India's growth offers cold comfort to investors as Fed looms

[NEW DELHI] For investors considering where to put their money this week ahead of a possible increase in US interest rates, the case for India may not be as strong as it first appears.

Finance Ministry officials point to faster economic growth than most other emerging markets, exports that are relatively immune from China's slowdown and the benefits of falling commodity prices. Foreign reserves have swelled, inflation has eased and the current-account deficit has narrowed.

That's all in stark contrast to 2013, when the suggestion that the Federal Reserve would tighten policy triggered outflows that sent the currency to a record low.

Even so, risks abound. Here are the biggest in India:

Exports have fallen for nine straight months through August, boosting the trade shortfall and risking a renewed widening of one of Asia's largest current-account deficits.

Local bank lending is near a 21-year low and net overseas loans fell in April-June for the first time since 2010.

"You start with a handicap in a global system that is not going through easy growth prospects," Ashoka Mody, a former IMF economist who's now a visiting professor at Princeton University, said by phone. "I do not see any easy, short-term basis for India to start growing at the kind of rates that officials talk about."

Prime Minister Narendra Modi's plans to raise military pensions and the expected increase in state-employee salaries threaten his goal of reducing Asia's widest budget deficit to a nine-year low by March.

Mr Modi faces a series of state elections that make it hard to take politically unpopular decisions such as cutting subsidies to benefit from lower oil prices.

Mr Modi last month backtracked on a move to make it easier to acquire land, and has struggled to pass a goods-and-services tax through parliament that would create a single market among India's 1.2 billion people.

"To the extent there is any reform disappointment, there could be downside risks to growth next year," Sajjid Chinoy, a Mumbai-based economist at JPMorgan Chase & Co., wrote in a report last month.

India's 30 largest companies saw a record drop in net profit in January-March.

The benchmark stock index - among the world's top five performers last year - is now among the biggest losers.

India's rupee, which offered Asia's highest carry returns until China devalued its yuan on Aug 11, has since almost erased the year's gains and is among the region's worst performers.

Swaps are pricing in a cut in the key policy interest rate to 7 per cent from 7.25 percent by the end of this year, the steepest decline among 14 emerging markets tracked by HSBC Holdings.

BLOOMBERG