The collapse in commodity prices has plunged Brazil and Russia into a long recession. China is grappling with slowing growth and skyrocketing corporate debt. Is this perhaps an opportunity for theIndia, hitherto in the shadow of the other BRIC countries? The Pictet Asset Management report dedicated to India opens with this question: “The time they are a changin'”, by Prashant Kothari, Senior Investment Manager of the company. We publish some excerpts below.
“Last year, for the first time since 1999, India experienced faster growth than China. It could be the start of a trend. India's national product is expected to continue expanding at a rate of more than 7%, more than double the average global growth rate projected by Pictet Asset Management for the next five years. In truth, India needs to catch up quite a lot to make it through. India's per capita GDP is 3% of that of the United States, roughly what China recorded 10 years ago. The remarkable fact, however, is that India achieves this level of growth without resorting to fiscal or monetary stimulus.
A renaissance favored by reforms
India's economic renaissance owes much to the Prime Minister's robust program of structural reforms Narendra Modi. The program includes tax reform, a new bankruptcy law, an inflation control policy, the liberalization of the rules governing foreign direct investment and, in general, greater efforts aimed at streamlining a bureaucracy that complicates life for businesses and citizens .
Overall, India's progress on the structural changes it needs has placed it near the top of the OECD ranking of emerging market reformers. This is partly due to the efforts made by the government to stimulate greater competitiveness among the 29 states that make up the country. Increased domestic competition in turn supports India's global competitiveness.
Modi's main reform is the introduction of a single national tax on goods and services, the so-called GST. GST replaces a chaotic and piecemeal system of duties, taxes and surcharges, which made interstate trade almost as complex as foreign trade. Indeed, Modi's tax reform will be very effective in transforming India into a true single market.
The new bankruptcy and insolvency code should make it easier for banks to recover bad debts, thus making them more willing and able to finance new projects and business activities. Other measures include the attribution to each citizen of his own tax code. Furthermore, the independence of the Reserve Bank of India seems guaranteed, with the appointment of Urjit Patel.
Solid fundamentals
The presence of relatively low debt levels ensures that India is more capable of increasing infrastructure spending from current levels to historical lows, thus favoring the urbanization process. The country's sound finances are also aided by the high national savings rate.
India's outlook is also good on a longer-term time horizon. Demographic dynamics are favourable: the relatively young population heralds several decades of dynamic development. Conversely, China's one-child policy has shifted its demographic profile, making the country's long-term prospects more critical.
A market suitable for stock pickers
Despite the rapid pace of reforms, India still faces equity investors with a dilemma. On the face of it, Indian equities may look expensive, with valuations around 10% above developed market stocks, but Indian companies should continue to benefit from the improving investment climate.
A rich hunting ground offering numerous investment opportunities is transport – India is projected to have one of the fastest growing aviation markets in the world in the next 15-20 years. The airline sector will be favored by a booming middle class, such as low-cost IndiGo, which can and will spend more to avoid the inconvenience of long-distance train travel.
No doubt, we will have to overcome many hurdles before India starts operating at full capacity. However, the country finally has a government with the political will to implement real reforms. This, in turn, will give Asia another huge opportunity to express its full potential. This process will also bring out more attractive and valuable investment opportunities for managers able to find them”.
