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EDITORIAL COMMENT: India's Prospects Look Good But Don't Get Carried Away
Tom Burroughes
24 October 2014
Chalk it up to journalistic cynicism if you will but when the expression “Goldilocks” – not too hot/not too cold – gets used to describe an economy, some caution is in order. And then there is Arvind Chari, investment advisor to ACPI Investment Managers: “These results are good news for India. They indicate that the ‘Modi Wave’ is getting bigger and bigger with the BJP party emerging as the single largest party across the country. The BJP’s mantra of good governance and development is connecting well with the youth which is helping to move the political discourse away from caste and religion which has dominated Indian politics for many years." So why is your correspondent a touch more cautious? Partly it is natural wariness. Also, it is worth remembering that in the 1990s, the “Goldilocks” expression was sometimes used to describe a period when central bankers and their political overlords appeared to have cracked the long-running challenge of delivering robust growth, low inflation and low unemployment at the same time. The subsequent bust meant that some of that confidence got dented, although it is worth remembering that a lot of enduring wealth and transformational business achievements resulted from the dotcom boom (such as the sort of web-based platforms you are using right now). Perhaps, however, it needs to be spelled out that markets seldom continue in a straight line and that investors will need to see concrete results from a country that has often failed to live up to transformational expectations. Put it like this: Don’t get carried away.
For the past few months, your correspondent has struggled to find anything seriously negative or cautionary about the Indian economy since Narenda Modi’s Bharatiya Janata Party won a decisive election victory in the world’s largest democracy. The party has also won important victories in two of India’s regional governments. It is likely to form the government in Maharashtra and has an absolute majority in northern Haryana.
Some of the numbers can explain the jovial mood. The MSCI India Index shows total returns of almost 23 per cent (capital growth plus reinvested dividends). That compares to a measly 0.62 per cent return for MSCI China. As for the MSCI World Index of developed countries’ shares, the return is a mere 1.04 per cent. While concerns about anaemic eurozone growth, deceleration in China and an end to QE have spooked some markets, India looks to be on a roll. With so much grim news on other fronts, such as on the geopolitical side (Russia, Middle East), events in India are a tonic.
An example of the confidence investors feel about India can be seen in comments from Avinash Vazirani, manager of the Jupiter India Fund. In a note, his firm says a stable a “can-do” prime minister and a recovering economy may prove to be the best recipe yet for Indian stocks. With a falling oil price (India is an importer), then Indian firms might be looking at a “Goldilocks moment”.
The Jupiter note says: “For the last five months Indians have been enjoying a rare treat: used to the endless bickering and paralysis engendered by a succession of coalition governments, a resounding victory at the polls last May for Narendra Modi’s Bharatiya Janata Party (BJP) delivered the first parliamentary majority for a single party since 1984. For the investment community there is the added bonus that Indians have elected the first business-friendly centre-right government with an outright majority since independence in 1947.”
There’s more: “With his party firmly in control, Prime Minister Narendra Modi has been able to take decisive action to address longstanding issues that have acted as an obstacle to economic growth. He has rightly identified that India’s weakness is not the absence of reform, but the absence of execution, with far too many projects caught up in India’s labyrinthine and bloated bureaucracy. Measures to improve approval processes have seen 176 projects cleared so far, worth $104 billion out of a total of $376 billion that have been taken up for consideration1 – a boon for the Indian economy.”
Meanwhile, the fund manager notes that International Monetary Fund has recently raised its 2014 GDP forecast for India to 5.6 per cent from 5.4 per cent and continues to forecast an acceleration in growth to 6.4 per cent next year. The situation is so benign, Jupiter reckons, that “we believe we are in the unusual situation where the Indian economy is performing well across all sectors”
But perhaps as Jupiter realises, such optimism carries the risk of hubris, so the firm points out that the country cannot be immune to global hiccups, or any wider investor coolness towards emerging markets.
Kunal Desai, manager of the Neptune India Fund, is also pretty sanguine about the pace of reform expected in India: “With the BJP buoyed by the electorate’s approval of their economic agenda, they introduced a key ‘big bang’ reform as the state election results were confirmed over the weekend. Diesel prices will now be de-regulated and move in line with international prices for the first time in India’s history. This will improve the government’s fiscal finances significantly.”
He continued: “Meanwhile the government raised the regulated gas price by a third, the first increase in 5 years. This will likely spur investment in gas production and reduce the hefty import bill. Activity will accelerate in the coal sector with structural changes expected imminently. Labour laws were adjusted too with a sharp decrease in approvals, red tape and inspections required. Further wide-ranging change on labour reform will be the game changer in our view and we are hopeful that it will be comprehensively addressed in 2015.”
The world can use some positive economic news, and India looks set to deliver some of it. Faster growth will, for example, hopefully translate into India delivering a quicker rise in the size of high net worth individuals - which would be good news for the wealth management industry. As disclosed by the RBC/Capgemini report on Asia recently, the population of HNW individuals in India grew the lowest in Asia-Pacific, rising by only 2.0 per cent in 2013 to reach 156,000, while wealth grew by 4.0 per cent in 2013 to $612 billion. So there is a lot to be hoped for in a faster growth pace.