After an uncertain start to the year, Narendra Modi’s BJP party emerged victorious in this year’s Indian elections. We believe the next five years will allow India to benefit fully from the reforms introduced by Modi in his last term, which are only now starting to bear fruit properly. As investors in high-quality Indian companies that are best positioned to benefit from the unprecedented pace and scale of the reforms undertaken such as the Goods & Services Tax (GST) and the Real Estate (Regulation and Development) Act (RERA), amongst many others, we are very excited about the next five years. 
Reform progression
Over the last five years, the government has brought in numerous progressive reforms focused on improving India’s long-term productivity. Alongside the state-wide roll-out of GST and RERA, the reforms also include the introduction of a monetary policy committee and a high-profile programme of demonetisation.
Although these policies have made progress in combatting India’s inflationary issues, such success has some initial limitations. Indeed, due to the very nature of bureaucracy, India’s efforts to adapt to Modi’s reforms has disrupted some areas.
For example, the introduction of a monetary policy committee in India has helped to reduce the country’s inflation from high single and double digits to a target rate of between 2-4 per cent. This is much more amenable to long-term growth. However, it has also reduced prices across-the-board, meaning a lower income for India’s vast population of farmers that had previously benefitted from minimum support pricing on their crops.
Similarly, since the implementation of GST on 1 July 2017, there has been a constant tweaking of all aspects of the tax from the varying rates of GST across different products to the systems and processes around the registration and actual monthly online filing of GST returns. This constant state of flux led to a lot of business disruption and uncertainty and it is only now that things are stabilising and companies are beginning to see the benefits. Even on the fiscal front, the benefits of higher compliance (and better tax collection) is also just kicking in, with April 2019 seeing the highest ever GST collection. We think this trend will continue and have a twofold benefit – it will ease pressure on the fiscal front and give the government more firepower to drive investment and it will accelerate consolidation around the dominant and tax compliant sector leaders across categories that we are invested in.
History shows that reforms enacted in one parliament bear fruit for the next and after a brief election-related hiatus, we anticipate growth to accelerate again. It, therefore, seems likely that the benefits of Modi’s reforms on India’s GDP will become increasingly apparent over the next 18 months to five years. What’s more, the BJP are expected to introduce further changes focused on streamlining Indian bureaucracy and judicial reform. As such, the next five years could be as exciting as the last five.
Making the most of opportunities
As investors looking for domestically-focused growth businesses, we invest in low penetration sectors influenced directly by reform. Within these areas, we then identify those boasting the highest growth and quality. It is these leading names that will fare best under change, growing ever stronger and consolidating their slower-to-adapt rivals.
To demonstrate, one theme we have focused on, in particular, since launch is the increasing discretionary spend among Indian consumers. As it stands, the penetration of sectors like automobiles, insurance, and property is below 10 per cent across categories but growing fast. As India crosses the $2,000 in GDP per capita, we see the average Indian consumer having more disposable income allowing them to spend more in these areas. Our job, then, has been to find the leading consumer-facing names ahead of the curve.
A good example is Godrej Properties, which is a top real estate developer in India. The business has posted two consecutive quarters of record property sales while many of its competitors have struggled against reform and tightening liquidity. We also invest in United Spirits and United Breweries, which are subsidiaries of drinks behemoths Diageo and Heineken respectively. India’s per capita consumption of alcohol has doubled over the last decade and at $38bn, the market is among the world’s fastest growing. This is evidence that India is moving from the basic level of consumption into discretionary spending and is backed further by the fact that United Breweries has delivered volume growth of 17 per cent in 2018.
We have already seen early signs of our strategy’s success in the first quarter of earnings since we launched the fund, with many of our stocks growing at three times the average rate of growth within their sector. We think this is just the beginning of a theme under India’s reform agenda where the biggest and best companies will continue to outperform.
Abhinav Mehra and Andrew Draycott are co-managers of the CC Indian Subcontinent fund. The views expressed above are their own and should not be taken as investment advice.