Is it time to invest in India? Five positive signs
On November 8, Donald Trump was handed the keys to the White House. Most of us didn’t notice what happened on the other side of the world that very same day.
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 would need to be swapped for new notes at banks.
This program, dubbed ‘demonetization’, 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 dependant electronic transactions, it’s estimated that arounds 95% of old notes were reclaimed and the economy is recovering.
This was an extremely brave piece of policy and is just one example of the bold reform program that Modi has pursued while in power. Progress towards reform is just one of a number of reasons, outlined below, that we believe the Indian economy is on a strong trajectory in the medium and 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. More importantly, the ratio of working age Indians relative to non-working age Indians is set to continue to rise. We anticipate India will benefit just as China did before (although China is now having to adapt to an aging population).
2. Room for growth –India is the 7th largest country in the world based on GDP according to the World Bank. However, in terms of GDP per capita, it ranks only 123rd. This shows India has significant room for development which will create 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.
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 slowdown and Trump’s protectionism.
5. Reform – The Indian Prime Minister, Modi, has passed a number of substantial reforms (Goods and sales tax, demonetisation, issuing 1bn biometric Identities). These should curb corruption while boosting consumption and productivity and improve India’s fiscal position, creating room for the government to invest.
We believe that these changes will ensure that India continues to grow and develop. This should benefit all companies who depend on the domestic economy. 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.
While we are upbeat about the mid and long term opportunities in India, we are concerned about risks in the short term. Much of the positivity surrounding the Indian economy is supported by Modi’s reforms. There are concerns that the recent demonetization may have damaged his popularity – a few people reportedly died, most of them elderly citizens waiting outside banks for days.
An important state election (Uttar Pradesh) held between February and March should prove a good bellwether of support. If Modi’s party does well in the election, it will show that voters remain supportive of his bold, and sometimes painful reform program.
Assuming that Modi’s party does well in the Uttar Pradesh election, the positive case for India will remain very much intact. 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 boost corporate earnings and equity prices.