India at 70

India celebrates its 70th birthday this month. On the 15 August 1947 the Union Jack was lowered and Jawaharlal Nehru, the first prime minister of India, raised the Indian national flag in Delhi and history was sealed.

A lot has changed since then. In 1947 Indian life expectancy was 32, now it is 68 and the economy has become the world’s seventh largest at $2 trillion. It’s still growing fast too. According to the IMF’s World Economic Outlook, the Indian economy grew by 6.6% in 2016, just a whisker behind China at 6.7%.

However, growth is never a straight line upwards and economies often pause for breath. This week news of an overall slowdown in economic growth and a drop in consumer prices led India’s central bank to lower its benchmark interest rate to a six-and-a-half year low, from 6.25% to 6%.

The Reserve Bank of India’s Monetary Policy Committee voted 4-2 to cut the rate. Inflation in India has fallen to a five-year low of 1.25% in the 12 months to June and the country’s gross domestic product grew just 6.1% in the first quarter of this year, which is its slowest pace since late 2014.

What’s more, the latest Purchasing Manager’s Index (PMI) figures for India’s services sector fell sharply last month following the introduction of the country’s first Goods and Services Tax (GST) on 1 July. Implementation of the new tax policy has sowed confusion among manufacturers over the pricing of their products, leading to a reduction in activity and slowing down the demand for services.

The PMI plunged from 53.1 to 45.9, leaving it at the lowest level since September 2013. PMIs measure changes in activity levels across a particular industry sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below that suggests they’re deteriorating.  A movement from positive territory to below 50 so quickly is very unusual.

Stepping away from the short-term noise, however, the long term outlook for India remains positive. Many investors highlight the country’s favourable demographics. The median age is just 27 and nearly 7 in 10 Indians are currently under the age of 35. However, this is only part of the story. Radical improvements in terms of per-person productivity due to capital investments and better technology will play an even more important role.

In PwC’s report The World in 2050 the consulting firm predicts that India’s economy will grow by about 4.9% per year from 2016 to 2050, with only 0.7% of that growth caused by increases in the population.

Alex Duffy, portfolio manager of Fidelity Emerging Markets Fund believes India is currently one of the ‘stand-out’ emerging markets. In particular, the attractiveness of the country’s financial and consumer sectors, driven by the growing wages of its over 1 billion population and Prime Minister Narendra Modi’s reform agenda, makes it an attractive proposition for investors.

Tax reform is the latest and largest part of Narendra Modi’s reforms which aim to promote growth and create a stable environment for economic development. The new Goods and Services Tax which attempts to unify each of the country’s 29 states and seven union territories under one tax system is bound to cause teething problems.

Some short-term disruption as businesses adapt to a new system should be expected, but longer term a reduction in logistics costs, brought about by the new tax regime, should boost productivity and enable Indian companies to realise efficiency gains.

As India turns 70, there are still plenty of reasons to believe it’s in relatively good health.