Investing in India. Five positive signs

70 years after independence from Britain, India is now the world's seventh largest economy, valued at £2 trillion.

Facebooktwittergoogle_pluslinkedinmailFacebooktwittergoogle_pluslinkedinmail   by Josh Seager, 22nd August 2017

Last November, on the very same day that Donald Trump was handed the keys to the White House, most of us didn’t notice what was happening on the other side of the world.

Indian Prime Minister, Narendra Modi announced that at the stroke of midnight, 85% of all the rupees (500 & 1,000 notes) in circulation would cease to be legal tender. Just like that, billions of currency notes suddenly became unusable. They would retain their value until the end of the year, but only if they were deposited in bank accounts.

This program, dubbed ‘demonetisation’, was designed to target those with undeclared cash savings and reduce corruption. Analysis suggests that as much as 2% of GDP was held in notes reflecting black economic activities. After initial disruption in the form of huge cues at cash machines and weather dependent electronic transactions, it’s estimated that almost 99% of old notes were deposited through the banking system.

Positive signs

This is just one example of the ambitious reform program that Prime Minister Modi has pursued while in power. While it may not have had the desired effect of removing ‘black money’ from the system, the Indian Government’s positive intent is just one of a number of reasons why we believe the economy is on a strong trajectory in the medium to long term.

1. Strong demographics

India is currently the second largest country in the world with over 1.3bn people. A recent UN study estimates that by 2022, India will overtake China as the largest country in the world. Perhaps more important, the ratio of working age Indians relative to non-working age Indians is set to continue to rise with the country is set to become the world’s youngest country by 2020 with an average age of 29.

2. Room for growth

India is the 7th largest country in the world based on GDP (gross domestic product) according to the World Bank and the fastest growing amongst the G20. Since 2014, its GDP has increased around 7.5% yearly. However, in terms of GDP per capita, it ranks only 123rd. This shows India has significant room for development, creating further growth and opportunities.

3. Low private sector debt

India’s private sector debt to GDP is low at around 60%. This gives the private sector room to invest which will boost productivity and profits. Indian households are increasingly saving money in stock-based investments like mutual funds.

4. Domestic growth

Since 2011, domestic consumption has accounted for 66% of Indian GDP. This is in sharp contrast to China in the 2000s which averaged around 40% of GDP from domestic consumption. This is a valuable trait in the current climate given China’s relative slowdown and Trump’s protectionist trade agenda.

5. Pro-reform government

Modi’s bold reforms include; the Goods & Services Tax (GST), which aims to unify the country under a single tax system; demonetisation; and collecting bio-metric data from a billion people. These measures will help to curb corruption, while boosting consumption and productivity. This is turn should improve India’s fiscal position, creating room for the government to invest. Following key state elections in Mid-March, Prime Minister Modi will remain in power until at least 2019.

Potential headwinds

In spite of the push towards demonetisation, the economy still remains cash-dependent. This has implications for the much celebrated introduction of the GST. The very nature of cash means that there will always be an opportunity for tax evasion.

The ‘informal economy’ employs around 90% of people in India, these tend to be small businesses who carry the burden of regulatory and tax compliance more heavily than large firms. Any suffering on the part of these businesses could disrupt consumer demand. These are the short term risks to growth which accompany positive long term reform.

Strong long-term prospects

Despite these concerns, we believe that India’s economy, sheltered by its reliance on domestic spending and supported by favourable demographics, will continue to grow rapidly for some time. This should benefit firms who depend on the domestic economy, boosting corporate earnings and equity prices.

Specifically, we see good long term opportunities for banks, who traditionally benefit from strong growth and increased borrowing. We also believe that the rapidly expanding supply of spenders is likely to benefit Indian consumer facing companies.

How we invest

Emerging markets make up an increasingly significant part of global stock markets and India is one of the most important. Our favoured choices are two diverse emerging market funds; the Stewart Investors Asia Pacific Leaders fund and the Hermes Global Emerging Markets funds, both with large weightings in the Indian market.

 

Josh Seager
Macro-economist & Investment Analyst

About the author: Josh Seager

Josh is an investment analyst supporting the portfolio managers. He is responsible for macro-economic analysis which assists with asset allocation decisions. He also conducts analysis that contributes to portfolio construction and risk management across all portfolios.

Josh graduated with a BSc (Hons) in Mathematics from the University of Edinburgh in 2012 and has since completed the IMC and CFA Levels 1 and 2. After leaving university, Josh joined the Threadneedle Investments graduate scheme, working as an Investment Risk Analyst for two and a half years before joining EQ.

Outside of work, Josh is a keen sportsman, playing football and running cross country and road races between 5k and half marathons.

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