Strategy & economics
India up close: assessing one of the world’s most dynamic economies
Rapid technological change, political reforms, improving infrastructure and a large, youthful population are just some of India’s attractions, as Charles Armstrong discovered on a fact-finding trip
From the moment I landed in Mumbai the change of pace was stark: it was immediately evident that this is a country in a hurry. However, much like my daily commute back on home soil, no one is going anywhere fast. There are too many people all with the same agenda and bottlenecks are thus inevitable.
Our travels got off to an inauspicious start. Our first company meeting was preceded by getting stuck in their lift for twenty minutes before finally being allowed to climb out of half opened doors between floors - with the use of some spare decorating ladders. This was later followed by an emergency stop in our taxi to allow some cows (they are sacred in India) to cross the motorway directly in front of us. Despite these mild hiccups, there were a number of insights from what were a fascinating few days.
Politics is a topical issue in India, with state elections taking place in late 2018 followed by a general election in May 2019. The incumbent prime minister Narendra Modi is expected to win, but with less seats than before. But this year Modi gained control of the upper house and hence will potentially have more power than in his first term. This should allow him to push through further reforms, in addition to the significant amount he has achieved to date (which include demonetisation, a new Goods & Services Tax and measures to improve financial inclusion, to name but a few).
Interestingly, the consensus is that whilst Modi is an important figurehead, many of the proposed reforms and projects might well still play out regardless of future leadership. This is a country building 35km of new road a day. It has increased the number of airports from 75 to 102 in as little as three years. Why is this important? Because to travel from Mumbai to Delhi takes 2 hours by plane or 16 hours by train.
Technology is driving efficiencies – and raising public revenues
Connectivity is the name of the game in India – and change is coming at an incredible rate. Financial services have leap-frogged our old UK high street bank model, for example, with the introduction of biometric anti-money laundering checks (thanks to India’s Digital Unique ID system). This means you can open a new bank account or set up a telephone contract in fifteen minutes rather than fifteen days.
Online banking is mainstream, especially in the rural communities where benefits or subsidies can be directed straight into an individual’s account. This replaces the old model where cash passed through various officials’ hands. An astonishing 99.9% of Indian households now have access to a bank account.
Additionally, through a harmonised new sales tax, products and produce can be more easily moved between different states – delivering significant savings for companies whilst raising additional revenues for the government. Usury (money lending at an unreasonably high rate) and black markets are also being tackled by the government. Whilst many of these reforms have been painful in the short term, they will allow improved productivity to filter through to the whole economy over time.
The population factor
What else differentiates India? It’s population. At a staggering 1.3bn people, India accounts for nearly a fifth of the people on earth. As well as being huge, it is also remarkably young. While developed nations struggle with ageing citizens, the majority of Indians are under 35 (nearly 70%) and the median age is 27, with a growing middle class. During company visits, there was an acknowledgement that “professionalising” of work practices had further to go. But the quality of management is improving. Western-educated young Indian professionals are returning home, keen to change old business models and raise standards.
Upon independence in 1947, 80% of the population were involved in agriculture. This is down to 45% as urbanisation takes hold. Similarly, only 20% of the population had access to a road in 1947 - and this has now increased to 95%. Every village has electricity, and life expectancy has increased by seven years due to 93% of households now boasting a toilet compared to 37% just five years ago.
India is a domestic story with 7% GDP growth and partial immunity from the current global growth environment. That said, with 80% of oil being imported, the country is sensitive to changes in the oil price.
Banks have begun to recognise their non-performing loans and corporate earnings are starting to improve from a low base. Inflation is falling principally due to food prices.
This is a country that has always shown great potential but struggled to reach escape velocity. However, once the political noise has calmed, India presents an interesting opportunity for investors over the long term. Since the start of this century the MSCI India has compounded an annualised return of 10.3% (for sterling investors), as opposed to the S&P 500 which has managed 6.7%.
Charles Armstrong joined Cazenove Capital in 2001 having started his career with Buchler Phillips, Corporate Recovery & Restructuring specialists. He is a Portfolio Director with responsibility for managing UK private client portfolios, private OEIC’s and inflation plus mandates which also includes the Schroder Managed Wealth Portfolio Fund. He is a member of the Wealth Management Investment Committee, Wealth Management Research Committee and the Private Equity Committee. Charles is a Fellow of the Chartered Institute for Securities & Investment and has 17 years' investment experience.
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