India will make a virtue of patience in 2018
India’s economy is likely to suffer continued near-term disruption in 2018 as the country absorbs a raft of reforms implemented over the last year and votes in an upcoming round of local elections, says Avinash Vazirani, Fund Manager, Emerging Markets.
‘Patience should be rewarded, in my view, as the reforms will help underpin India’s long-term economic future,’ he added.
In my view, a series of major economic reforms introduced over the last year by the government of Narendra Modi will likely remain disruptive to India’s economy for at least the first half of 2018. From demonetisation, meaning the removal of high-denomination notes from circulation, to the introduction of a pan-India Goods and Services Tax (GST) and a £32 billion recapitalisation of the country’s public sector banks, Indian business needs time to adjust.
While we believe all of these reforms will be positive for the Indian economy in the long term, in the short term we think adapting to GST will be the country’s biggest challenge. Supply and distribution chains have been disrupted and companies are uncertain about their short-term prospects. We saw this ourselves during a recent visit to India, where several companies with whom we met noted that their financial results had been unusually unpredictable for the last couple of quarters due to GST-led disruption.
The advantage of simplified taxes
In the long run, GST, in our view, will be massively beneficial for India. Business, for instance, should shift from the informal sector towards businesses that are already tax-compliant, with the benefit for the government of an increase in tax takings. Logistics should also become more efficient, as taxes will no longer have to be paid on goods crossing state borders, eliminating the need for border check posts. While companies may see some benefit from lower logistics costs, we think most of the savings will be passed onto consumers, which should reduce inflation.
So, although the implementation of these reforms has caused some short-term uncertainty, it also reinforces our key economic thesis: that the modernisation and reforms of Modi’s administration are helping to lay the foundation for strong growth in India’s economy over the long term. In the World Bank Group’s latest ease of doing business report, India jumped 30 places to 100th in the world – and this doesn’t yet take into account the recent implementation of GST.
Election on the horizon
Added to the uncertainty, a number of state elections are due to take place in the next 18 months, which could increase the volatility of the Indian stock market. States representing about 24% of the seats in the Lok Sabha (lower house of parliament), and 23% of seats in the Rajya Sabha (upper house of parliament) are due for elections, including Gujarat, Modi’s home state. A strong performance in state elections would bode well for the general election in 2019; we believe Modi’s re-election is the likely outcome, and would allow him to roll out further reforms.
We think that company results will be better than analysts are expecting, as we have identified several factors that will drive long-term profitability of Indian companies and which are still under-appreciated by the market: GST, introduction of direct benefit transfers, increasing access to high-speed internet and the greater availability of financial services (including introduction of the India Stack, a comprehensive government-run software platform which combines infrastructure for biometric identification, e-signatures and digital payments). We think companies that are linked to domestic consumption, such as fuel retailers, asset management companies and domestic airlines, have the most to gain from these themes.
What is more difficult to predict, and it would be a brave man to try, is the risk of shocks to global investment markets. Investing in India, as in any stock market, comes down to choosing companies that are able to operate and grow over the long term, whatever the economic and political conditions that may be buffeting them.
This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. For definitions please see the glossary at jupiteram.com.
The views expressed are those of the Fund Manager at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.
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