India is set to grow faster than China – buy in if you haven’t already

I used to be sceptical about how much government really mattered when you were considering investing in a country.

On reflection, that’s because I was young and ideologically blinkered. Of course governance matters.

People might cite Belgium (“no government for ‘x’ years and still functioning”), or cheer when the US political system is gridlocked – “now the politicians can’t interfere”.

But that only works when you live in a functional democracy with well-established property rights, a largely law-abiding, tax-paying citizenry, and the vast majority of the important infrastructure already laid out. In short, only a developed economy can afford the luxury of poor government.

If you want to invest in emerging economies, governance matters. And that’s one reason why India has been doing so well recently.

India shows why governance matters

India’s markets have been surging ever since prime minister Narendra Modi’s BJP gained power last May. He gained his reputation for competence by turning Gujarat into India’s fastest-growing state.

From an economic point of view, Modi is seen as someone who gets things done – which is very much what red-tape and corruption-bound India needs.

And over the weekend, the finance minister Arun Jaitely revealed the government’s first full budget. There were no major fireworks – just an assurance that the government is sticking to the plan of getting stuff done.

The Indian government has decided to “slow down the pace of fiscal consolidation”, as the jargon has it. In other words, it’s not as worried about cutting its annual overspend as it had been.

However, the extra spending is largely going on investing a lot more money into much-needed infrastructure – particularly roads and railways. The transport budget is being doubled over the next five years. Countries are always being told to take advantage of low interest rates to borrow and spend on infrastructure – India may be one of the few that can surely make good use of this.

The government also plans to cut corporate tax sharply over the next four years, to improve inward investment. Another major tax move that remains on track is to impose the equivalent of VAT nationwide from April 2016.

As John C Hulsman in City AM puts it: “The new national tax on goods and services will increase revenues, while in essence finally completing the Indian common market, as up until now different states have had a confusing and diverse series of local taxes.”

There are a range of other measures. The plan is to make it easier to start businesses, and also to go bankrupt. Property taxation will be simplified. Limits on foreign ownership of banks will be looked at. Lower subsidies on fuel (made a lot easier by the drop in the price of crude oil).

All the things we take for granted as being common sense, basically. Ways to improve the ease of doing business. Fewer arbitrary rules that were only ever established in the first place to protect favoured sectors or particularly accomplished lobbyists.

And yet so hard to push through. Some pundits have complained that the budget wasn’t radical enough. But a brisk rather than revolutionary approach strikes me as sensible when you’re trying to deal with a nation full of entrenched interests. You don’t want to scare the horses too early on in the process.

And you only need to look at the rest of the Brics (Brazil, Russia, and China), to see how difficult it is to meet your potential. Brazil I still find interesting, but it’s mired in a corruption scandal and smarting from falling resources prices. Russia – it only seems to be going from bad to worse. And while China looks good from an investment point of view, it’s also vulnerable to mistakes by the ruling party.

In short, it’s really hard to make the leap from emerging economy to developed nation, and it’s so easy to end up backsliding.

India is about to overtake China’s growth

So a steady pace doesn’t seem such a bad thing. And the upshot is that India is expected to grow more rapidly than China in the next fiscal year – by 8% – 8.5%, notes Hulsman. That’s pretty impressive by anyone’s standards – particularly against a backdrop of uncertain global growth.

The Indian market is hardly cheap, but it’s certainly worth having some exposure to the country. At our most recent roundtable, our experts suggested some of their favourite ways to invest in India, and other promising emerging markets. If you’re not already a subscriber, get your first four issues free here.

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