The impact of the “lower for longer” oil price windfall is not just a positive tailwind for developed economies. It is also a significant support for oil-importing emerging market countries, predominantly in Asia.
Lower inflation trends across the region have led to surprise central bank easing actions across a number of economies, instilling greater macro-economic stability relative to other emerging market regions. Macro indicators for EM Asia (in aggregate) show real GDP growth of around 6% year-on-year in 2014, a current account surplus of nearly 3% and inflation around 3% (falling significantly from a near 5% level in 2013/2014).
Of course, country selection is key and some economies hold better prospects than others within the region from a macro perspective. In many Asian countries, including India and China, we are seeing the confluence of fiscal stimulus, structural reforms, easier credit conditions and rising real incomes that should support stronger domestic demand in 2015.
India is the standout economy positioned to reap the most reward from cheaper energy prices. Disinflationary forces should leave room for further central bank easing in support of growth, as headline inflation rolls over from a peak of 11% in 2013 to 5% at the end of 2014.
The Indian economy is exhibiting greater macro stability (2014 real GDP was 6.6%) and should continue to attract strong capital flows into the country. It is noteworthy that the Indian rupee has withstood US dollar appreciation more ably than other emerging currencies. Alongside lower energy costs that are reducing import costs, continuing international investment is helping to address the current account deficit.
But more than the cyclical driver of a lower oil price, investing in India remains attractive because of the long-term structural drivers of growth; the most significant being prospects for reform. This includes deregulating the labour market, a national goods and services tax (to remove trade barriers between certain states) and lifting caps on foreign direct investment flows into sectors of the economy (for example, supermarkets).