We have had a significant investment exposure to India within our fund since 2012. While it still remains a large part of the portfolio (c.+15 per cent overweight versus the index), we have pared our exposure in the past couple of months.
Respect for the cost of capital in the long run and significant barriers to entry allow good businesses to flourish. As such, India is a market that fits our investment philosophy very well.
But in the past 12-18 months almost every Asian or emerging market-focused fund manager has started to sing from the same hymn sheet, which makes us nervous.
Performance of indices since January 2014
Source: FE Analytics
Setting aside these concerns, I drew the following conclusions from a recent research trip to India: 
•Financial inclusion for the masses is making remarkable strides thanks to government initiatives, including the opening of bank accounts and a proliferation of well-managed micro finance lenders.
•The effects of a crackdown on policy and high level corruption are, anecdotally at least, clear, with negative effects on economic activity, especially property construction and land transactions.
•Progress on infrastructure is excruciatingly slow; there is a big difference between the execution of projects within the government and private sector.
•The rural economy has slowed as the current government has moderated the rise in farm support prices while plugging leakages from subsidy schemes.
•Government finances are in much better shape courtesy of significant hikes in indirect taxes.
•For corporate India in general, volume growth is scarce but margins are robust. For growth to revive, the Government needs to aggressively spend on infrastructure.
Infrastructure – slow progress
Progress on infrastructure is notoriously slow in India.
The Dedicated Freight Corridor (DFC), a much-needed plan to build parallel railway tracks dedicated to carrying freight traffic along eastern and western corridors, is a case in point. India's rail tracks currently carry both passenger and freight traffic.
Passenger trains get priority to the detriment of freight; average speeds for freight trains are abysmal, resulting in long delays and inefficient logistics. Over the decades, railways have lost share to road transport, which is more expensive and more polluting than rail.
But once the DFC is up and running, with double-stacking of wagons and a doubling of average speeds, it should transform logistics costs and efficiencies for Indian manufacturing and trade. Inevitably, though, construction is running behind schedule, and the project's original 2017 estimated completion date has slipped.
A stretch of the DFC we visited in Uttar Pradesh had only seen 6 km of the total 25km of this section of track lain in the past five months, when this particular task should have been completed in two months. The DFC project is run by the Indian Railways and is symptomatic of the way a government organisation functions.
A personal finance revolution
The Reserve Bank of India (RBI) is one of the better-managed central banks in emerging markets. A tentative start by the RBI towards financial inclusion has been given a big push by the Modi administration.
At the micro level, this push for financial inclusion by the Government is starting to see great progress. In just one year, almost 190 million new bank accounts were opened in India; almost 40 per cent of these accounts are now linked to the Aadhaar card (a unique 12-digit biometric and demographic-linked centralised database card).
In a bid to reduce the significant losses that were routine in subsidy payments to Indian citizens, the energy-related subsidy is now credited directly to recipients' bank accounts. Additionally, these newly-opened bank account holders are given a RuPay debit card. By October 2015, two million transactions, with an average transaction size of Rs2000 (US$3), were being conducted.
The Government has also linked an accident insurance scheme to these accounts, with annual premiums of just Rs30 (US$0.50). A large unbanked, cash-oriented population is now incentivised to become part of the formal financial system.
Corruption crackdown
During the days of the bull market, land sales by farmers (for infrastructure projects) realised windfall gains.
Performance of indices between 2003 and 2008
Source: FE Analytics
At Chandigarh in Punjab, we landed at a newly-opened airport. Land for this airport was acquired at an approximate cost of Rs50mn per acre, when the prevailing land price before the announcement of the airport (7-8 years ago) was less than Rs5-10m an acre.
The current crackdown on corruption – a new government act allows for incarceration for those caught indulging in bribery or in possession of unaccounted wealth – has seen land transactions plunge and prices fall 20-40 per cent.
Another anecdote we heard from a retailer of luxury watches reminded me of the knock on effects of the anti-corruption drive in China. High-end watch sales in India have fallen sharply in the past year.
A mixed outlook for corporate India
While India's rural economy has largely slowed, the urban markets are so far in a relatively better state.
Yet, across industries, volume growth is very anaemic. Companies are reporting much higher margins as a result of falling commodity prices and a reduction in competitive pressures, but, in general, growth is scarce.
The well-managed businesses are still delivering decent top line and profit growth. But, even for these companies, it is going to be incrementally challenging.
Many expected that falling commodity prices, especially oil, would mean a bonanza for Indian consumers. In reality, they have not enjoyed any benefits, because the Government increased indirect taxes on petroleum, although governmental finances are in much better shape as a result.
As income growth has moderated and credit growth (except for micro finance institutions) is muted, expectations remain high for large government outlays on road construction, railways and defence, in particular.
By the end of the year, public sector employees will get a hefty revision in salaries as part of their five-year wage negotiations. It looks like government largesse is the main hope for revival in economic activity. But progress currently is slow.
As to our fund, on balance, if our current Indian holdings do deliver on expectations, we remain happy shareholders.
But unless we find compelling opportunities, given where valuations are for the well-managed businesses, it is more likely that our exposure to India will remain around current levels or lower.
Samir Mehta is manager of the JOHCM Asia ex Japan fund. All the views expressed above are his own and should not be taken as investment advice.
