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You can’t trust India’s growth figures – say India managers | Trustnet Skip to the content

You can’t trust India’s growth figures – say India managers

19 June 2019

Ocean Dial’s David Cornell and JP Morgan’s Rukhshad Shroff say earnings have been in a recession for five years – but there is light at the end of the tunnel.

By Anthony Luzio,

Editor, FE Trustnet Magazine

Investors looking to increase their exposure to India in a bid to take advantage of its powerful demographics should be warned – they need to take the country’s official GDP growth figure with a heavy pinch of salt.

And rather than coming from fund managers focused on other regions who have a vested interest in talking down the world’s second most populous country, this is the message coming from India managers themselves.

In an article, published on FE Trustnet earlier this year, Janus Henderson’s Sat Duhra said: “India’s growth story doesn’t make sense.”

“This is a country that is allegedly growing at 7 per cent,” he explained. “If you look at everything underlying in that economy, if you look at industrial production, if you look at credit growth, if you look at the state of the big banks there, if you look at job creation – they should be creating 12, 13 million jobs, but they are only creating about 5 million jobs.

“If you look at the fact that private enterprise has not started doing any capex since [prime minister Narendra] Modi came in,” he added. “I mean, none of that correlates with an economy growing at 7 per cent.”

Instead of trying to defend these figures, JP Morgan Indian IT’s Rukhshad Shroff – who claims to be able to “sniff out a dodgy deal in 10 minutes” – agreed with Duhra, calling the GDP figures a “fudge”, while David Cornell of Ocean Dial’s India Capital Growth trust said: “The guys at Janus Henderson are right.”

While GDP growth is in of itself of little consequence to equity investors, both managers point out earnings have also disappointed and that from this point of view, India has been in a recession for the last five years.

Cornell said there are two reasons for this.

“India came out of the global financial crisis smelling of roses: no leverage in the banks, no leverage in the consumer, no mortgage finance issues, no toxic loans in the banks that suddenly went pear-shaped,” he explained.

“So when the price of money collapsed as [Federal Reserve chair] Ben Bernanke tried to reflate the global economy, India went on a massive private sector lending splurge, with a huge investment cycle in infrastructure and heavy assets like utilities, oil & gas, power, telecoms and mining companies.

“Then in 2011, global GDP growth slowed and India’s GDP growth went from 8 per cent per annum to 4 per cent per annum. So they have been left with this massive excess capacity in the economy, because they built all this capital in 2010 and then the economy slowed. And that’s why there’s been no growth and why there’s been no jobs.”


The second reason is the immediate impact of the reforms introduced by prime minister Modi. For example, Cornell described the policy of de-monetisation as “like a heart attack to the economy” – Shroff noted that more than 100 per cent of India’s money supply was returned to banks due to the proliferation of counterfeit notes – while he said the implementation of the GST (the goods & services tax) has also stressed out a lot of businesses.

However, both managers believe the long-term value of these reforms will far outweigh the short-term disruption, with Shroff saying the digitalisation of India will accelerate and multiply the benefits.

“Just think about a vendor in in a little village,” he added. “Previously, there’s no question he’s not in the system. It is a cash-based system, he doesn’t pay a central tax, sales tax or income tax.

“Today if he’s not in the GST system, if he’s supplying metal parts to Suzuki or to someone who’s supplying to Suzuki, for example, you can’t get the tax set off. If I’m a partner of them I am not transacting with you anymore, because I need you to give me a receipt saying this is how much I have paid you.

“That person has a choice of going out of business, which is economically depressing, or coming into the system. As he comes into the system, you might have low margins because he is going to be paying 15 or 20 per cent tax, but he’s now got a monthly record.”

“No one used to give him any credit, no bank, because it used to ‘say where are your books, how big or small or profitable are you?’ Now he just gets his own phone and says ‘look, every month I have £1,000 of turnover, will you give me a £200 loan?’

“And the answer is yes, because I can see the data. So that data availability has transformed that person – his revenues can now double because he’s expanding. So that’s the benefit. Now you’ve got that person in the net.”

Both managers believe there is light at the end of the tunnel following the problems with overcapacity and the initial shock from Modi’s reforms. They say the recovery is likely to be exponential rather than gradual, with Shroff noting that consensus earnings forecasts for next year predict a jump of 19 to 20 per cent due to the normalisation of the banking sector.

Cornell added that Modi strengthening his majority in the recent elections and gaining control of the upper house will be crucial for passing new laws, helping him tackle corruption and other causes of inefficiency in the economy. He said the prime minister’s progress is being noted by the international community – India jumped from 137th position in the World Bank’s Ease of Doing Business Index in 2016 to 77th in 2019.


Regardless of this, Shroff is confident India’s demographics – where the average age of its 1.3 billion people is 29 – should allow it to match or surpass its performance over the past quarter of a century.

“In those 24 or 25 years, every conceivable Indian problem that you can think of, and not think of, has occurred,” the manager continued.

“We have had economic ups and downs, we have had governments come and go, we have had a government for 13 days, which collapsed.

“We’ve had a nuclear test, we’ve had a nuclear neighbour respond to that test, and soon after you’ve had the sanctions.

“We’ve had two days – driven by politics – where the Indian market moved more than 15 per cent, once up, once down. That is not supposed to happen in 900 years: it’s happened twice in my career.

“By the way, we haven’t talked about the currency impact: the rupee has depreciated probably by 50 per cent in these 25 years.

“So after that – this is including the global financial crisis, the Asian financial crisis, we had our own Indian mini events – after all that, the index in sterling has compounded at 7.4 per cent annualised for 25 years.”

Performance of trusts vs index over 5yrs

Source: FE Analytics

Data from FE Analytics shows JP Morgan Indian IT and India Capital Growth have made 87.74 per cent and 70.1 per cent respectively over the past five years compared with gains of 75.47 per cent from the MSCI India index.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.