Registering an annual growth rate of 5.7% in the first quarter of its new fiscal year (Apr-Jun) has put India on the top of many global and regional publications’ ‘to follow’ list, hailing it as the surprise success story among the faltering (large) emerging markets (see snapshots from various global publications below). And by no means should one discount the importance of 5.7% figure, given that it is the country’s fastest growth in more than two years. But at this juncture, it is important to ask three fundamental questions to keep matters in perspective: (1) How surprising is India’s out-performance? (2) Is this a result of the ‘Modi-Effect’? and (3) Does this mean India is back on its path to recovery?

1. How surprising is India’s out-performance?

• India’s growth outpacing that of its peers should not surprise most MNCs; according to forecasts as early as March of this year, South Africa and Brazil were expected to grow at 2.5% and Russia at barely 0.8%, all significantly slower than India 5.4%, for the year 2014. The major adjustment then doesn’t come so much from an improvement in India but the continued deterioration of its peer markets; Brazil has now entered a technical recession and the Ukrainian conflict is expected to take Russia into one as well

2. Is the improved Q1 growth a result of the ‘Modi-Effect’?

• Narendra Modi’s victory was announced on the 16^th of May, his party officially began to take office by the start of June, and the new budget was only announced during the second week of July, much after the end of the first fiscal-quarter. Given this chain of events, the party would have been unlikely to have had any direct impact on the Q1 growth figures but their impeding victory might have played a significant role in the uptick. Improved consumer sentiment (from their expectations of faster growth ahead) and investor confidence (in their belief in a stabilized policy-making environment) likely led to the higher output from manufacturing and services

3. Does this mean India is back on its path to recovery?

• Companies should not assume that India is going to return to its 8-10% growth potential in the next 6-to-12 months because the Modi government has yet to roll-out the major overhauls the country require in-terms of (a) taxation, (b) land-acquisition, (c) labor regulation, (d) sector deregulation, and (e) infrastructure upgrades. However, improving consumption demand along with revival in capital investments (yet to be seen) can allow India to grow from 5.5% in 2014 to 7.5-8% by 2016. Leading indicators to monitor – car sales, electricity consumption, oil imports, money-supply, and capital investments (Watch out for FSG’s next Quarterly Market Review on India)