Economic Environment and Country Analysis. Midterm. India 2014

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in the south and along the west coast, in regions having attracted industrial and technology companies.  While literacy and life expectancy have increased significantly in most areas, still only 41% of schools in the rural areas are connected to power grids. (OECD 2015 a)

Public spending on enhanced infrastructure is massive, however should be complemented by private-sector involvement. Public-private partnerships may be incentivized with fiscal policies aimed at investments in infrastructure needs that support transport projects, healthcare structures, education, research and development, renewable/sustainable energy production and consumption, and efficient agriculture, with the aim to foster inclusive, broad-based GDP growth.

Brain drain from India to the West and from Public to Private

A key factor to broader-based, sustainable productivity growth is to limit ‘brain drain’, removing many of the best talents from the Indian labor market. Furthermore, India’s limited public pay scales are pushing India’s remaining best talent to work in the private sector. This trend will likely not slow down, unless the public sector’s effectiveness increases through political leadership and a push from the private sector.

Evaluation of inclusive growth needs to focus on the long-term implementation of Modi’s reforms and its socio-economic impacts, despite the short-term evaluations pointing towards India’s being on the right path. Nevertheless, extensive structural investments throughout the country need to follow; otherwise, millions of Indians, especially in the rural areas, will not have any chance to actively contribute and share in the country’s development.

To conclude, we believe double-digit growth in India can be achieved, but may come at the expense of non-inclusive development, likely fostering more social disruptions (such as the Naxalite movement) and potentially destabilizing the country. Therefore, we rather believe that inclusive, high single-digit growth would establish a solid platform for economic stability and future economic growth for India. 

3. Would you invest in India? Where and why?

India forms the ‘I’ in BRIC(S), which are currently attracting attention from foreign investors and analysts due to their huge growth potential. India is presenting potential investors two extremes: on the one hand they have opportunities for structural development that are hard to find elsewhere, and on the other hand they are struggling with meeting some of the most basic needs of their people, which makes investment there high risk.

Monitor the trends carefully, and watch out for the political dead-ends

In 2013 the Indian tax authorities asked Vodafone, Shell, HSBC and other international companies to retrospectively pay for taxes that were underpaid in 2011/2, which caused havoc amongst the international investor community. Then, looking to stimulate foreign investment, in 2015 the new government under FM Arun Jaitley decided to review this ‘adversarial’ tax policy. Such vacillation in political decisions has the potential to damage the image of economic stability India seeks to portray, which could discourage investment from large multinationals. The government’s devotion to solving structural problems, (e.g. with infrastructure developments or agricultural sector efficiencies,) and reduction of red tape for businesses will encourage foreign investment.

Are Fiscal and Monetary discipline and low oil prices the new normal?

Assuming the answer is yes, it would be a good idea to invest in cyclical companies who will structurally benefit from continued GDP growth and a wealthier Indian middle class. For many years, India has had a current account deficit, but new winds are blowing and the rupee has been relatively stable, which might actually help reduce India’s fiscal debt. Like Turkey, India is one of the countries that is benefiting most from relatively low oil prices, since the country is so dependent on cheap energy. Despite the unrest in a number of oil-producing areas, prices for oil and coal have been relatively stable. If the price of this energy increases too much, growth of the Indian economy would be hurt.

Continued reforms and stable political climate will be decisive

Continued reforms and privatization of the state’s assets, will lead to a more profitable nature of these sectors, thus increasing direct foreign investment. Continued reforms are needed to maintain the growth momentum in India, such as upgraded infrastructure, and more efficient public and tax systems. The size of the black economy is another destabilizing factor, which politicians need to solve. This would be a detracting factor for growth and keep foreign investments away. Another potentially high impact occurrence would be the resolution of India’s dependency on coal to look for greener sources of energy. On the other hand, to avoid weak coalition governments, the two large nationalized political parties need to develop their presence at the grassroots level and avoid regional parties becoming too strong, which could prevent the formation of a majority government, thereby stalling economic reforms.

Bumpy road ahead

The new government under Modi has a very clear mandate to make economic changes. Because of this, new reforms are being undertaken and the macroeconomic situation is more stable. Political problems, corruption and underinvestment in long-term development have hampered progress and there is no doubt that infrastructure will need an upgrade regardless of which investment direction one decides to take.

We believe the most interesting areas to invest in the short to mid-term would be in:

Infrastructure – The government wants to push for infrastructure development, including the creation of the “Made in India” concept and “Smart Cities”, and to reinvigorate projects amounting to US$60 billion which were previously stalled,

Defense - The government has capped FDI at 49% in 2014, up from 26%, which will attract potential international investors. This, coupled this with China’s aggressive military actions at their shared borders and open support of Pakistan, might stimulate the government to spend more, and

Banking – the banking sector will benefit from the general expansionary policy adopted and structural reforms such as ease in monetary policy.

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