The entire world economy has defied pessimists, and 2023 is turning out to be a much better year than expected. The good news will spill over into 2024. Hence, one can expect markets to rise across the world. Emerging markets will see a return from a lot of the hot money withdrawn earlier on fears of a global slowdown.
I was asked on a TV programme what impact the state election results would have on foreign investors. I poured cold water on the gung-ho views of some of the optimists. The fact is that state elections are a very minor factor for global investors. They understand that there are many ups and downs in state polls, and believe – rightly – that these matter little for who rules in New Delhi, which is what they are interested in.
All of them already assume that Narendra Modi will be re-elected in 2024, maybe with a few more or less seats but re-elected nevertheless. This expectation is already baked into their investment allocations. Hence, the results of the state election will make virtually no difference to foreign inflows into India.
On the other hand, the US is making a ‘soft landing’, and that is a huge plus point for global investors. The US Fed attempts to quash high inflation by raising interest rates. But more often than not, this drives the economy into a recession. That is why markets widely expected a US recession this year after the Fed kept interest rates higher for longer than anyone expected. Yet, the results have been benign.
Inflation has more than halved to 3.2%, though it is still above the desired 2%. The labour market remains red hot, with unemployment down to 3.9%, and wages rising according to all indicators. Yet, this has not re-stoked inflation as feared. Meanwhile, the economy powered along at 5.2% in Q3 2023, and could average 4% over the year, an excellent rate.
In Europe, German GDP was expected to contract sharply, but was down just 0.1% in the third quarter. Meanwhile, China has registered a stronger-than-expected recovery from its self-imposed Covid controls, and IMF forecasts its GDP to rise by 5.4% this year, upgraded from 5% earlier.
In sum, the entire world economy has defied pessimists, and 2023 is turning out to be a much better year than expected. The good news will spill over into 2024. Hence, one can expect markets to rise across the world. Emerging markets will see a return from a lot of the hot money withdrawn earlier on fears of a global slowdown.
Of all emerging markets, India seems to have the best long-term chances, with China slowing down. So, even though the state election results will not impact global markets, India has good reason to be optimistic about 2024.
Suppose Congress had won in two or three of the central Indian states. Would that have made any difference to global investors? I think not. Foreign analysts know that Modi is much more popular than his party or chief ministers. Typically, the BJP share of the vote in general elections is 5-10% higher than in state elections.
The most extreme example of this came from the state of Delhi. In the 2014 general election, BJP won all seven parliamentary seats in Delhi. But in the subsequent state election, it won only 3 of the 70 state seats – AAP swept the rest. This contrarian drama was repeated in the next general election of 2019, when again BJP won all seven parliamentary seats. But in the subsequent state election, BJP won only 8 of the 70. There cannot be clearer proof that state elections are poor indicators of what will happen in a general election.
Global investors like continuity. Despite caveats, they have been impressed with Modi’s handling of the economy in the last 10 years. Congress spokespersons will keep repeating, quite accurately, that GDP growth in the 10 years of UPA rule (2004-14) was faster than in Modi’s 10 years. But that is mainly because global conditions were exceptionally buoyant in the Congress period.
In 2013, when ‘taper tantrum’ led global investors to pull billions out of emerging markets, India was called one of the ‘Fragile Five’ because of its lousy macroeconomic indicators. The current account deficit had crossed 4% of GDP, inflation had long been in double digits, and the fiscal deficit was high. So, the rupee crashed from ₹55 to ₹65 to the dollar. New RBI governor Raghuram Rajan devised a scheme to bring in foreign bank deposits disguised as NRI deposits, and saved the day.
In 2023, we once again have a global crisis with billions fleeing emerging markets. India’s neighbours – Pakistan, Sri Lanka, Bangladesh – have all gone to IMF for help. But India remains rock solid, so solid that most Indians are unaware that ‘the world is on fire’, to use the words of Larry Summers.
Indian stock markets have done reasonably well in 2023. But that is not because of global investors – they withdrew money from India earlier in the year and became net investor only in November. Markets stayed up because of support from Indian investors, especially through systematic investment plans (SIPs), impressing both Indian and foreign experts. That bodes well for 2024.
This article was originally published by The Economic Times on December 6, 2023.