Is India bound for a Bollywood style happy ending?

The trailer: the view from the ground

International financial markets renewed their interest in India after Narendra Modi came to power in May 2014. Mr Modi’s reformist and pro-business mandate described by many as “god-sent”, raised hopes that India would begin to break free from decades of institutional sclerosis. The stock market rallied on these expectations, while key macro indicators also started to improve.

As the so-called “unorganised” economy (also called the “mom-and-pop” economy) accounts for more than 75% of activity in India, it is extremely difficult to obtain robust macro-economic data that provide a reliable picture of broader economic health or prevailing trends. In order to help our assessment of the current situation, we conducted on-the-ground research in India. During our visit, we met high-level executives of state and private sector banks, senior management from economic bellwether companies, bureaucrats, policy experts, a rating agency and strategists. This provided us with an excellent balance of micro and macro perspectives.

The critical determinant on whether medium-term growth will live up to expectations is infrastructure investment. Insufficient infrastructure and administrative hindrance are key reasons behind why India has been unable to capitalise on its huge economic potential.

Institutional inefficiency, complex regulation, corruption and, ironically, a democratic system, have led to under-investment in infrastructure. The government will play a crucial role in kick-starting the investment cycle, thereby “crowding in” capital spending via private partnerships. So far, the Modi-led government has shown it understands what is needed, and has shown some determination in pushing for the necessary reforms, as reflected in the recent Budget. Later in this commentary, we will highlight the challenges and key policies that are critical to a revival in capital expenditure (capex).

Our view is that in the short term, economic growth will be constrained by the legacy of inefficiency in the system: investment is still depressed, credit growth remains sluggish and demand has not really picked up. However, there are strong hopes that India will be able to break free from these historical constraints, with collective wisdom suggesting that the economy will regain traction further ahead. While the executives we met were brutally honest about being bearish on the short-term outlook for the economy and corporate earnings, they are consensually very optimistic over the medium-term. Given the positive changes announced since Mr Modi took office less than a year ago, they are confident roadblocks to growth will eventually begin to clear. In relation to this, we will focus on some visible progress already brought about by Mr Modi, and also on potential reforms going forward.

Envisage India’s unfolding macro story as a typical Bollywood plot – an extravaganza with elements of action, challenge, hope and drama. Realising India’s potential and implementing reforms will take time, but a happy ending will be revealed if the much needed infrastructure and removal of impediments are undertaken, enabling more self-sustaining and inter-connected growth to develop within the economy.


Contents of the full article:

The trailer
  The view from the ground

- Setting the macro scene

  Focus on infrastructure

- The leading and supporting characters
  Narendra Modi and Raghuram Rajan

- The suspense…and a happy ending?

  A long and winding road to reform

- The review

  Investment implications

- Extras

  Outtakes and anecdotes


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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

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This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.