India’s Sensex index, after hitting a new record last year, has gone off the boil. Foreign equity inflows have hit their lowest point since August 2013. What’s gone wrong? “Capital is like a dog,” one fund manager told James Crabtree and David Keohane in the Financial Times. “It goes to where it is best treated.” The government’s recent surprise decision to raise $6.4bn dollars in tax from global fund managers has prompted fury and legal challenges.
But the bigger problem is the new government under Prime Minister Narendra Modi, who was elected a year ago this week. He was heralded as a great reformer, but progress has been slower than investors had hoped. Yet the big picture remains encouraging.
A series of laws raising the limits on foreign direct investment (FDI) in sectors ranging from defence to insurance and pensions has left India with “one of the most open FDI regimes in the emerging world”, says Crabtree. The government has ditched costly diesel subsidies, plans to boost investment in infrastructure, and has pushed states to liberalise labour laws.
One key change is a nationwide general sales tax (the equivalent of VAT) to replace the messy patchwork of state levies. This would usher in a genuine single market. Opposition in the upper house may delay its arrival beyond April next year, however.
The government will also auction all mineral rights to stop them going to politically connected firms. A new law will open the coal sector to competition, eventually ending Coal India’s monopoly and helping to end electricity shortages. Modi’s approach, says Niharika Mandhana in The Wall Street Journal, can be summed up as fixing the plumbing before building a new house.
The government now plans a new bankruptcy law and has promised to resolve the tax dispute with investors, which may in fact have been down to a bureaucratic error – it seems the finance ministry failed to notice that its officials planned to implement it.
In sum, “things are getting better” under Modi, “even if we all wish he’d [implement reforms] even more quickly”, says Bejoy Das Gupta of the Institute of International Finance. Lower oil prices, along with India’s sound demographics and a strong presence in global services, complete the picture. Our favourite India play, Aberdeen’s New India Investment Trust (LSE: NII), trades on a 9% discount to its net asset value.