A Look at the Week’s Global Economic Events

We take a look at global economic updates or interesting key developments that investors can take note of. This week, I’m looking at the future of India’s economy following recent polls in the country that resulted in Narendra Modi being elected as the country’s newest Prime Minister.

How might India’s economy change?

According to newswire BBC News, India’s business community is elated with Modi’s win (declared on 16 May) as he is being held with very high regard amongst the country’s business leaders as someone who can right the country’s economy.

India currently is facing headwinds of all sorts: Flat economic growth; lesser investments being made within the country; and falling consumer demand.

In his time as chief minister of Gujarat for more than 12 years, the Indian state had experienced annual economic growth of close to 10%. Such figures lend strength to the high expectations that India’s business community has for Modi.

But while Modi certainly has his fair share of support from the corporate sector in India,  daunting tasks lie ahead of him. According to the same BBC News report, more than 50% of India’s population is under the age of 25 and these young people would require jobs to be created each year for them. The resulting figure is not trifling – BBC News has it pegged at 10 million new jobs per year. And in order for India to be able to create that many jobs, its economy has to grow by some 7% to 8% annually.

For a sense of the tall hurdle Modi has to cross, here’s one key figure: In the seven years between 2004-05 and 2011-2012, only 7.6 million jobs were created annually. That’s just three-quarters of the target India has to hit to absorb that massive proportion of young people entering the work force.

The shortfall is due mainly to two reasons: 1) Inflexible labour laws in India; and 2) a shift in the country’s economic structure to emphasize less labour-intensive sectors, such as Information Technology. Fortunately, as BBC News pointed out, more jobs could likely be created if the government increases its support for both the manufacturing sector and small/medium enterprises.

But, that’s not all that Modi needs to focus on. In order to grow India’s economy further, the country’s infrastructure needs to be improved. With India’s lumbering bureaucracy hindering development, that’s something the new Prime Minister needs to figure out a solution to as well. If India’s business and social infrastructure is strengthened, there can be many potential benefits: Future economic slowdowns can be cushioned; inflation could be brought under control (India’s food inflation, for instance, hit a high of around 20% last November); and there could be a favourable atmosphere for foreign investments in the country.

All said, India’s stock market, represented by the iShares MSCI India Index ETF (SGX: I98) (an exchange traded fund that tracks the broad Indian stock market barometer, the MSCI India Index), has responded very positively to this new development in Indian politics; the ETF has gained 35% in the last 30 days alone. In addition, the Indian currency has also strengthened considerably.

Companies or listed-entities with operations predominantly in India, such as Ascendas India Trust (SGX: CY6U), may stand to benefit if India’s economic environment does improve as a result of Modi working his magic on the overall Indian economy as he had done to the state of Gujarat.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo owns shares in Oxley Holdings mentioned.