India's economic growth prospects have been bleak in recent times. A combination of policy paralysis and red tape had crippled GDP growth. Things have brightened with the Modi government coming to power. However, the enthusiasm has yet to translate in to decisive action. Despite this, it is clear that the Indian economy is on the mend. The government has made its intentions clear. A few reforms have also been announced. But the key question remains: how fast will the economy grow?
If Goldman Sachs (GS) is to be believed then India will soon outpace China! That's right. The chief economist at GS has stated that by 2016, India's GDP growth will be higher than that of China. For calendar year (CY) 2016, he has forecasted 6.8% GDP growth for India and 6.7% GDP growth for China. In fact he is even more bullish for CY2017 projecting 7% growth for India.
The reasons are not hard to find. After growing at a breakneck pace for decades, the Chinese economy is finally slowing down. Domestic demand has been moderating in China and investment growth, the main driver of the economy, has slowed down considerably. Chinese factories have also had to deal with higher labour costs which have depressed margins and reduced profitability. It is clear that China will need many years to transform itself from an investment driven economy to a consumption driven economy.
At the other end is India. In India, the investment cycle is yet to pick up. But all indications are that it will pick up. If the government can keep up the reform momentum and can keep the fiscal deficit in check; then there is no reason to doubt a rebound in the economy. To add to this, if the RBI provides a tailwind in the form of lower interest rates then it should not be too difficult to overtake China's rate of growth we believe.
Does this mean that investors can go all out and buy any stock in the infrastructure/manufacturing sectors? Certainly not! It is important to remember that economic trends play out slowly and cannot be used as definitive forecasts. Also, there are still many risks to the nascent economic recovery in India. A lot will depend on the government fulfilling its promises. Thus, it will be wise if investors do not get caught up in euphoria and invest only in fundamentally sound companies that are available at attractive valuations.