India has grabbed the attention of investors over the past year, with the election of pro-business reformist Narendra Modi boosting sentiment towards the emerging market. But what are the economic and political factors that are changing their view of the country?
The MSCI India index, which tracks companies listed on India’s National Stock Exchange and the Bombay Stock Exchange, jumped 31.58 per cent in sterling terms over the course of 2014. This came after Modi was voted in as prime minister on the back of pledges to speed up government decision-making and remove the bureaucratic hurdles which have been blamed for slowing India’s development.
While past performance is no guide to the future, as the graph below shows, this return was significantly stronger than the rise in global stocks as measured by the MSCI AC World index. It was also the strongest performer out of the so-called ‘BRIC nations’, an acronym used to refer to Brazil, Russia, India and China, which are generally considered as some of the leading emerging markets.
Source: FE Analytics. Cumulative return with income reinvested, bid-to-bid and rebased into sterling
A cynic may argue that this is a short-term lift thanks to a favourable election for investors and will soon end. After all, the MSCI India is up just 22.90 per cent on a five-year view to 17 March 2015 – which is better than the 5.45 per cent loss made by the MSCI BRIC index but far below the 62.85 per cent rise in the MSCI AC World index.
However, over the long term India has shown itself capable of making significant gains, as demonstrated by the 496.04 per cent rise in the MSCI India index since the beginning of 2001 to 17 March. In comparison, over the same period the MSCI BRIC index is up 345.17 per cent while the MSCI AC World has advanced 108.34 per cent.
Performance of indices since Jan 2001
Source: FE Analytics. Cumulative returns with income reinvested, bid-to-bid and rebased into sterling
Emerging markets tend to be riskier than their developed world counterparts. When it comes to India, its headline disadvantages include significant overpopulation, inadequate infrastructure, environmental degradation, poorly-targeted subsidies, widespread poverty and extensive corruption.
But focusing solely on these factors would give a misleading picture of the Indian economy. Sources such as the latest edition of the CIA World Factbook offer insight into the ‘raw materials’ that the India economy has to work with and how different they are to the more familiar UK economy.
When it comes to demographics, India’s population amounted to more than 1.2 billion people in 2014, making it the second most populous nation in the word after China, and a population growth rate of 1.25 per cent a year. The country’s median age is just 27, with 40.6 per cent of the population between 25 and 54 years of age.
This is markedly different from the UK, which has a population of around 64 million with growth of just 0.54 per cent. Although 41 per cent of the UK’s population is between 25 and 54, there is a much greater share at the older end of the spectrum and fewer people at the younger end. The UK’s elderly dependency ratio, for example, is 27.6 per cent; India’s is only 8.1 per cent.
With favourable working-age demographics such as these, India has been moving over recent decades from an agricultural economy to a knowledge-based service one, with close to 60 per cent of GDP coming from the services sector.
India’s service sector covers a wide range of activities such as information technology, logistics, financial, business process outsourcing, healthcare and consultancy.
Indeed, the country has become a major exporter of information technology services, business outsourcing services and software workers on the global stage.
A large service sector offers the prospect of higher economic growth rates, but the country also has a big industrial base. Some 25.8 per cent of GDP comes from industry, through sectors like textiles, chemicals, machinery, food processing and pharmaceuticals.
Only 17.4 per cent of GDP is a result of agriculture – a stark change from the 1950s, when it was responsible for more than half of economic growth.
The country’s continued move towards a modern, open-market economy has been by no means smooth. It has been implementing economic liberation measures since the early 1990s, leading growth to average a 7 per cent a year between 1997 and 2011.
Economic growth began slowing in 2011, on the back of declining investment caused by rising inflation, high interest rates and pessimism over the government’s commitment to reforms. Additional reforms were announced in 2012 but in 2013 growth dropped to a decade low after leaders failed to deal with government spending coming in higher than tax revenues and trade imbalances with the rest of the world.
The Modi government, however, has launched a fresh stimulus package that investors have shown much more confidence in, which – coming with a reduction in the current account deficit and a stabilisation of the rupee – has seen a surge of interest in the nation.
Avinash Vazirani, manager of the Jupiter India fund, said: “These are exciting times in India. The election last May of primeminister Narendra Modi and his Bharatiya Janata Party has been the catalyst for a wave of renewed optimism that this vast, young and populous country can again begin to fulfil its economic potential.”
“For the first time in 30 years, India is not being run by a coalition government. Instead, the government, which has a non-socialist, pro-market philosophy, has a mandate for reform. The importance of this must not be understated.”
Vazirani uses the state of Maharashtra as an example of how India is already steaming ahead with Modi’s reforms, where work on three massive infrastructure projects is set to start in the coming months – an eastern coastal road link between New Mumbai and Old Mumbai, a western road link between the business district of Nariman Point with Mumbai’s Northern suburbs and construction of Mumbai’s second airport.
Progress has been made here because of state government’s commitment to streamlining the procedures around approving projects, such as cutting the time needed to apply for a change of land use, which was previously a sticking point for infrastructure projects.
In March 2015, the Modi government unveiled its first full-year budget since taking power. This added depth to many of the reforms promised by the prime minister.
India’s GDP growth is currently between 8 and 8.5 per cent but the Indian government is aiming for this to move into double-digit territory in the near future. It also expects consumer inflation to remain close to 5 per cent, which should create room for the central bank to lower interest rates or use other tools to stimulate the economy if needed.
The budget showed how the Indian government plans to start tackling many of the deep-rooted problems highlighted in this article. For example, plans for corporate tax to be cut by 25 per cent over the coming four years, infrastructure spending to be lifted by £7.32bn to boost growth and a “universal social security” to give poor Indians access to subsidised insurance and pensions.
Although the reforms are intended to be incremental in nature – which carries the risk that some investors may lose patience with a lack of ‘big bang’ initiatives – the government was keen to highlight the progress already made.
Finance minister Arun Jaitley said: “We inherited a sentiment of doom and gloom. The investment community had almost written us off. We have come a long way since then.”
“We have turned around the economy, dramatically restoring macroeconomic stability and creating the conditions for sustainable poverty elimination, job creation [and] durable double-digit economic growth.”
Important information
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The views expressed above represent the views of the fund manager at the time of preparation and may be subject to change. They are not necessarily those of Jupiter as a group and readers should be aware that they should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided, but no assurances or warranties are given.
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