Stéphane Monier, chief investment officer at Swiss private bank Lombard Odier in Geneva, discusses the driving forces behind India’s expected economic growth in 2023, with the country’s economic ambitions gaining the attention of long-term investors. 

With India seen as one of the world’s fastest-growing major economies, and with the country set to benefit from a global drive to diversify supply chains, Stéphane Monier, CIO at Lombard Odier, looks at investment opportunities in the region. 

Reforms by the Narenda Modi regime in recent years, coupled with global supply chains to China having been disrupted by COVID-19, have encouraged investors to pay more attention to India. The country's relatively youthful demographic and rising middle class are also cited as reasons for being bullish on the country. This news service has carried a number of articles exploring India's potential – and some potential risks. (See examples here, here and here.)

According to Monier, India’s economy probably expanded by 7 per cent in 2022. Over 2023, it is expected to slow to 6 per cent, but that modest change is unlikely to be sharp or lasting. The business sector looks better prepared to weather this slowdown with higher profitability, while monetary policy tightening is poised to pause soon, Monier continued. Although the banking sector’s underlying fragility is a risk, the firm’s base case is that the cyclical slowdown will be manageable. 

Monier believes that India’s youthful population will continue to work in its favour. According to the United Nation’s forecasts, India’s population will surpass China’s in April 2023. The country’s working age population growth will also be higher than most of its global peers in the coming decade. The UN’s population forecast points to the addition of nearly 95 million to India’s working population.

“Further boosting India’s long-term prospect will be its position as an alternative to China amid shifting global geopolitics. As the Western world looks to diversify supply chains away from Chinese production and manufacturing, and China begins to focus on domestic consumption, India is consolidating its role between the two,” Monier said. 

“The push to make India an alternative in global supply chains seems to be bearing fruit. India’s electronic goods exports, for instance, nearly doubled since 2020 as firms such as Apple and Samsung accelerate investments into the country’s technology production,” Monier continued. 

Prime Minister Narendra Modi’s cabinet hopes to further this trend with "production-linked incentives" worth a total of 32 trillion rupees ($39 billion) to industries including carmakers, aviation, chemical, and electronics as well as medical devices and pharmaceuticals. 

Considering these tailwinds, Monier believes that India can achieve between 6 and 6.5 per cent annual growth over the next decade, despite some complications from the pandemic and climate volatility. “If the country manages to maintain this pace of growth, it will become the world’s third largest economy by 2033, ahead of Japan and Germany,” Monier said.

Climate challenges, inflation credibility
Nevertheless, India’s big unknown is the impact of global climate change. “India is still mostly rural and its underdeveloped economy is vulnerable to climate volatility. Additionally, the credibility of its inflation targeting framework depends heavily on food prices that account for nearly 40 per cent of the consumer price basket calculated by the Reserve Bank of India, the country’s central bank,” Monier continued. India’s macroeconomic policy is effectively at the mercy of the annual monsoon. “In the medium-term, building infrastructure resilience to climate volatility will be essential to India’s development,” Monier said

“In the near-term, normalising global demand and stabilising commodity prices should help India bring domestic consumer inflation below its 6 per cent threshold. In fact, headline consumer price inflation already rose by a below-target 5.9 per cent in November compared with a year earlier,” he added. 

This supports the RBI’s recent assessment that "the worst of inflation is behind us." He expects the RBI to implement its final rate hike of 25 basis points in early 2023, and then set the benchmark repo rate at 6.5 per cent for the remainder of the year. 

A stable domestic political outlook
Monier believes that the ruling Hindu nationalist Bharatiya Janata Party’s remains in a position to win the next general election that needs to be held by May 2024. Recent state elections supported this outlook. 

He also sees little scope for infighting within the BJP as Mr Modi seems to be preparing to run for another term, though there is discussion of a challenge from Amit Shah, the current home affairs minister, and Yogi Adityanath, chief minister of Uttar Pradesh state. “Confident in the Modi brand, the BJP may push for reforms to land acquisition and labour laws nationally this year. A lack of majority in parliament’s upper house, however, may constrain the government,” he said.

Investment opportunities
Overall, Monier believes that Asian economies may outperform in this period of global weakness. “Southern Asia’s economies in particular performed better than other emerging markets in 2022, led by India. As China changes its Covid strategy, North Asian economies become more likely to outperform in 2023,” he said.

India’s strong performance means that it is already widely held in investment portfolios. “India makes up 15 per cent of the MSCI Emerging Market index, half the weight of China and almost three-times the weight of Brazil. Still, Indian equities are trading around 30 per cent higher than their long-term averages, or 21-times forward earnings, significantly higher than the broader MSCI World index,” he continued. 

“Consensus expectations point to growth in earnings of more than 15 per cent in both 2023 and 2024. At the sectoral level, India will continue to benefit from its strong industrial focus on digitalisation. However, Indian equities’ valuations remain high for now, and so look less appealing,” he said.

“With interest rates at 6.25 per cent in December, and one more hike expected early in 2023, India’s government bonds look attractive compared with other emerging sovereign debt in local currency,” Monier said. 

“High carry yield and an investment grade credit rating of ‘BBB-’ from Standard & Poor’s, mean India’s bonds may see rising levels of foreign interest. Inclusion in major bond indexes would boost their attraction further. At this stage, we prefer shorter-duration Indian sovereign debt, while longer-duration bonds may look more attractive later in 2023,” he continued.

The Indian rupee has depreciated against the US dollar, from around 40 rupees in 2005 to around 80 rupees today. This is largely due to India’s higher inflation rate compared with trade partners. 

In the months ahead, he believes that the rupee is unlikely to benefit directly from China’s reopening economy, since higher commodity prices will keep India’s current account deficit wide. Any external inflows into equities will be countered by the central bank re-building its foreign currency reserves. 

“The RBI will look to prevent any spikes in the dollar-rupee exchange rate, to keep the Indian currency high yielding, with lower volatility than many of its emerging peers. We see the currency trading in a range of 80 to 84 rupees to the dollar over the next 12 months,” Monier concluded.