US Economic Slowdown – An Opportunity for India?

As the US economy edges toward recession, equity investors are seeking opportunities in other countries. The focus is on emerging economies, specifically in Southeast Asia, and the main contenders are China and India. Both countries have positive and negative factors influencing investor decision. Which country would attract the bulk of the diverted investments is yet to be seen.

The US economy has been witnessing a slowdown and a shift to recession starting in 2022. While it showed resilience against the Russia-Ukraine war and the lingering effect of COVID, several factors are pushing it toward recession in 2023.

The start of the year saw a slew of layoffs by US tech companies, starting with Google. In January 2023, the tech giant gave the pink slip to almost 12,000 employees. Meta followed suit and laid off more than 11,000 staff, with more cuts to be announced. This follows closely on the heels of job cuts by Amazon and Microsoft in the preceding year. Despite this, the US job market has continued to be strong and inflation remains much higher than the Fed’s target of 2%. This has led to the Federal Reserve Bank imposing significant rate hikes, yet the stance on the ongoing battle against inflation is still uncertain.

Recent events, such as the failures of Signature Bank and Silicon Valley Bank, as well as the rescues of First Republic Bank by JPMorgan and Credit Suisse by UBS, highlight the potential risk of financial contagion in the face of rapid interest rate increases. The current environment leaves many financial institutions exposed to vulnerability of default, as elevated interest rates erode the market value of their assets.

Although the US debt ceiling deal has allayed concerns over a potential default, there are still challenges ahead. The Treasury would have to issue a substantial amount of new bonds to replenish its cash balance at the Federal Reserve. This alone would drain about USD500 billion in liquidity from the market in the upcoming months, leading to a continued surge in yields in the near term. Coupled with the Federal Reserve’s quantitative tightening policy, these factors are likely to be a drag on the economy.

As the struggle to achieve economic stability persists, equity investors are becoming increasingly cautious about further investing in the US. Their attention is now shifting towards the emerging economies that have better prospects. Among these contenders, China and India stand out as two formidable candidates.

The story of China

China’s economy is on the rebound and is expected to grow 5.2% this year. The country finally relaxed its zero COVID policy and removed the various restrictions on its citizens' movements. As mobility and activity pick up, the country expects increased spending and a boost to its economy. The growth estimates are highly promising, with China expected to contribute approximately one-third of the global economic growth in 2023.

There are significant challenges as well, and the contraction in the real estate segment remains a major headwind. While China has enjoyed monopoly status as a manufacturing hub for many global companies, it is now losing this standing due to the following reasons:

• An aging population has led to slow productivity growth.
• The pandemic forced many global companies to re-evaluate their over dependency on China for their supply chain. Several players have pulled out their hubs and established alternative channels in other locations.
  
• Its deteriorating relationship with the US and increasing alignment with Russia have led to many US companies moving out of China.
• The US has stopped Chinese tech companies from operating in the country and has also banned their stocks.
• Another major concern pertains to the ongoing devaluation of the Chinese yuan in relation to the US dollar. The yuan has surpassed the critical threshold of 7 against the dollar, signifying considerable depreciation.

China has recently announced a series of policy decisions aimed at shoring up economic growth, including increased spending on infrastructure and support for SMEs. These measures come amid concerns over a potential slowdown in the Chinese economy, fueled by a combination of factors including rising debt levels, slowing population growth, and trade tensions with the US. While many analysts are in favor of these policy decisions, the market's view on whether they will be enough to sustain economic growth remains mixed. Some experts believe the measures would be effective in boosting short-term growth but may not be enough to address more fundamental challenges facing the Chinese economy. Others argue that the policies represent a positive step toward reforming China's economic model and could lead to more sustainable growth over the long term. Ultimately, the success of China's recent policy decisions would depend on various factors, including implementation, effectiveness, and the ability to navigate a rapidly changing global economic landscape.

Therefore, while its overall growth rate is positive, investors may remain wary of investing heavily in the country.

The rise of India as a strong opponent

The other South Asian country that is a strong contender to China is India. As per the IMF’s projection India’s growth rate is 5.9% in 2023.

India's growth trajectory over the past decade has been truly remarkable. While the global economy grapples with sluggish growth, soaring inflation, supply chain disruption, and an unprecedented level of debt, India has emerged as the fastest-growing major economy. This exceptional growth can be attributed to a mix of judicious government policies, economic reforms, and the presence of a vast, youthful, and diverse population.

One key factor bolstering India's economic expansion is the upswing in domestic private consumption, which has provided a considerable impetus to manufacturing output across the nation. Furthermore, the government's proactive endeavors to improve infrastructure, digitize various public platforms to ensure convenient accessibility, and implement groundbreaking economic reforms such as production-linked incentive schemes have substantially contributed to India's economic advancement.

Many international businesses and fund managers have already initiated investments in India. Its economic prospects could be written more tactfully without appearing one-sided in favor of India. While India can benefit from “friend shoring” and long-term favorable factors, there are certain challenges.

One of the key challenges facing India is inflation, which has been on the rise in recent years and has the potential to dampen investor confidence. In addition, high current and fiscal deficit, along with a weak currency, have made India less attractive to foreign investors. Other challenges include a complex regulatory environment, inadequate infrastructure, and persistent issues with corruption and bureaucracy.

In spite of these challenges, there are signs of progress, as the Indian government has taken steps to address these issues and create a more business-friendly environment. Recent reforms in areas such as taxation, labor laws, and ease of doing business have been well received by investors, and there is a growing sense of optimism about India's potential as a major economic player. In order to become the first choice for investors, India must continue to tackle these challenges and build on its strengths.

Conclusion

India has the potential to grow 7% if it is able to attract the right investments and make itself a preferred choice for foreign investors.

The country stands poised to reap substantial benefits from a range of pivotal initiatives in the foreseeable future. These initiatives encompass the global offshoring trend, burgeoning domestic consumption, gradual relocation of manufacturing from China, digitization drive, and rising services exports.

India's propitious business environment, coupled with its extensive reserve of skilled labor and abundant availability of raw materials, positions it as an enticing destination for companies seeking to transition their operations from China. Moreover, India's expanding digital infrastructure and flourishing services exports are anticipated to propel economic growth, offering lucrative investment prospects in the technology and services sectors.

With these advantageous factors in place, India is well-equipped to capitalize on the prevailing themes and establish itself as a prominent player on the global economic stage, fostering a prosperous future for the nation and its stakeholders.