Emerging Markets

India has defied the emerging market slump. Can it last?

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You know a country has it good when the worst news to emerge in the last year is a warning that economic growth could slow — to 7 percent.

Such is the situation in India, which is enjoying a remarkable combination of good luck and fundamental strengths that include a popular prime minister in the form of recently elected Narendra Modi, a growing consumer market and its emerging market cohorts in Brazil, Russia and China (BRICs) faltering in a way that has unsettled investors around the globe.

India's successes have led to the country's becoming what political scientist and geopolitical expert Ian Bremmer recently referred to as "the last BRIC standing."

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Around the world, Brazil is mired in political scandal and battling both recession and surging inflation, China's economic struggles have roiled markets worldwide, and Russia's economy is struggling to shake off the effects of economic sanctions and plunging crude prices, which this week touched 12-year lows.

Not so for India, the world's largest democracy, which is home to more than a billion people and is currently a darling of investors.

"In contrast to other major developing countries, growth in India remained robust [last year], buoyed by strong investor sentiment and the positive effect on real incomes of the recent fall in oil prices," the World Bank said last week. Highlighting the country's relative outperformance to other BRIC economies, the organization cut its global growth estimates but forecast a 7.8 percent growth rate in India for 2016.

Growth holds up--for now

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With its $2 trillion economy, India looks well situated to weather higher U.S. interest rates in 2016, a factor many market watchers and analysts point to as a fulcrum for emerging market fortunes. And unlike China or South Africa (another formerly high-flying developing economy lumped in with the BRICs), India's growth does not seem to be too much of a concern.

"Indian economic growth is holding up," said William Adams, senior international economist with PNC Financial Group, whose growth forecasts for India are slightly less rosy that the World Bank's.

"The Reserve Bank of India's inflation targeting regime is increasing the credibility of Indian economic policy," he said, pointing out that inflation last year fell to its lowest level in more than a decade. With the so-called "commodities super-cycle" giving way to a bear market, low global commodity prices should keep inflation low and growth strong in India.

"As a net commodity importer and consumer, low prices of coal, oil, iron ore and other basic materials should contain India's inflation, shrink its trade deficit, boost consumer spending power, support corporate profit margins, and raise headline real GDP growth," Adams added. It should also help keep India's currency, the rupee, stable against other currencies, Adams said.

Still, there are some clouds on the horizon. The MNI India Business Sentiment, a monthly poll of Indian business executives at companies listed on the BSE (formerly known as the Bombay Stock Exchange), showed last month that Indian business sentiment eased for the second consecutive month in December amidst a "weak demand backdrop." Meanwhile, China is now India's largest trading partner, and a prolonged slump in the world's second-largest economy would have serious implications for a bilateral trade relationship worth at least $70 billion.

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Yet India's balance sheet has improved since the "taper tantrum" of 2014 — fears of a less activist Federal Reserve — sent shockwaves across developing economies. According to Rachel Ziemba, managing director of emerging market research at Roubini Global Economics, India is more resilient to external shocks like changes in U.S. monetary policy.

The country "has sharply reduced debt service costs and short-term external financing needs and continued to attract capital," Ziemba said. "We tend to think India is moving in the right direction slowly. There are some modest fiscal and investment reforms but the risk is just that — things are moving too slowly."

Ziemba added that the government led by Modi has struggled to use its political capital, which may depreciate as Modi's honeymoon gradually wears off.

The country's lack of reliance on commodities has also left it in a better spot. India's economy is heavily reliant on fossil fuel imports, and ranks as the fourth-largest energy consumer in the world, according to the Energy Information Administration.

The sharp drop in crude and natural gas prices has helped curb India's estimated $120 billion annual energy bill, keep inflation in check and assisted the government in targeting its spending, Roubini's Ziemba said.