Recently there have been a number of significant economic developments in India, which, while causing some difficulty in the short term, we believe will be highly beneficial over the longer term.
In November 2016, President Modi announced the surprise decision to remove all 500 and 1,000 rupee notes from circulation (a process known as “de-monetisation”), representing around 86% of India’s cash by value, in an attempt to fight unaccounted-for wealth and counterfeit notes. Then, at the start of February, the government presented its 2017/2018 Union Budget; the key takeaways included tax cuts for small businesses and individuals on lower incomes, and increased government spending for rural development and infrastructure. Economic stimulus targeting the poorest people should help consumption pick up after the slowdown caused by de-monetisation.
Goods & Services Tax
The government now intends to roll out the Goods & Services Tax (GST) by July 2017 (and it must be implemented in September at the latest). The law enabling GST has been passed and the tax rates have been agreed between the states; all that is left is for a final resolution to be passed, which we anticipate will happen during this month. We believe the benefits to India of this landmark reform are likely to be significant and far-reaching once it is implemented. Transforming India’s patchwork of state goods and services taxes into a single tax regime should not only increase central government tax revenues, but should also provide a major drive towards the formalisation of the economy and lower company logistics costs, vastly increasing efficiency. Taken together, we believe the combination of cash de-monetisation and introduction of GST should significantly increase the government’s tax revenue and encourage a greater number of people to transition to the formal economy.
India’s large online presence
In addition to these economic developments, India is in the midst of a shift in consumption patterns. For example, price competition in the telecommunications sector has encouraged the proliferation of mobile data usage, with one telecom provider recently disclosing that its 100 million subscribers are using on average around 10 GB of data per month1
; India is now the second largest country in terms of internet users (being ahead of the US, but behind China), with around 76% of internet users in India accessing the internet through mobile data2
In the airline sector, consumers are increasingly taking advantage of improving regional connectivity, and in 2016 India had the highest domestic air passenger growth in the world at 23.3%, twice that of China3
. Finally, de-monetisation has accelerated the shift to the formal economy as people had to deposit their cash reserves into the banking system, with public sector banks, mutual funds and life insurance companies especially standing to benefit in our view.
It will likely take a few months for these long term positive factors to develop, and in the meantime there will be some uncertainty. December quarter results, despite the slowing effect of de-monetisation, surpassed all expectations, although it remains to be seen if earnings in the upcoming quarters will be impacted. However, share price valuations are currently hovering around long term averages4
, despite the potential for an uptick of growth as consumers shift to the formal economy.
While there will be some short term uncertainty due to de-monetisation and the impending implementation of GST, we think this is a case of short term pain leading to long term benefits and may assist the long term profitability of the businesses we have in our portfolio.
1Economic Times article 1
Note this is based on 100 crores (1000m) GB of data used per month / 100m telecom customers = 10GB per telecom customer.
Source: Nomura, Global Markets Research, ‘India internet’, October 2016
3Economic Times article 2
Source: Edelweiss, ‘Macro & Markets Chart Book’, February 2017
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