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Simon Finch Investment Manager

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Making India great again

07 Apr 2017
A leader who had his travel ban cancelled, received initially patch support within his own party, seeks to promote, drive growth and create jobs domestically, has promised to chase out the political elite and has engaged with dissatisfied voters through social media.

One could assume we were identifying President Donald J Trump. We are not. All of the above can be attributed in varying measures to India’s Prime Minister, Narendra Modi, and the driving force behind his own “Make India Great Again” campaign.

The bull case for India and its financial markets is well established. The world’s fastest growing major economy, its 1.3 billion citizens are among the most entrepreneurial on the planet, facilitated by 65% of the demographic being under 35 years old. The Prime Minister is intent on driving out corruption and pushing through reforms across all sectors, seeking to improve the lives of Indians. All this is based on the structurally sound foundation of India’s long history of a stable bureaucracy supported by its legal framework. Additionally companies with strong corporate governance principles and respect for the minority shareholder are rewarded over time.

In spite of these indisputable positive factors, Indian equities have underperformed the S&P over the past two years. Foreign investors rushed to invest in India following Prime Minister Modi’s election win. More savvy investors were allocating capital to India prior to that, recognising the desperate need for new leadership to replace the listless Congress-led coalition government. The voter base was agitating for change; change which commenced with Modi’s appointment.

Patience within the investor community appears to be increasingly sparse, particularly in regards emerging economies, perhaps driven by a regulatory framework focused on quarterly results. Perhaps it is a societal matter, as instant gratification manifests itself in impatience and short term market views. India’s foreign investors have recently been sucked in by the media that Modi has not been able to press ahead with his reformist agenda.

However, it must be noted that Modi is by his own admission at the start of a ten to fifteen year project to reset India on its path to growth. The importance for him and his party is to have the local economy more fully engaged nearer the re-election date in 2019, rather than ramp up the economy in those early years, hence patience remains pivotal  at this point.

Now firmly in the countdown to re-election positioning for 2019, Modi continued to shake up pre-conceived ideals within India business circles with his demonetisation move on 8 November 2016; the “demonetisation experiment” led to the immediate cancellation of 86% of the country’s currency. Representing close to £180 billion, impact in the weeks following was devastating, especially given more than 90% of India’s monetary transactions occur in cash. Daily life was impacted; bank queues were many hours long, farmers could not purchase seeds for the sowing season and wholesale merchants could not restock for the few end users that could access useable cash.

The rhetoric at the outset was another stepping stone in the government’s clampdown on corruption, with a particular focus on tax evasion. Those objecting to the methods used to suffocate corrupt transactions were those that had not heeded the warning signs of the government. Modi has staked a significant piece of his political capital on the line with this move. However following our own research trips within India in the weeks following the announcement, it has been well supported, even by those suffering directly.

Alongside targeting corruption, Modi used the demonetisation process to extoll the virtues of moving to a more digital monetary framework. PAYTM, an unlisted e-wallet provider saw app downloads soar, adding 20 million new users to a 150 million strong user base in just a few weeks and were processing more transactions per day than India’s combined credit and debit card users.  

Digital transformation is another weapon in Modi’s armoury of fighting corruption and improving upon the less than 3% of Indians who currently pay income tax. Since 2012, more than one billion Indians have signed up for identity controls under the Aadhaar scheme. The scheme has allowed for rapid provision of bank accounts, more than  270 million bank accounts within the last two years expansion of financial inclusion and more cost efficient direct benefit transfers of subsidy payments. India is teeing itself up to collectively embrace technology, financial services and e-commerce.

In early 2017 the government vowed to provide greater access to affordable housing schemes and to ensure everyone has access to sheltered accommodation by 2022. The Union Budget was brought forward a month, and while there were some concessions ahead of five upcoming state elections, it was less populist than some had predicted. This demonstrates the government’s continued fiscal prudence, while offering some respite to those at the bottom of the pyramid who were more heavily impacted by demonetisation. The shift to digitisation and extending bank accounts across the demographic enables smarter targeted distribution of subsidies supported by a reduction in leakages, which have plagued the system historically.

Since the Budget, the messaging has shifted to “remonetisation” following moves from the Reserve Bank of India (RBI) to ease withdrawal limits over the coming months. Thus we can expect the cash that was deposited in the weeks after demonetisation, to partially reverse as cultural habits such as exchanging in cash are difficult to breakdown in just a few months. Most industries will see a pickup in demand as liquidity rushes back into the market. Cash left idle previously will also become active in the marketplace, thus we expect discretionary consumption to see  a bounce in the upcoming months.  

A further factor for additional spending could be due to the implementation of the long-awaited Goods & Services Tax (GST), which is due to launch in July 2017. The introduction of a panIndian tax will drive efficiencies for business, curb inflation pressures, especially with regards food and will increase inter-state trade. We can expect pockets of the economy to be impacted negatively as rates are raised for some goods and services, and we await the finer details on the announcement of categorisation.

What does all this mean for growth expectations? The RBI’s February report stated that they see a strong recovery in growth in the coming year, to March 2018, which likely led to their decision to hold interest rates. Discretionary demand, restricted in the weeks following demonetisation will return, while sectors more reliant on cash transactions such as retail trade, hospitality and transport should show a sharp rebound. Finally the RBI are noting the improvement in bank funding conditions as affordability of loans and consumer financing has stepped up in recent weeks.

Prime Minister Modi’s strong showing in the state elections conclusively sets India up for a period of political stability likely to last for at least seven years, unique in emerging markets and indeed globally.  Indian assets were not pricing this outcome and we expect the positive boost to sentiment to aid both the stock market and the Indian rupee. The Ashburton India Equity Opportunities Fund remains closely aligned to the government’s investment path; infrastructure, banking sector reforms and decisions to support an uplift in consumer spending. Our overweight positions in industrials, financials and consumer discretionary stocks, have consistently delivered outperformance for the Fund. India remains the favoured emerging market investment destination of Ashburton Investments, for the medium to long term.