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Why India's Economy Isn't as Bad as Headlines Suggest

Earlier this week ratings agency Standard & Poor’s said India could be the first BRIC economy tolose its investment grade status, which was followed a day later by data showing factory output had nearly stalled in April.

While India’s recent dismal economic performance has investors looking for exits, several experts tell CNBC things are not as bad as the headlines suggest.

Bombay Traffic
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Bombay Traffic

"India has been and will continue to be a very strong nation," Sean Egan, Founding Partner of Michigan, U.S.-based ratings agency Egan-Jones, told CNBC Asia’s “Squawk Box”. "You will find that in 5 years, it has an even more important place in the global market. I think they will do fairly well over time."

Slowing growth, accelerating inflation and rising fiscal and trade deficits along with a pause in economic reforms have pushed India’s currency to record lows and hurt investor sentiment. But some analysts argue that there is a silver lining in the form of India's strong consumer base and a declining debt-to-GDP (gross domestic product) ratio.

“I think most investors look at the hard numbers to see whether there’s a big increase in debt-to-GDP, and I think compared to a lot of other countries, India is probably better off,” Egan said.

India’s debt-to-GDP ratio stood at 74.9 percent in the fiscal year ended March 31, 2012 according to Standard and Poor's and it forecasts that this will fall to 74.7 percent in the current fiscal year. This compares to the 81.5 percent for Germany and 102.9 percent for the U.S., according to the figures from the International Monetary Fund.

The strength of India's consumer base, made up of a 250 million-strong middle class, will also provide support to the country’s economy, say India watchers. The Managing Director of fund management company Bowen Asia, which invests in Indian consumer stocks, says despite “horrendous” macroeconomic numbers recently, domestic consumption is still strong.

“I think the reality on the ground is very different in terms of what you read,” Aadil Ebrahim, said. The 15 large and mid-cap consumer-focused companies that he tracks grew their sales by as much as 28 percent in the March quarter, he told CNBC.

“On the ground, the consumer is doing absolutely fine right now,” Ebrahim said. “You have seen wage growth of 10-12 percent. There is still a lot of under-penetration out there in a lot of core categories, in terms of housing, in terms of consumer goods. So I think we’re overall quite bullish on the micro level but the macro level is keeping investors away.”

India’s economy expanded at 5.3 percent in the first quarter of the year, its slowest pace in nine years. That has increased the call for the government to initiate pro-growth policies to boost investment so that India can return 8 percent plus growth.

“A major constraint that is holding India back is lack of investment and capacity constraints,” said Hans Timmer, Director of the World Bank’s Economic Prospects Group. “If reforms are put in place, India has the potential to grow 8 percent, almost similar to what we have seen in China.”

By CNBC's Jean Chua.

Contact Asia Economy

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