Passage for India
Hugh Young of Aberdeen Asset Management is encouraged by the political will driving India forward despite the many challenges it faces.
Which was the world’s largest economy in the year 1700? The answer may surprise you – it was India. According to the Cambridge Economic History of India, before the Industrial Revolution, the India of the Mughal Empire had a 24.4% share of world output, compared to 23.3% for the whole of Europe.
There is little doubt that today India continues to be a country of vast potential. The population is youthful – half of India’s citizens are less than 28 years old. Many of the young are educated and speak English fluently, and are thus able to compete in the global labour market. The UN estimates that India’s middle class will double in size in the next five years. There will be unprecedented demand for an array of goods and services in this vast middle-class consumer market. India has much potential for further growth. The last four years have seen India strolling along at an average growth rate of 5.5%, well below its potential. The conditions are now ripe for the economy to truly take off.
The election of Narendra Modi in May last year was a signal from the country’s vast populace that it was ready for change after 10 years of stagnant Indian National Congress party rule under Manmohan Singh. Indeed, Modi’s reign has largely been a success thus far. Since his election last May, the government has launched initiatives to boost investment in infrastructure and manufacturing. Among other things, it has increased the limits on foreign direct investment in the defence and insurance sectors (from 26% to 49%), and now allows 100% foreign stake holdings in railway infrastructure and most large construction projects. It has started to privatise banks and natural resources groups. Fuel subsidies have been abolished and bureaucratic inefficiencies reduced.
In an effort to reduce absenteeism, the government has set up a website which logs whether 51,000 of India’s civil servants come to work – a great move in a country where truancy in the civil service is rife. Last month, an engineer in the Central Public Works Department was fired, but only after skipping work for 24 years.
India still faces challenges. The country lacks quality roads and railways in many areas. Private investment is low in some sectors. State ownership, regulation and lack of competition continue to limit the potential of many companies. Landowners hold too much privilege and have the power to stop crucial public works from going ahead. While these problems are widespread, they also represent surmountable hurdles that the government has already started to tackle.
The 2015 Budget, revealed by Arun Jaitley, India’s Minister of Finance, at the end of last month showed the government’s commitment to implement reforms that can address these issues and bring about genuine economic and political change. India has chosen to prioritise investment in infrastructure at the expense of fiscal consolidation – its deadline to cut the deficit to 3% has been extended by one year to fiscal year 2018. We think this decision is in India’s best long-term interests.
There are reasons to be very optimistic. In a country where powers are highly devolved to individual states, Modi’s Bharatiya Janata Party (BJP) has already succeeded in winning over many state officials. The BJP won many of the state elections last year following the general election, notably ending the Indian National Congress party’s 15-year rule of Maharashtra, the home state of Mumbai. The election of renowned economist Raghuram Rajan as Governor of the Reserve Bank of India in September 2013 brought credibility to the institution and its monetary policy. Perhaps most importantly, Modi’s government has disbanded the old Planning Commission and replaced it with the National Institution for Transforming India Aayog. This change from top-down central planning to bottom-up, local decision-making provides an excellent framework for implementation of policy.
The Budget has come at an opportune time for India. As one of the world’s largest net importers, India has benefited greatly from the recent fall in the oil price. The country’s trade deficit fell from $16.9 billion to $9.4 billion from November to December 2014 alone. The oil price fall has improved the balance of payments, protected the current and fiscal accounts and curbed persistently high domestic inflation.
The Indian government should now take advantage of the momentum it has and the current supportive economic environment to implement the reforms and restructuring it has promised. There will be challenges, including dealing with the complexities of the country’s archaic land laws and ensuring sufficient revenues are raised from taxes to fund the promised investments. But if Modi and his administration can continue to show genuine commitment to change, India will take flight once again.
Hugh Young of Aberdeen Asset Management is the manager of the St. James’s Place Far East fund. The opinions expressed are those of Hugh Young and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.
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