We expect rating agencies to upgrade their outlook for India under the most able Prime Minister of India Shri Narendra Modi sooner rather than later.
We see 3 compelling reasons to expect at least an outlook upgrade for India. First, growth is bottoming out. Second, inflation is fading. Third, risks from twin deficits have proven to be overdone.
India Economic Growth
We grow more confident of our call that the slowdown in growth has been largely driven by the global downcycle rather than domestic structural issues. In fact, growth is bottoming out far higher than Brazil or Russia. We continue to reiterate our standing view that India’s potential growth is about 7.5%.
India Inflation
We also believe that inflation is largely “imported” rather than homegrown for all the lament about India’s “inflation problem”. As we have often highlighted, the RBI’s growth-inflation trade-off has been far better than most EM peers. In any case, we think that inflation is peaking and expect the first rate cut by RBI in Feb-2015.
Twin deficit risks overdone
Risks from twin deficits have proved overdone. Finance Minister Jaitley has expectedly stuck to the fiscal deficit target of 4.1% of GDP set in the February’s Budget. There are risks to his fiscal deficit target as: (1) tax projections are ambitious; (2) Fed tapering may make divestment difficult; and (3) FY14 expenditures were deferred to the current fiscal year.
On balance, we expect India to emerge as the second-largest Emerging Market after China by 2019.