Reading the Future of India's Economy

According to Enam's Chakraborty, "In January 2008, the Indian market was banking on global and domestic liquidity, despite its over-leverage, combined with pockets of over-valuation and over-ownership. Since then, India has been one of the worst performing markets, even as most global markets have bounced back, banking on being rescued by the U.S. Federal Reserve, while commodity inflation has aided Brazil and Russia."

Chakrabarti of ISB says that what happens in the U.S. matters enormously to India. "On the export front, if the global slowdown continues -- and worldwide there is an expectation that the U.S. economy will be slow for at least the next few quarters -- then exports are likely to drop. How deep the drop will be depends largely upon the U.S. market because, historically, when America slows down, most other economies also follow. It now remains to be seen if the slowdown will be as global as it has been in earlier times. "In the medium term, things don't look too good for India. But given the structural changes that India has made, I believe that it will be only a temporary blip. In the long run things will be back on track. The question is when? I believe that in 12 to 18 months we will be back to where we were. I don't expect a long term slowing down."

Subir Gokarn, chief economist of Standard & Poor's Asia Pacific, agrees. In his April review of the economy -- CRISIL EcoView -- he writes: "The recent downturn in investment activity has clearly contributed to the overall deceleration in manufacturing. This, and other indicators, such as credit growth, point to the onset of a cyclical downturn in the economy. This is obviously a matter of concern, but, at this point, our expectation is that the downturn will be both shallow and short. Remember that barely five years ago, GDP growth was less than 6% a year. Compared to that, we are now worrying about it falling to 8%. That is perhaps the best reflection of how dramatically the economy and its investment climate have changed in such a short span of time."

Editor's note: For U.S. investors, the WisdomTree India Earnings Fund EPI is an exchange-traded fund that tracks the performance of 150 India-based companies.

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