India’s fast pace of growth and the slowing global economy appear to be on a collision course.
One of the world’s fastest growing economies over the past 5 years, economists are now predicting slower growth for India in 2008 and 2009. Morgan Stanley has lowered its 2009 estimate from 7.5% to 6.9% and left room for further changes.
The Wall Street Journal’s Jackie Range points to concerns about a growing fiscal deficit in the article India’s Swelling Deficit Has Potential to Set Off Cascading Economic Troubles.
India’s government is fighting off inflation while continuing to subsidize fuel and fertilizer prices and deliver on promised pay raises to government workers. As a result, the much needed investment in rural infrastructure may be delayed and underfunded.
For a more in-depth look at the long term investment case for India, see Investing in India with ETFs.
The largest exchange traded product that focuses on India is the $600 million iPath MSCI India Index ETN (INP). As you can see in the chart below, INP has underperformed the S&P 500 YTD with significant deterioration since the beginning of May.
A growing inflation problem will hurt the value of India’s currency, the Rupee. If that does occur, look for a declining share price in the WisdomTree Dreyfus Indian Rupee Fund (ICN) which is designed to provide exposure to movements in the Indian Rupee relative to the U.S. Dollar.