When will India fulfill its growth promise?

Thanks to rapid population growth and increasing prosperity, India's economy will eventually catch up with that of the United States. But first Prime Minister Narendra Modi needs to speed up the pace of economic growth.

What is the similarity between Mark Rutte, Greta Thunberg and Bollywood star Deepika Padukone? All three of them are or were present at the Summit in Davos this week. The meeting was kicked off Monday by the IMF. That organization seized the opportunity to once again temper the economic outlook.

The IMF is now taking into account that the global economy grew by 2,9% in the past year. The reason for the adjustment is obvious. It is not the trade war or the weak economy in Europe that is playing tricks on us. This time India is the culprit.

Why 5% is not enough
At first glance, there is little to criticize about India's growth rate. The country's economy expanded by more than 2019% in 5. Since 2007, growth in Europe has not exceeded 3%. Nevertheless, Prime Minister Modi is keen to increase the growth rate.

On his way to his election victory last year, he promised that the Indian economy will be about twice the size by 2024 than it was two years ago. Keeping the population happy is of course much more important to Modi. That will be a big challenge, as unemployment has risen to its highest level in more than 40 years.

10 million jobs wanted
Every year, as many as 10 million young people enter the labor market in India. The best way to ensure that all of them get a job - so that unemployment remains manageable - is to boost economic growth. That growth is under pressure, because banks are struggling with many defaulters.

With other lenders – the so-called shadow banks – the problem is at least as great. The loan tap is closed and that puts a brake on activity. Due to the problems, the confidence of the Indian population in their own economy is diminishing. And that is a bad development, in a country where consumer spending accounts for no less than 60% of GDP.

Bigger than the United States
The economic problems in India are hardly noticeable on the foreign exchange market. The rupee has fallen about 2019% against the dollar in 2. Despite the country's need to import a lot of commodities, foreign exchange reserves at the central bank increased by more than 10% to more than $450 billion.

The increase is due to a substantial influx of investors. They put their money in Indian stocks, so that the stock prices jumped by almost 20%. Investors are looking beyond the current slump to the enormous growth opportunities in the long term. Consultancy firm PwC, for example, predicts that India's economy will be larger than that of the United States by 2050. With such growth potential, it is probably not wise to bet against the rupee in the long run.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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