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Ready, Steady, Goa - 4 Factors Driving Our New Investment in India

We have recently invested into a specialist India fund within our portfolios for the first time.

India is the second most populous country in the world with a large and youthful workforce given the median age of around 27.5 years. 

Compare that to the average age in the UK of 40.5 years, or 38 years in the US, and you begin to understand the demographic advantage. 

And yet whilst the UK is ranked 21st of all countries by global GDP per head, India languishes down at 135th.*

Clearly, both countries are at very different points in the long term economic lifecycle. 

India’s history of central planning led to severe inefficiencies in the economy and companies drowned in red tape. The turning point occurred in 1991 when, as a result of major balance of payments problems, the government went to the International Monetary Fund for assistance and had to pledge planeloads of gold for a loan to support the public finances. 

Fast forward to today, and the capitalist model adopted after this crisis is beginning to bear fruit.

There are four key areas of change that lead us to believe that India is at an inflexion point in growth.

1. Political – A Vote for Reform

The first is a pivotal change in the political landscape. 

In March of this year, the ruling Bharatiya Janata Party won a decisive election in India’s largest regions, Uttar Pradesh, (with a population larger than that of Brazil).  This clear win effectively strengthened Prime Minister Modi’s position in the upper house of India’s parliament where its reform efforts have been hampered by the lack of a majority. 

This reform programme, we believe, will be the key to unlocking the country’s potential. 

2. Economic – Sacred Cash Cow

Many in the West read with curiosity about how India withdrew the large denomination (£7 and £15) banknotes from circulation last November.  Whilst the process was controversial in its implementation, it was part of Modi’s stated intention to curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity.

In July, the second leg of this economic reform package was launched with the introduction of the national Goods and Sales Tax. Hitherto, producers and retailers in India had to contend with a complicated web of 17 different regional, state and national taxes and levies if they wanted to make or move products across the country.

Whilst the new system has had issues, the general direction of simplifying and unifying the tax system and, crucially, raising the number of tax paying individuals and corporations, is a very positive direction.

3. Financial – That Will Do Nicely

India is rolling out a biometric identification system for every citizen with currently around 1.13 billion registered.  The biometric ID, Aadhaar card, which contains personal data such as fingerprints and eye scans, is linked to a personal bank account to allow for financial transactions.  This holds several fundamental advantages.

In the past, subsidies, benefits and pensions paid out by the government often did not reach the intended recipient because of red tape and corruption but now this welfare fraud is very significantly reduced by direct payments.  In the past two and half years since the introduction, the government says it has saved around £6bn** by ensuring the payments go to the right individuals.

This access to finance and proof of identity has spurred a rapid growth in the purchase of life and general insurance and savings products which can be bought more easily with the new accounts.  Clearly, access to these products opens the door to greater financial security and personal finance planning.

4. Technological – Bollywood on iPhone

India boasts the second highest number of mobile subscribers of any country and is also now the world’s second largest smartphone market, having overtaken the US in the first half of 2016.   

Much of this growth has been spurred by intense competition amongst the service providers who started to offer large data packages to grab market share. As a result, consumers have leap-frogged into mobile data for services and entertainment which is stimulating significant growth in these new technologies.

One telecom provider recently disclosed~ that its 100m subscribers use on average around 10GB of data per month, equivalent to around 2-3 high definition movies per month.  The average UK user uses 1.7 GB^.

In India

Hopefully this gives a snapshot of the changes that are transforming the country.

We are very aware that material risks persist. A number of issues continue to dog the country such as corruption at higher levels, the BJP’s struggle to reform the judiciary and issues with sectarianism which boils over into social unrest.

Another issue is the stock market valuation. The current level is relatively high on a historic basis but this is the case for most major equity markets at the moment. The key here is that we believe the growth outlook is not only sustainable but may surprise on the upside and purchases will be funded by switching out of other equity markets which are more likely to disappoint.

Whilst clearly we cannot make any guarantees, and as investors we are well aware that the value of an investment will go down as well as up, for the first time in many years we believe the balance of opportunity has tipped in favour of investing in the country. Given these reforms to drive future growth we have taken the first steps to establish an equity fund holding for our clients.

The content contained in this blog represents the opinions of Equilibrium investment management team. The commentary in this blog in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the reader.  

References

*http://www.nationmaster.com/country-info/compare/India/United-Kingdom/Economy

**https://www.theguardian.com/global-development/2017/mar/21/no-id-no-benefits-thousands-could-lose-lifeline-india-biometric-scheme-aadhaar-card

~Source: Economic Times, 21 February 2017  http://telecom.economictimes.indiatimes.com/news/thanks-to-reliance-jio-india-becomes-top-mobile-data-user/57269548

^https://www.giffgaff.com/sim-only-plans/campaign