India’s reformist government has been busy engineering an Indian renaissance. Since the election two years ago of Narendra Modi as prime minister, key legislation has been introduced to cut through bureaucratic fetters that have long held the Indian economy back. Changes that could pave the way for India to become the next great secular emerging markets story.
While tumbling commodity prices have plunged Brazil and Russia into long recessions and as China struggles with slowing growth and a mountain of corporate debt, India, for the first time since 1999, last year posted stronger growth than China. Yet India’s growth is being achieved without resorting to either fiscal or monetary stimulus.
Unlike many other major economies, India has been paring back its deficit over recent years. Monetary policy has been relatively tight and a high savings rate, at 31 per cent of GDP, should enable it to grow organically and avoid borrowing heavily from foreign investors.
Mr Modi’s deep-rooted structural reform programme includes tax reform, a new bankruptcy code, inflation targeting, liberalisation of foreign direct investment regulations and generally more sustained efforts to reduce the bureaucratic tangles that complicate life for businesses and citizens.
His chief reform is the imposition of a single nationwide goods and services tax, the GST. It replaces a chaotic and fragmented system of duties, surcharges and taxes that have made trade across India’s state borders almost as complex as the country’s trade with foreign countries. The tax reform will go a long way in transforming India into a true single market from what had often seemed like a federation of competing fiefdoms.
Elsewhere, too many stressed assets are sheltered in zombie companies, which banks, hobbled by archaic bankruptcy laws, are unable to resolve. The new insolvency and bankruptcy code should make it easier for banks to recover bad debts and thus be more willing and able to finance projects and businesses.
Investors should also be comforted by the fact the Reserve Bank of India’s independence looks secure and Urjit Patel, the RBI’s new governor, is considered an inflation hawk.
Relatively low debt levels leave India with greater ability to increase infrastructure spending from historically low levels, which would help its drive towards further urbanisation. The country’s sound finances are further bolstered by a strong domestic savings ratio.
Notwithstanding the successful pace of reforms, India still presents a conundrum for equity investors. On the face of it, India’s stocks can look expensive, currently trading at about a 10 per cent premium to developed markets – even if this is lower than its historic valuation premium of some 20 per cent.
Of course, valuations should be considered in the context of performance – Indian shares have historically generated higher earnings growth and higher returns than their global counterparts and the country’s corporations should continue to benefit from an improving investment climate. One rich hunting ground for investment opportunities is transport – India is forecast to be one of the world’s fastest growing aviation markets over the next 15 to 20 years. Its airline industry will benefit from a burgeoning middle class able and willing to spend extra to avoid the discomforts of long-distance rail travel.
Urbanisation will also be a driver for consumer goods companies. Rising population density makes hygiene more of a pressing issue while, at the same time, rising levels of per-capita income will give Indians more disposable income to spend on themselves.
Fieldwork is crucial and helps to generate investment possibilities where there might not be any at first sight. By tracing customer networks back to listed companies it is possible to gain insights into which companies are benefiting from ventures with entrepreneurs. As the government pushes its “Make in India” initiative, this sort of bottom-up analysis will only grow more important.
Undoubtedly there are many hurdles to be overcome before India starts to fire on all cylinders. But the country finally has a government with the political willpower to implement real reforms and this will throw up evermore attractive investment opportunities for investors with the skills to sift out the gems.
Prashant Kothari is a senior investment manager at Pictet Asset Management.
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