Emerging market economies: India

As an emerging market economy, India can offer a wealth of opportunities for traders and investors who know where to look. Learn about India’s economy, its 2019 growth forecast and how you can gain exposure to Indian assets.

Indian rupee Source: Bloomberg

Overview of the Indian economy

The Indian economy is currently ranked as the sixth largest in the world by gross domestic product (GDP).1 Despite its position in the world rankings, India is still classed as an emerging market economy because it is currently transitioning from developing to developed status.

Due to its rapid development, India is part of the BRICS, an acronym given to five of the most prominent emerging market economies in the world. The other economies are those of Brazil, Russia, China and South Africa.

In the previous few decades and on the back of economic reforms, Indian GDP has experienced largely upward growth, with GDP per capita increasing from around $81 in 1960 to $1939 in 2017.2 However, this figure is still exceptionally low for a country like India, which had an overall GDP of $2.597 trillion in 2017.3

Despite this, the prosperity of India’s 1.3 billion population has largely increased in the last few decades, with poverty levels falling from 45% in 1993 to 21.9% in 2011. The growth currently being experienced by the Indian economy makes the country an interesting investment prospect, but an upcoming general election in April and May 2019 could cause increased market volatility.

What are the biggest industries in India?

The main industries in India are agriculture, industry (which includes manufacturing and textiles) and services.4

  1. Agriculture makes up 15% of Indian GDP. Around 47% of India’s working population have jobs in the agriculture sector, with a large number of farm workers coming from poorer groups of the population. India is one of the leading exporters of rice, wheat, cotton and sugarcane in the world, so many countries rely on Indian exports for their own populations
  2. Industry incorporates a lot of the manufacturing and production industries in India, including mining, construction and energy production. Industry contributes 23% to India’s GDP5
  3. Services is the biggest industry in India, making up the tiger’s share with a 61% contribution to GDP.6 Services covers government activities, transport, communications, finance and all other private ventures which do not produce material goods

History of India’s economy

India’s economy has a long and chequered past. To keep things simple, we’ll look at the Indian economy since 1991, when economic reforms laid the foundation for much of the growth that the economy has since experienced.

As part of an international monetary fund (IMF) bailout, the Indian government had to agree to implement economic reforms in the hope of liberalising the economy and increasing growth. Manmohan Singh, India’s finance minister at the time, agreed to the terms of the bailout and a series of economic reforms came into effect from 1991. The reforms set about encouraging foreign direct investment in the Indian economy, deregulating the financial markets, lowering taxes, and reducing the import tariffs on an array of imported goods.

Since then, subsequent governments have continued with the reform policies of the past and the results have been far-reaching. For instance, life expectancy has increased from 58 in 1991 to 68 in 2016, and literacy rates and availability of food have also both increased.7 However, these benefits have largely been felt in urban communities.

Some commentators partially blame the economic reforms for the levels of income inequality currently present in Indian society and say that the reforms have helped the rich more than they have helped the poor. For example, the number of billionaires in India increased from 9 in 2000 to 101 in 2017.8

Other commentators argue that increased wealth inequality is a characteristic flaw of neo-liberal capitalism, and it will take time for India’s inequality to level out.

Future of the Indian economy

Looking to the future, economic reforms and increasing foreign direct investment are likely to stimulate Indian economic growth in the years ahead. The GDP growth forecast for 2019 is 7.5%,9 following 8.1% in 2015, 7.1% in 2016 and 6.7% in 2017 (data for 2018 not yet available).10

With India’s population set to overtake that of China in the coming decades, it is likely that the production and agricultural industries will expand in light of a requirement to house, feed and provide jobs for India’s increasing population. On the other side of this, India could see a net reduction in the amount of land that is available to farm as the growing population will need somewhere to settle. For many Indians, the cities are seen as having more opportunities than the countryside, so urban areas are likely to expand.

Considering the expansion of these industries and India’s growing population, renewable energy and waste management could also play an important role in the future development of the Indian economy. With the rapid industrialisation that is continuing in India, carbon dioxide emissions in metric tons per capita increased from 0.3 in 1960 to 1.7 in 2014.11 With this in mind, the Indian government have taken steps to attempt to reduce pollution, which could see greater investment in renewable energy and waste management systems in India in the coming years.

How to trade the Indian economy

By using financial derivatives, such as CFDs, you can speculate on Indian markets including rupee (INR) forex pairs and India’s National Stock Exchange (NSE). CFDs enable you to go short as well as long, which means that you can speculate on the prices of these assets during potential economic downturns in India as well as periods of growth.

How to trade the Indian rupee (INR)

A popular way of gaining exposure to India’s economy is through the currency, the INR. Forex is always traded in pairs, and the most popular pairing with the Indian rupee is the US dollar in the USD/INR pair.

If you are optimistic about the future of the Indian economy and believe the rupee will increase relative to the US dollar, you would be bearish on the USD/INR pair. If you are more concerned about the Indian economy’s growth, you would take the opposite view and buy USD/INR with the expectation that it would increase in price.

The Indian rupee is a managed floating currency. In normal circumstances, the value of the Indian rupee floats according to conventional foreign exchange market mechanisms. Despite this, the Reserve Bank of India (RBI) will intervene should the rupee fall to levels which it deems to be detrimental to the overall health of India’s economy. It should be stressed that this rarely happens and, for the most part, the rupee is left to its own devices and is affected only by FX market pressures.

If intervention was deemed necessary by the RBI, it would buy or sell US dollars in the forex market with the hope that the change in supply of US dollars restores the exchange rate balance between the US dollar and the Indian rupee. Therefore, it is important that traders pay attention to the RBI’s monetary policy and any news or events that could impact the FX markets.

Discover other emerging market currencies to watch.

How to trade the National Stock Exchange

The NSE is India’s largest stock exchange and is located in the financial centre of India: Maharashtra, Mumbai. Over 1900 companies are listed on the NSE, with a market capitalisation of $2.27 trillion.

The NIFTY 50 is India’s benchmark stock market index and represents the 50 largest publicly-listed companies on the NSE.

Traders can get exposure to the Indian stock market by speculating on the price movements of the NIFTY 50 index as well as trading other indices like the BSE SENSEX, which operates as part of the Bombay Stock Exchange (BSE) and incorporates 30 BSE-listed companies that are seen to be financially viable and stable.

Aside from taking a position on the various indices in India, traders could take a position on individual stocks. India’s three largest publicly-listed companies are Reliance Industries Ltd, HDFC Bank Ltd and Oil and Natural Gas Corporation (ONGC), which have all benefited from the economic reforms in terms of their share price.

India offers an exciting opportunity for investors. Foreign direct investment is actively encouraged and has contributed to the unprecedented Indian GDP growth rates. However, before opening a position, it is important to get up to speed with any news and events which could affect the growth of the Indian economy, and to have a suitable risk management strategy in place as this can help to protect against adverse market movements.

Visit our economic calendar to monitor the dates for Indian macroeconomic data releases such as GDP and employment rates.

1 World Bank, 2017
2 World Bank, 2017
3 World Bank, 2017
4 CIA, 2017
5 CIA, 2017
6 CIA, 2017
7 World Bank, 2017
8 Oxfam, 2017
9 World Bank, 2017
10 World Bank, 2017
11 World Bank, 2017

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