Professional Paraplanner - Does the 21st century belong to India?
Looking back to May last year, it’s hard to underestimate the seismic impact Narendra Modi’s general election victory had on India. Capturing the mood of the nation, Modi ran on a platform of reform and change. He promised to end the dynastic politics of old and to restore India’s standing on the world stage. The electorate soon delivered its verdict: Modi’s Bharatiya Janata Party-led (BJP) collation won by a landslide – securing the first absolute majority in the lower house in 30 years.
Now that time has dampened the euphoria, the question is: can Prime Minister Modi deliver on his bold election pledge and make the 21st century “India’s century”? And what does all this mean for investors?
A sizeable task
There’s no doubt that Modi faced numerous challenges. India’s once-vibrant economy was stagnating, with fiscal-year 2013 GDP the worst in over a decade. The country’s infrastructure was crumbling and in need of huge investment. Parliament, meanwhile, was gridlocked and key legislation languished in limbo. Foreign investment had dried up. The list goes on.
Since coming to power, however, Modi has pushed his reform agenda with gusto – and already we are starting to see the fruits of his labour.
For one thing, the economy is showing signs of life, with growth rebounding last year. Investor sentiment towards India – both at home and abroad – has also improved. Indeed, the Sensex Index returned over 35% in 2014 (sterling, total returns) and hit an all-time high on 30 January.
Of course, Modi has also had fortune on his side. The dramatic slump in the oil price has been a particular boon to India. The country, after all, imports 80% of its energy needs. Inflation, as a result, has fallen. This allowed the Reserve Bank of India (RBI) to cut interest rates twice to 7.5%. It has also meant Modi’s government was able to reduce costly fuel subsidies without drawing the ire of the electorate.
That’s not to detract from Modi’s achievements. In the opening months of his tenure he introduced bills (they have not been passed yet) to allow higher levels of foreign-direct investment (FDI) into a wide range of industries, such as insurance, defence and retail. He also launched the ambitious Jan Dhan financial inclusion mission. This aims to provide a bank account, a debit card and insurance to 500 million of India’s poorest.
One of Modi’s boldest – and eye-catching – initiatives has been his clarion call to “Make in India”. The goal of this programme is to turn the country into a major international manufacturing hub. This is a timely aspiration given China is attempting to rebalance its economy away from manufacturing-led growth. (they haven’t yet lost any market share).
A well-received budget
Perhaps the government’s strongest statement of intent was its first full-year budget, delivered on 28 February.
Proposals included a pledge to dramatically increase public spending on infrastructure by 25%, including building five new much-needed power stations. The government will also introduce major tax reform, with the introduction of a long-overdue goods-and-services tax in April next year. The measure, according to the RBI, could add as much a 1.5 percentage points to India’s economic growth.
Other plans include further fiscal devolution to the states, the creation of a bankruptcy code, and various steps to make doing business easier.
Although doubters remain
Of course, it hasn’t all been smooth sailing. The BJP recently lost the Delhi election, its first major setback. Critics also bemoan the government’s lack of ‘big ticket’ initiatives. The current account deficit, while falling, remains high. Perhaps most worryingly, though, is that the complex issue of land acquisition has yet to be unresolved. This therefore represents a major obstacle to growth.
Despite these criticisms, however, Modi continues to hold the confidence of large swathes of the investment world. The economy appears to be on a higher and sustainable growth path. So much so, that the IMF predicts India will overtake China as the world’s fastest-growing large economy by 2017.
What does all this mean for investors?
One of the most exciting times to be an investor is when economies, markets or companies are going through periods of change. The current situation in India is no different. While our analysis focuses on bottom-up stock picking, the rapidly changing landscape in emerging economies undoubtedly merits attention.
Overall, Indian equities remain reasonably priced, especially given the improved economic outlook. Specifically, the promise of increased spending in the infrastructure and power segments will be an important factor over the coming years. As such, stocks to highlight include BHEL (power plant equipment manufacturer), CESC (power generation) and Coal India.
A bright outlook
So, will the 21st Century be India’s century? As yet, it’s too early to tell. Nonetheless, Modi has shown he is an adroit politician and his reform agenda has impressed many. The key now will be delivering on his promises.
Alex Wolf, Emerging Markets Economist, Standard Life Investments
First published in Professional Paraplanner – April 2015