Indian stocks have been under significant pressure in recent months after Prime Minister Narendra Modi implemented a controversial demonetization program. On Nov. 8, Modi announced that the country would be scrapping its two highest-denomination bills. The effort is reportedly intended to reduce the impact of corruption, tax evasion and counterfeiting in India.
So far, the process of replacing the old 1,000-rupee and 500-rupee notes hasn’t exactly gone smoothly. In early January, the Indian government lowered its GDP growth forecast for the fiscal year ending in March from 7.6% to 7.1%. Economists are forecasting growth in the 6.3%-6.4% range in the coming fiscal year.
The prospect of an economic slowdown in one of the largest emerging markets in the world clearly spooked investors.
However, American investors should make sure to keep the Indian slowdown in perspective. The currency-related sell-off in Indian stocks has provided long-term investors with an excellent opportunity to buy the dip.
India’s Long-term Grown Prospects Remain Impressive
Investors should certainly pay attention to any economic slowdowns. However, U.S. investors need to appreciate the differences between the Indian economy and the U.S. economy.
In the most recent U.S. quarter, GDP growth came in at 3.2%, its highest level in more than two years. In the past five years, U.S. GDP growth has been mostly flat in the 1%-3% range, and the S&P 500 has climbed 77% to new all-time highs.
In India, on the other hand, GDP growth was around 5% annually five years ago before it steadily increased to the 7%-8% range in the past two years. Even after the demonetization slow-down, India’s projected growth in the upcoming fiscal year is roughly twice the growth rate of the U.S. economy.
American investors should also realize that by 2020, the Indian economy will likely be the third-largest economy in the entire world behind just the U.S. and China.
A huge part of that growth will come from younger Indians in the country’s exploding middle class. While the median age in the U.S. and China is over 37 years, India’s median age is only 27.3 years. Not only does India have more than 1.2 billion residents, its younger working population is growing by leaps and bounds.