Turning things around
The nation of 1.35 billion people has been overshadowed in recent decades by the rise of China, with a cocktail of corruption, a “Licence Raj” of complex regulations, and shaky government finances, all conspiring to hold back development. Modi has made some bold reforms since he came to power in 2014, shaking up antiquated bankruptcy laws and implementing a sales tax. India is now poised to overtake Britain as the world’s fifth-biggest economy, and the BJP is planning for it to be number three (behind China and the US) by 2030.
The prime minister can boast of presiding over the world’s fastest-growing big economy, says James Crabtree in The Times. With the economy expanding at about 7%, India is already contributing as much to global growth as the UK, France and Germany combined.
Yet Modi has not delivered the “Thatcher-style economic revolution” his enthusiasts hoped for. India hasn’t achieved the double-digit expansion of the type China enjoyed at its peak, and the BJP has failed to create millions of promised jobs. A leaked report has put the unemployment rate at a 45-year high.
Modi’s pro-business stance went missing in a campaign dominated by “nationalist rhetoric”, says Tom Miller for Gavekal Research. Yet with the opposition “obliterated”, he now has a chance to push through more radical policies, such as privatising heavily indebted state-owned banks and loosening labour laws that keep people out of work. With growth set to slow to below 6.5% by the end of the year and investment spending lacklustre, he will know that bold action is required. Infrastructure investment is another positive, says The Economist – the BJP plans to build “100 new airports and 50 metro systems”.
Priced for growth
Indian stocks have beaten the broader MSCI Emerging Markets Index since 2014, but that has left them expensive. On 18 times forward earnings, the Indian market is near “the top of its ten-year range”, notes Lex in the Financial Times.
Weaker credit growth and the introduction of a much-needed value-added tax system have hit corporate earnings growth, which is now down into single digits. Those who have previously hailed India as the world’s next “economic miracle machine” have been disappointed.
Yet the country’s long-term growth prospects remain “compelling” despite the price, says Jonathan Jones in The Daily Telegraph. The demographics are excellent – half the population is under 25 – and the middle class is expanding rapidly. That should drive growth in consumption – which accounts for about 70% of GDP – from $1.5trn today to $6trn by 2030, according to the World Economic Forum.
Whatever Modi does with his new mandate, reforms enacted in his first term will bear fruit in the second, argues Craig Mellow for Barron’s. Against a “backdrop of global crabbiness”, the fact that “voters in the world’s largest democracy think their country is on the right track” is a hopeful sign. Our favourite way to get exposure is via the Aberdeen New India Investment Trust (LSE: ANII), which is on an 8.5% discount to net asset value. David Stevenson also suggests several other funds on page 18.