A short memo on India's opportunities and threats

The cyclical opportunity for India is that our Covid recovery is late & has a significant space to accelerate. Nearly after a decade of struggle, our banks and industry balance sheets are clean & well-capitalized. There is a decent momentum in high frequency indicators such as GST (37% YOY in Q1), Credit growth (13% YOY), PMIs (58+) along with auto volumes and mobility.
 
But simultaneously, there exist cyclical threats, mostly a result of high crude and coal prices, pushing our current account deficit to 3.5% of GDP and creating a setup of tight financial conditions forcing higher rates and weaker currency. A sustained dollar outflows has meant that there is a wedge between deposit and credit growth that may push for tighter credit conditions, despite good credit worthiness of firms & capitalization of banks. While urban employment & wage growth are decent, the rural ones are not (non-Agri wage ~5%yoy). Finally, external financial conditions have forced RBI to tighten rates more swiftly. Our fiscal policies have little room to support given how hostile bond market is to any incremental slippage.
 
So, if exteriors, most specifically, elevated crude prices and tighter US rates don't become too harsh on us, we will do reasonably well for next 12m. But be mindful of cyclical risks which will get exaggerated if both these variables turn more inimical.
 
There are structural tailwinds for India as unlike most other major economies, it continues to enjoy cheap & growing labor pool. Our digital and physical infra are much improved now. Since many western firms are being forced to review their China-only manufacturing policies due to rising hostility and increasingly expensive labor pool, India may benefit. The case of India as world's office remains as strong as ever.
 
The structural threats for India are many. Fast ageing demographics and inflated debt mean weakening global growth impulse. Disintegrating world order means trade will slow and countries (and external investors) will look at each other with much more suspicion. Reshoring & retiring boomers in west mean - neutral rates and average inflation may stay relatively higher levels- forcing EM bonds and equities flows to slow if not reverse. If China chooses to remain antagonistic towards us, we may face threats from both sides of Kashmir. Our labor participation rate continues to remain puzzlingly depressed and isn’t recovering since a secular fall began in 2006. That tells us that all isn’t well with our economic & industrial policies. Finally, Climate change imposes a substantial offset on us by making energy cost prohibitively high and food supplies (soil erosion, fertilizer cost, ground water crisis) restrictive.
 
Net, net - India can only realize its grandeur if world figures a cheap climate tech, energy scarcity doesn’t become a permanent crisis, US-China rivalry doesn't become too ugly and our relations with northern neighbor doesn’t deteriorate too much.
 
PS

Bullish and bearish narratives on Indian markets will swing basis what seems to dominate, the threats or opportunities, both structural & cyclical ones. As in the previous decade and unlike noughties, this will oscillate on both sides. The only secular narrative is that there is none.