored. The reason why India achieved super high year-on-year economic growth in the second quarter of 2021 is that its base in 2020 was too low due to the epidemic. While the figure of 13.5% is high, it is lower than the RBI’s forecast of 16.2%, indicating that the Indian economy is not performing as expected. In terms of growth drivers, the relaxation of epidemic prevention and control measures, the rapid recovery of the service industry, which dominates the Indian economy, and the rapid growth of exports have all contributed to the rapid economic growth. However, the market is generally worried that the RBI will raise interest rates in order to curb prices and keep inflation below 6%, which will lead to a slowdown in India’s economic growth. Considering the above factors, the IMF has lowered India’s GDP growth rate from 8.2% to 7.4% in the 2022-2023 fiscal year, which is lower than the 8.7% in the 2021-2022 fiscal year and higher than the -6.6% in the 2020-2021 fiscal year.

The Russia-Ukraine conflict has brought about turmoil and polarization in the world political landscape, and it has also provided development opportunities for many countries. What benefits has India gained from the Russia-Ukraine conflict? First of all, I believe that what most people know is the oil interest. Although international oil prices rose sharply after the outbreak of the war, Russia sold them at a discount in order to get rid of sanctions and find sellers. India is that big buyer. It buys Russian crude oil in large quantities, transports it from Russia’s Urals to India, and then refines it and sells it to Europe. This adds a lot of unnecessary procedures and brings greater profits to Indian refineries. Statistics show that in recent months, India has purchased more than twice as much crude oil from Russia as in the whole of 2021. The second is that Russia’s attack on Ukraine has greatly disrupted the global grain trade, and it has also triggered a battle for substitutes among demanders. In this context, Indian wheat has become competitive for the first time. On the food issue, in addition to announcing a ban on wheat exports, the Indian government also plans to limit sugar exports to avoid skyrocketing domestic sugar prices. Of course, these self-protection restrictions have also aroused criticism and opposition from various countries, because one of the first results of these measures is to push up global food and sugar prices.

Let’s discuss some of the challenges that the Indian economy may face. Economic growth is overly dependent on government spending. Before the epidemic, the growth of private investment in India had slowed down. The hasty implementation of goods and services tax has curbed investment demand. Low labor productivity, backward infrastructure, and an unfair competition environment need to be improved. After the outbreak of the epidemic, private consumption demand was significantly impacted. Government finances have shouldered the burden of sustaining economic growth over the past three years as private demand has fallen. The average annual growth rate of government spending in India is twice the growth rate of GDP and three times the growth rate of tax revenue, resulting in an average annual increase of 46% in the central government’s fiscal deficit and a 16% increase in public debt, which is unsustainable from a macroeconomic perspective. India’s economic growth momentum needs to be quickly shifted from government expenditure to private demand. Increasing private consumption and investment demand has become an important challenge for the government. In fact, India has structural advantages. It has a large land area and is about to surpass China to become the most populous country in the world. India is one of the few large countries in the world that can accommodate large industries and can supply many goods to the world market and a thriving domestic market.

Speaking of India’s overall structure being at an advantage, then the second aspect we discuss is the structural imbalance of the economy. Affected by the epidemic, small and medium-sized enterprises have a low ability to resist risks and have suffered heavy losses, while large consortiums have taken the opportunity to expand their business territory. India’s economic structural imbalance has intensified and the gap between rich and poor has widened. According to the Global Inequality Report 2022, the top 10% of India’s wealthy account for 57% of the country’s gross national income, while the bottom 50% account for only 13%. Different industries have been hit differently by the epidemic. Trade, hotels, and transportation were the most affected by restrictions, with an average annual negative growth rate of 1.9%; financial and real estate services, public administration, and defense grew at more than twice the rate of GDP growth, but only a small number of elites directly benefited. How to improve this gap has always been a headache for the Indian government.

Third, inflation and unemployment restrain demand growth. According to the Reserve Bank of India survey, affected by weak employment growth and inflation, India’s consumer confidence index in July was only 77.3. Many respondents expressed pessimism about employment, income, and the overall economic situation. With persistently high unemployment and record-low real wages, domestic consumption may not be enough to fuel growth further. According to data from the Indian Economic Monitoring Center, the labor force participation rate in India has dropped from 48.7% in March 2020 to 47.5% in July 2022. The labor force participation rate is the lowest among the G20 countries. Under the pressure of high international commodity prices and rising food prices, India’s inflation rate has remained high and has exceeded the central bank’s tolerance limit of 6% for seven consecutive months. In August, the inflation rate reached 6.9%. In order to curb inflation, India may continue to raise interest rates, resulting in higher borrowing costs and restrained investment demand.

Indian Stocks: Investing in India with I Know First

I Know First provides predictions for the Indian stock market based on the AI algorithm for six horizons: 3-day, 7-day, 14-day, 1-month, 3-months, and 1-year. I Know First has constructed four forecast packages that cover Indian stocks: Indian Stocks, India Large Cap Stocks, India Mid Cap Stocks, and India Small Cap Stocks. Below, we can observe the performance of the prediction of these packages which were sent to our clients (you can access our forecast packages here).

Package Name: By Country – Indian Stocks
Recommended Positions: Long
Forecast Length: 1 Month (11/20/22 – 12/20/22)
I Know First Average: 10.93%

Package Name: By Country – India Large Cap Stocks
Recommended Positions: Long
Forecast Length: 7 Days (12/25/22 – 1/1/23)
I Know First Average: 4.21%

Package Name: By Country – India Mid Cap Stocks
Recommended Positions: Short
Forecast Length: 14 Days (12/8/22 – 12/22/22)
I Know First Average: 7.11%

Package Name: By Country – India Small Cap Stocks
Recommended Positions: Long
Forecast Length: 3 Months (9/19/22 – 12/19/22)
I Know First Average: 7.05%

Indian Stocks: Conclusion

Geopolitical concerns have derailed the economic recovery from the coronavirus pandemic. Russia’s use of force against Ukraine has further accelerated an already existing trend. Rising food and energy prices will add to inflationary pressures as the debt-laden global economy braces for climate change and health concerns. Under these pressures, India’s development is indeed enough to make our eyes shine. If the only way out of the predicament and macroeconomic stability is the maturity of Indian democracy, pessimists would expect a long wait. Let us continue to pay attention to the dynamics of the global economic environment and be more vigilant.

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Please note-for trading decisions use the most recent forecast.