For the last five months Indians have been enjoying a rare treat: used to the endless bickering and paralysis engendered by a succession of coalition governments, a resounding victory at the polls last May for Narendra Modi’s Bharatiya Janata Party (BJP) delivered the first parliamentary majority for a single party since 1984. For the investment community there is the added bonus that Indians have elected the first business-friendly centre-right government with an outright majority since independence in 1947.
Indian bureaucrats feel the heat
With his party firmly in control, Prime Minister Narendra Modi has been able to take decisive action to address longstanding issues that have acted as an obstacle to economic growth. He has rightly identified that India’s weakness is not the absence of reform, but the absence of execution, with far too many projects caught up in India’s labyrinthine and bloated bureaucracy.
Measures to improve approval processes have seen 176 projects cleared so far, worth $104bn out of a total of $376bn that have been taken up for consideration [1]– a boon for the Indian economy.
In a further radical move, Modi gave his blessing to the introduction of an electronic surveillance system to monitor civil servants’ working hours. India’s bureaucrats have a reputation among the wider Indian population for being work shy but Indians can now simply log onto a website to get a real time snapshot on how many of India’s civil servants are actually at their desk at any one time. The system, which has been developed on the back of the introduction of biometric identity cards, is so sophisticated users can check the attendance record of individual named civil servants. Up to 100,000 central government workers will eventually participate in a scheme which we believe will ultimately benefit Indian companies by speeding up their dealings with the country’s bureaucracy.
A helping hand from the economy
Modi’s promising start has been helped by an improving Indian economy. The International Monetary Fund recently raised its 2014 GDP forecast for India to 5.6% from 5.4% and continues to forecast an acceleration in growth to 6.4% in 2015 [2]. Inflation, which the previous government struggled to tame, is finally coming down and is likely, in our view, to fall faster than analysts are forecasting, paving the way for a significant cut in interest rates. We believe the Reserve Bank of India could find itself in a position next year where it is able to cut its key interest rate by as much as 200 basis points from its current level of 8%.
The recent sharp fall in oil prices, if sustained, could also prove extremely beneficial to the Indian economy.
Gross oil imports account for 36% of India’s total import bill and research shows that every 10% fall in in the price of crude could add up to 0.25% to GDP growth whilst reducing the country’s account deficit by 0.5% and its fiscal deficit of 0.2%. [3] More importantly for the outlook for interest rates, it could help drive down inflation by between 0.8-1.0%. [4] With crude oil down nearly 25% from its mid-June peak, the implications are clear [5].
No let-up on reforms
To sustain India’s recovery, it is important, in our view that Modi pushes through some reforms, like the introduction of a Goods and Services tax, sooner rather than later. Meanwhile, we are hopeful that the changes he is making now to the country’s planning process is laying the groundwork that will make it possible for him to realise some of the large scale infrastructure projects he has promised including establishing dedicated freight and industrial corridors and creating 100 new ‘smart’ cities.
In this context, we believe we are in the unusual situation where the Indian economy is performing well across all sectors. Exporters, whether of IT services or manufactured products, continue to benefit from the sharp fall in the rupee last year. Domestic spending is showing signs of a turnaround, with sales of cars and two-wheelers having picked up quite considerably in the last two months. [6] Some of the big infrastructure projects that were put on hold over the election period have not re-started yet but we are confident that they will do so soon.
Sectors we favour at the moment include financials and consumer goods and to a lesser extent technology stocks.
The Indian stock market, as a whole, is likely to be buoyed in the near term by renewed interest from domestic investors, for whom the appeal of gold and property has waned as the precious metal’s price has dropped and house price growth has eased.
Whilst we remain confident about the outlook for Indian stocks, India does not sit in isolation from global market trends. India’s economy, in our view, is sufficiently different in its make-up from other emerging economies such as China, Russia or Brazil to mitigate any threat of economic contagion. However, were investors, for whatever reason, suddenly to become disaffected with global emerging markets as a whole and pull their money out of the sector, Indian stocks would be unlikely to escape unscathed.
