Should you write off India completely?

Tue, 27 Aug Pre-Open

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The Indian economy is in a state of a slowdown. The once near double-digit GDP growth rates Today's Market: Can India's GDP grow above 9%? - Indian Stock Market News have been falling consistently. At the same time the monster of inflation has hurt everyone from the common man to the corporate world. The deficit situation has not helped either. And the recent weakness exhibited by the Rupee has just added to the country's woes. The government's inaction on the policy front has led to a loss of investor confidence. Something that has led to a dwindling capex cycle which has further compounded the growth worries. Therefore it is not really a surprise that most investors are becoming increasingly cautious when it comes to investing in India.

We recently came across an article in The Mint that sums up that investors should not be giving up on India as yet. It has highlighted 5 reasons to support its view. One major reason for the daily's confidence in India is that the developed world is showing signs of improvement. This combined with the weakness in the rupee should help boost India's exports. In addition to this the article also highlights things like reduction in poverty, improving governance and revival in power investments as some reasons why the India story is still shining.

The idea that someone could be taking such a myopic view of the situation in India is something that surprises us. The problems in India go beyond the poverty numbers and India's export prospects. Lets us not forget the one of the reasons why the poverty numbers look better than before is due to the change in the definition of poverty by the Indian government. Even if we ignore that, saying that governance has improved is almost a laughable matter. The problems that we are facing are more to do with the lack of governance in the country and this has only hurt investor sentiments rather than helping them.

The government has been neatly sidestepping major governance issues rather than taking action on them. In fact they have adopted the same viewpoint towards governance as they have done with respect to the policy changes.

The policy changes made in recent times have more to do with raising FDI limits. They have not really addressed the issue of the investment environment in the country, which is simply not conducive to making investments. Large capex plans have either been deferred or cancelled altogether. The reason? Issues related to clearances and resource acquisition have been pending for so long that they have made the projects economically unviable.

The bottom line is that the long term story for India is still bright. We have a great demographic dividend capable of driving economic growth through internal consumption. But the dividend will accrue only when the economy is able to provide jobs to nurture the people. For that the economy needs to grow. And for this the government needs to remove the structural roadblocks that are plaguing the growth. This can only be done through policy reform and implementation. If these go through, then there is every reason for investors to stay optimistic about India. Otherwise the gloom will only deepen as the slowdown would bite in every possible way.