Why A Slowing Indian Economy Hasn’t Spooked Credit Suisse

Indian economic growth may have slowed to a six-year low, led by a credit crisis among non-bank lenders and waning consumption—the economy’s bedrock—among other factors. Yet, for Credit Suisse the nation is its “favourite structural story”.

That, according to the brokerage, is because of the nation’s unusually low urbanisation rate of just 34 percent compared with 59 percent in China, and the share of manufacturing sector to the gross domestic product—half of Asia’s largest economy—suggesting that there exists potential for growth.

India’s a very compelling demographic story, with its labour force growing by 1.4 percent annually, a robust legal system and more developed democratic institutions than many of its emerging market peers, it said in its 2020 Research Outlook report. Also, the rupee looks “abnormally undervalued”, with basic balance of payments at a surplus of 1.3 percent of GDP and abnormally high real rates, it said, adding that it expects benchmark interest rates to be cut at least twice in six months.

Here are the additional reasons why Credit Suisse is bullish about India.

• Exceptionally weak growth is a problem but with core inflation at 3 percent and government debt at around 69 percent of GDP, there’s monetary and fiscal flexibility. “India can be a defensive hedge as it’s a relatively closed economy and a net commodity importer.”
• India stands to benefit immensely as internet costs have fallen to among the lowest in the world and its penetration in rural areas increases.
• The country’s competitiveness has improved, having risen 79 spots since 2014 in the World Bank’s Ease of Doing Business rankings.

Other notable areas of reforms pointed out by the brokerage include:

• Sharp fall in corporate tax rates.
• Move towards privatisation.
• The new bankruptcy and insolvency code.
• First phase of the new wage code, which has been implemented.

The brokerage said economic reforms would be further facilitated with the BJP-led National Democratic Alliance expected to soon have a majority in the upper house of Parliament.

The rupee, Credit Suisse said, looks inexpensive given the improvement in export market share. India will now move towards a basic balance of payments surplus of around $35 billion (or 1.3 percent of GDP), partly driven by FDI inflows, which hit record highs in 2018-19.

While government deficit (state and local) is high by historical standards at 7.3 percent of GDP, government debt-to-GDP ratio and nominal GDP is well above nominal rates, leaving room for easing fiscal policy, the report said.

The brokerage’s top stock picks from the country include ICICI Bank Ltd., Larsen & Toubro Ltd. and Power Grid Corporation of India Ltd.