Global Research: Special Report
As one of the world’s fastest growing economies in recent years, India remains a key focus for global investment. However a recent slowdown in second quarter GDP to 5.7% has sparked debate over the impact of the country’s landmark economic reforms. The slowdown was one of the key topics of discussion at J.P. Morgan’s second annual India Investor Summit in New Delhi, which drew government officials, policy makers and independent experts across a range of sectors. JPMorgan Chase Chairman and CEO Jamie Dimon delivered the keynote address and also met Prime Minister Narendra Modi at his official residence to discuss the administration’s financial reforms.
The discussions at the Summit reinforced both the near term and medium term outlook on Indian Equities.
Twin reforms launched by Prime Minister Modi have created supply-side pressure, dampening economic growth.
In a move targeting corruption and tax evasion, India demonetarized 500 and 1000 rupee notes in November 2016, declaring 86% of cash in circulation worthless. While this impacted economic activity, policy makers and experts expect related issues to fade as the supply of cash returns to normal levels.
In July, the government also launched a sweeping new tax reform which for the first time unified the country under one market code, known as the goods and services tax (GST). This has also created dislocation and attendees expect transitional issues to persist for another quarter or two, although the informal sector of the economy may face structural change.
J.P Morgan’s head of EM Economic Research Jahangir Aziz said the two initiatives were not entirely to blame for the slowdown and urged patience, pointing to the inevitable “teething problems” of the reforms. He also predicted growth would increase in the next quarter and was optimistic in the medium term.
The good news is that the external environment is going to remain supportive for emerging markets like India. I don’t think the pace of normalization that the Fed is announcing is going to make a huge difference in terms of the capital flow dynamics into emerging markets.
Reaction from Policy Makers
Participants agreed that the government has made substantial progress over the last 3-4 years in terms of establishing macro stability, improving governance standards and the ease of doing business, and implementing key reforms in important areas, including Goods and Services Tax, Bankruptcy Code, Financial inclusion, and privatization of the national airline, Air India. These changes should augur well for growth over the medium term. In the near term, some agreed that using fiscal policy tools within limits could boost growth if focused on specific infrastructure sectors and recapitalizing the state-owned banking system.
For more, watch James Sullivan’s Insights from the India Investor Summit in New Delhi.
A senior analyst involved in the preparation of the content of this report has a household member who is a senior portfolio manager of and investor in certain emerging markets mutual funds, which may invest in instruments discussed in this report.
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