After an incredibly busy period for reform and headlines since the demonetisation experiment just over a year ago in India, we were expecting a period of quiet where focus would shift firmly onto growth as we begin the run-up to the national election in 2019.
However, since our note in late October on public sector bank recapitalisation, there have been three developments that warrant further comment. One came from the government and is firmly focused on growth, while the other two came from external agencies and represent good news.
First some context: Prime Minister Modi was elected more than three years ago with a revolutionary vision for India’s future that is radically different from its past. This vision always entailed at least two to three terms as PM. He has embarked on major reforms in multiple sectors as he starts this process, so it was interesting to see a survey released last week by the Pew Research Centre that showed 88% of Indians hold a favourable view of the PM, 83% are satisfied with the state of the economy and 70% are satisfied with the direction in which India is heading up from 23% in 2013 before Modi was elected PM. These are extraordinary results for an incumbent PM in a country with such diversity and a healthy democratic process.
While this is only one poll, it demonstrates that a strong majority of Indians have bought into Modi’s vision for change despite the very real pain that has been felt by segments of the population as a result of some of the reforms we have seen.
Modi's popularity is widespread
Favorable view of Narendra Modi
Source: Spring 2017 Global Attitudes Survey. Q106c.
PEW RESEARCH CENTRE
Clearly what the PM needs is some good news. This duly came from two sources outside of India and both vindicate the reform and change agenda that Modi has been following. The first was from the World Bank, which at the end of October released a report disclosing India has moved into the top 100 in the Ease of Doing Business global rankings for the first time. India is among the top ten improvers this year due to implementing reforms in eight out of ten “doing business” indicators. According to Annette Dixon, World Bank Vice President (South Asia):
“Having embarked on a strong reform agenda to improve the business environment, the significant jump this year is a result of the Indian government’s consistent efforts over the past few years. It indicates India’s endeavor to further strengthen its position as a preferred place to do business globally.”
This news is clearly important for a country that is opening up and desperately needs significant foreign investment and participation across multiple sectors.
The other piece of good news came from Moody’s, the rating agency. Last week they upgraded India to Baa2 (one notch above S&P & Fitch’s BBB-). This is the first ratings upgrade since 2004.
Moody’s highlighted various reasons for the upgrade, with recent reforms being the key reason as well as last month’s public sector bank recapitalisation. The upgrade comes on the back of higher growth potential relative to the peer group and is positive for domestic banks and corporates with foreign operations. It is also positive for those with debt (access to lower cost funds), but particularly the Indian bond market where 10-year yields have recently been rising.
The impact of both these announcements has certainly lifted investor spirits following a period of weak domestic growth due to the impact of demonetisation and GST (Goods and Service Tax). GST replaced the myriad of indirect taxes on 1 July, and is the most far-reaching tax reform ever undertaken by India. However as we have said numerous times, the tax was imperfect from the start (too complicated) but the point was we believed that any GST was better than none and the government would slowly amend and improve the tax as time went on.
Earlier this month the government announced a significant GST rate rationalisation and process relaxation exercise that show reformist and growth intent.
The government moved to cut the top rate of tax that was charged on over two thirds of items from 28% down to 18%. Several mass consumption items such as consumer staples, cosmetics and household durables like furniture and electronics are included in the tax cut. In addition some process/compliance changes have been made to make it easier for businesses to comply. Essentially the cut in rates and ease of compliance will give a boost to the formal economy. This is a pragmatic realisation that it is easier to help the formal sector to compete than to catch tax evaders. It will also give a growth boost to consumption and tax revenues in the run-up to the election in 2019.
We continue to believe that India offers investors one of the best risk/reward profiles in the emerging market complex through its reform minded government aligned to its strong structural drivers. While India has posted decent returns so far in 2017 and looks over-valued, investor positioning is substantially less optimistic than a couple of years ago. When we consider that the economic data points and earnings numbers in the upcoming three quarters will benefit from a low base due to the impact of demonetisation and GST, India could easily surprise again in 2018.