India’s Modi Still Has To Deliver On Reform

It seems the only emerging market on investors’ radar currently is India. And with good reason…

In the spring of 2014, reform-minded Prime Minister Narendra Modi was elected.

Under his stewardship, India has become the world’s fastest-growing economy. Last quarter, India’s GDP came in at 7.4%. In 2016, growth in India’s GDP should come in around 7.6%.

India Prime Minsiter Modi Still Has to Deliver on Reform

Cooling inflation also allowed the Reserve Bank of India to support the country’s economic growth. Led by Raghuram Rajan, the Bank has lowered interest rates by 1.25% to 6.75%. Some have even compared Rajan to America’s Paul Volcker for his inflation-fighting efforts.

But as with all economies, India’s has both good and bad factors at work.

The Good

First, there’s no doubt having a prime minister focused on reform is a huge plus. That alone has attracted big investors, such as the Canada Pension Plan Investment Board. It pledged to invest $6 billion by 2022 in the country.

India has also been one of the biggest beneficiaries of collapsing oil prices. Oil is the second-largest source of energy (behind coal) in India. And the country is expected to become the world’s third-largest guzzler of oil – at 4.1 million barrels per day – trailing only China and the United States.

Falling oil prices have helped push down inflation, making Rajan’s job at the central bank easier, as well as boosting the government’s efforts in stimulating growth. Falling oil also solved the once-precarious current account problem.

India is also blessed with youthful demographics, which bodes well for future economic growth. The median age in India is 27. That compares favorably with both neighboring China and the United States, where the median ages are 36.8 and 37.8, respectively.

Demographics are especially important when you consider that 70% of the country’s GDP is domestically driven.

India’s youth is also reflected in the fact that India will have the second-largest base of internet users by year-end, overtaking the United States. India’s 400 million-plus internet users only trail China’s 650 million.

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