Analysts debate whether they are positive on the new market

Professor: Right now the market has little to do with value - it's driven by mood and momentum

India has become the destination of choice for many investors — and that’s partly because it is outperforming many of its peers at a time of economic volatility, economists and analysts say.

But research also shows that India has a long way to go in building infrastructure and implementing reforms that can attract foreign investors, many of whom still find it challenging to do business in the country.

“The Indian economy has held up better than most other economies around the world,” NYU’s Stern School of Business professor of finance Aswath Damodaran told CNBC’s.Street signs Asia” last week.

“It’s stopped in terms of growth, in terms of resilience, and it’s also attracting money, because where else is the money going to go, right? I mean, you’ve taken a lot of markets off the table, the money has to go somewhere.”

“The reality is that India benefits from both having a remote economy and being a place where capital goes, that may change over time as well. But at the moment I can understand why India is an attractive market for many foreign institutional investors.”

Indian Prime Minister Narendra Modi has plans to make India a $5 trillion economy by 2024-25.

Bloomberg | Bloomberg | Getty Images

Falling GDP forecasts

GDP growth forecasts for India for 2022 have continued to decline, falling to around 6% in the face of global headwinds such as rising interest rates raising the prospect of a recession.

The United Nations Conference on Trade and Development said India’s GDP growth would slow to 5.7% in 2022, after hitting 8.2% for 2021. For 2023, it predicts a lower growth rate of 4.7%. The World Bank also cut its 2022-23 GDP growth forecast for India to 6.5% from an earlier estimate of 7.5%.

Although revised down, India’s growth forecast still cuts higher than others in the Asia-Pacific region. ASEAN+3 (which includes China, Japan and South Korea), for example, is expected to grow by 3.7% this year, the ASEAN+3 Macroeconomic Research Office reported last week, while economists have pushed China’s growth forecast down to between 2% and 4% .

Inadequate infrastructure

In recent months, Indian Prime Minister Narendra Modi and Indian business leaders such as billionaire Gautam Adani have redoubled their marketing of India to global investors.

Modi has plans to make India a $5 trillion economy by 2024-25while Adani said at a recent Forbes conference in Singapore that India will go from a $3 trillion economy to a $30 trillion economy in the next 25 years.

But in research conducted to test Modi’s $5 trillion target last year, Deloitte India said that while the country is a favored destination for foreign direct investment, it needs to adopt several reforms for this goal to be achieved.

The report highlighted the need for more foreign direct investment in the manufacturing sector, adding that the bulk of investment was driven by the services sector, with manufacturing attracting only about a third of the money that goes into services.

Adani said at a recent Forbes conference in Singapore that India will go from a $3 trillion economy to a $30 trillion economy by 2050.

Bloomberg | Bloomberg | Getty Images

On top of that, the majority of 1,200 business leaders Deloitte surveyed said India is more challenging to do business in compared to countries like China and Vietnam.

Business leaders in India’s real estate, industrial and utilities sectors find it particularly difficult to invest there thanks to low institutional stability and inadequate infrastructure.

“While the perception of China took a beating over the past year, the country remains a close competitor to India among US investors as a destination for their capital investments,” the report said.

That said, India’s reforms have improved over the years and are moving in the right direction, said Sasidaran Gopalan, assistant professor of economics at United Arab Emirates University.

The State Bank of India says inflation in the country should come down

Nevertheless, while Gopalan agreed that India “stands out both in its backyard and among other emerging markets,” he said it is not the “only game in town.”

Lee Kuan Yew pschool of public policy in Singapore professor Ramkishen Rajan acknowledged that India’s progress in reforms and infrastructure push has caught the eye of investors, but said its trade protectionism remains a drawback.

“So India is experiencing a combination of good politics and luck at the moment. So overall, I understand bullishness on India, although there is a caveat,” Rajan said.

“While there has been a relaxation of FDI rules, India’s reluctance to embrace greater trade liberalization, including joining regional trade agreements, may inhibit the extent to which labor-intensive manufacturing will enter the country.”

That would prevent the country from fully utilizing its “demographic dividend,” Rajan said.

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