Reform and structural change in India
Posted by Guest in Market commentaries category on 19 May 17
India is currently undergoing a period of change, and in my view there are several ongoing developments which mean that the long term investment outlook for India is positive. I believe India has great potential for growth and there is a wide range of opportunities for investors.
In my view, there are five main factors that I think will drive the long term profitability of Indian companies and which are currently under-appreciated by the market: political stability, the introduction of direct benefit transfers (DBT), the implementation of a country-wide goods and services tax (GST), increasing access to high-speed internet and a shift from physical to financial savings.
India’s latest round of state elections saw a good set of results for Prime Minister Modi’s Bharatiya Janata Party (BJP), particularly in the highly populous state of Uttar Pradesh – home to 16% of India’s population1 – where it won 312 out of 403 seats2. In my view this is a welcome sign of political stability from which India stands to benefit, as it shows the public is behind Modi’s ongoing regulatory reforms, despite the destructive impact of last November’s currency demonetisation (whereby 86% of India’s currency by value was taken out of circulation3). It indicates there is a good chance Modi will be re-elected in 2019, which would mean political visibility for the next seven years.
Introduction of direct benefit transfers
The government is moving away from subsidies towards a system of direct benefit transfers (DBT), where benefits are deposited directly into recipients’ bank accounts. This has all been made possible by India’s universal biometric ID card scheme (“Aadhaar”), under which 99% of India’s adult population has now been registered4. Not only will this save the government money as leakages will be reduced, but in my view, it will also lead to an increase in consumption and will encourage those on low incomes to join the formal banking system. DBT is currently in the process of being rolled out and several existing schemes have already been replaced, with little political opposition.
Introduction of a country-wide goods and services tax
The final resolution enabling the goods and services tax (GST) has been passed and the government now intends to roll it out in July 2017. India currently has a patchwork of state goods and services taxes, which will be combined into a single tax regime. Not only should this increase central government tax revenues, but it should also provide a major drive towards the formalisation of the economy and lower company logistics costs, vastly increasing efficiency. Listed companies especially should benefit, as they will likely take share from tax-evading competitors.
Increasing access to high-speed internet
We have seen an inflection point in internet usage in India, as price competition in the telecommunications sector has encouraged the proliferation of mobile data. One telecom provider recently disclosed that its 100 million subscribers use on average around 10 GB of data per month5
. India is now the second largest country in terms of internet users (ahead of the US, but behind China), with around 76% of internet users in India accessing the internet through mobile data6
. Given the fast pace of development, India has seen a “leapfrogging” of technology, with consumers bypassing fixed broadband and going directly to mobile internet.
Shift from physical to financial savings
Demonetisation has encouraged people to deposit their cash reserves into the banking system, which means that people are increasingly moving savings from physical assets, such as property and gold, to financial assets. Banks have seen a significant increase in deposits, domestic mutual funds have seen record inflows and life insurance sales were up 25% in January and February, year on year7. Moreover, the government has recently launched several digital infrastructure initiatives which means that bank accounts can be linked directly to Aadhaar biometric IDs, and accessed via mobile phone. This will enable people to make payments – or indeed take out insurance, apply for a loan or invest in a mutual fund – with a fingerprint.
The existence of even one of these factors would be positive, so the convergence of all five factors means that this is the most exciting long term investment environment I have seen in my 22 years of investing in India.
On the other hand, in the short term I anticipate there will be some uncertainty due to demonetisation and the impending implementation of GST, which may be reflected through negative surprises in company results announcements for the next two quarters. It is naturally possible that markets will fall in reaction to any negative news; there is also the potential that domestic inflows of money into the stock market, which have been very strong in recent months, will support the market. Either way, I have reason to believe this is a case of short term pain for long term gain. I am therefore positive both on the long-term trajectory of the Indian economy and on the profitability potential of the businesses held by the Jupiter India Fund.
1Source: Government of Uttar Pradesh (http://up.gov.in/upecon.aspx)
2Source: NDTV, 11 March 2017 (http://www.ndtv.com/india-news/assembly-election-results-2017-and-the-winner-is-counting-of-votes-for-up-punjab-and-other-states-be-1668519)
Source: Citi, India Economics View, ‘The Demonetization Project – Macro and Market Implications’, 15 November 2016
Source: UIDAI, 27 January 2017 (https://uidai.gov.in/images/news/on_111_crore_aadhaar_31012017.pdf
Source: Economic Times, 21 February 2017. Note this is based on 100 crores (1000m) GB of data used per month / 100m telecom customers = 10GB per telecom customer. (http://telecom.economictimes.indiatimes.com/news/thanks-to-reliance-jio-india-becomes-top-mobile-data-user/57269548
Source: Nomura, Global Markets Research, ‘India Internet’, October 2016
Source: Deutsche Bank, Markets Research, ‘India Life Insurance’, 9 March 2017
The fund invests in a single developing geographic area and there is a greater risk of volatility due to political and economic change, fees and expenses tend to be higher than in western markets. These markets are typically less liquid, with trading and settlement systems that are generally less reliable than in developed markets, which may result in large price movements or losses to the fund. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. For definitions please see the glossary at jupiteram.com.
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