Asia Economy

Forget China? India reports higher GDP

Mumbai, India
Danish Siddiqui | Reuters

Move over, China. On Monday, India, the world's third largest economy, announced it expanded by 7.3 percent in the last quarter, making it one of the world's fastest growing economies. This gives investors another reason to stay bullish on India as China's economy continues to suffer, with its gross domestic product slipping to 6.8 percent in the same period.

India's 7.3 percent GDP is quite a jump from the same period last year, when growth was 6.6 percent.

"With China slowing, India is certainly carrying the day in terms of best growth rates," said Peter Boockvar, Lindsey Group's chief market analyst.

Some market watchers weren't surprised, however. "India's growth outpacing China's growth has been widely expected as China slows," said John Stoltzfus, Oppenheimer & Co.'s chief market strategist.

Several factors make India an attractive emerging market. In addition to strong growth, India is a net oil importer, which means the decline in oil prices has helped bring inflation down.

Demographics also help India's case — with half of its roughly 1.2 billion population under age 25. By 2020, India is expected by some economists to become the youngest country in the world — a boon for consumer and tech companies and one of the reasons Wal-Mart and Apple, among others, have been trying to expand aggressively into the country. At the same time, China is dealing with a rapidly aging population and a slowing fertility rate.

Politics have mostly been a positive for India, although the recent delay in implementation of Prime Minister Narendra Modi's reforms have dented investors' confidence and sent Indian equities lower.

The Bombay Sensex rallied ahead of Modi's election in May 2014, but has traded down since then. Currently the Indian stock market index is down 7 percent this year. On Monday, the Sensex traded down by 1.3 percent. The GDP data was released after the markets closed.

Some are approaching the GDP news with caution.

"[I'm] bullish [on India] as a relatively defensive emerging market play. But must concede there has been some disappointment on the reform front," said Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management.

Reforms aren't the only concern. Questions have arisen over the validity of its growth figures ever since statisticians a year ago changed the way they calculate India's GDP.

"Some observers feel the figure is inflated, and that sectors like IT are booming while core fundamentals like agriculture and industrial manufacturing aren't performing as well: In other words, India's economy may look better on paper than it feels to a lot of Indian citizens," said Jonah Blank, senior political scientist at the RAND Corp.

The team at Capital Economics on Monday wrote to clients that there are two ways to look at India's growth number:

"One is to celebrate the health of India's economy. The other is to question the accuracy of the data. We tend to the latter response. After all, more direct measures are nothing like as rosy. Sales of durable goods are subdued. Credit growth is lacklustre. We are not the only skeptics out there. Even the Reserve Bank has suggested that it is preferring to focus on alternatives to the GDP data."

Investors will look to India's budget in late February where Finance Minister Arun Jaitley is expected to provide an update to India's path to reform — specifically on the infrastructure front. Economists say Jaitley will likely use the annual budget address as an opportunity to defend India's GDP formula. In the meantime, just as China is dealing with questions around the accuracy of its data, India will likely have to do the same.