A slow recovery
The first steps of the new Indian government are encouraging, judged by most international observers. There were initiated action plans to improve the fundamentals of the country and to create modern industrial network infrastructure. The financial markets also will be reformed and made more and more willing to accept foreign capital. Certainly, though, this will take long enough.
The national economy is becoming increasingly sound. Both the equity, and the Indian debt are able to properly reflect and respond very quickly to national economic, as evidenced by the events of this year. 2014 marked a monumental turning point: there is no hiding the fact that the electoral victory of the prime minister Narendra Modi, a member of the Hindu nationalist Bharatiya Janata Party, has raised a lot of enthusiasm.
His program, in fact, has been focusing almost exclusively on economic leap forward: just think of the recent campaign “Make In India” to bring back to the country nearly zilch direct foreign investment and to make the South Asian a thoroughly modern giant. Modi has moved energetically for meeting all the main foreign partners, Japan and China in the first place, and obtained important commitments for dozens of billions of dollars of investment. It is not just a change, especially given the historical difficulties in the relationship with the Dragon. The steps to succeed in intent are huge, however: to cut the public debt, while increasing revenue, modernize the bureaucracy and trigger a process of modernization of production. An expansionary austerity program that has so far been avoided by any other economy in the world.
Some important steps have already been taken, for example, with the predecessor Singh initiating a plan to reduce subsidies to the price of diesel fuel (about half of all fuel consumption in the country), now reduced to little more than zero. This should lead to sharpening of apparatus of the national oil and gas, whose profits have been decimated in the past policies of supporting consumption, thereby getting more tax to the Treasury. In the meantime, these reforms have already resulted in a significant market value growth of the securities in the energy sector on the national level.
God-be to expansionary austerity
So what assessment can be given the Indian situation after five months of the era of Modi? A slow recovery appears, according to the diagnosis of some of the largest institutional investors. The means of this expression is that the disaster seen in the last two years has been probably the transition of escalation of an emerging ecnomy crisis, after which the country is returning to its potential growth rate. Sandeep Kothari, portfolio advisor Ff India Focus Fund of the Fidelity Worldwide Investment, said: “The Indian economy grew by 5.7% in the second quarter of 2014, a faster pace than in the last two and a half years. Industrial production has started to improve and inflation is under control. Despite these early signs of recovery, however, still a lot remains to be done. According to forecasts, in the next two years, the economy should return to its potential for growth of 6-6.5%.”
In a situation not altogether easy, therefore, it seems that we are witnessing the realization of that picture of expansionary austerity we were talking about earlier, with higher economic growth accompanied by less structural imbalances. Adrian Pop, member of the management team of the East Capital Emerging Asia Fund, said: “The picture is very good for India. Economic growth has already been resumed in the last quarter to 5.7% year-on-year, a growth rate that had not been observed since the beginning of 2012. Inflation is going down with the CPI index to 7 8% more year-on-year in August, compared with the 9-10% reported in 2013 and most of 2012. The WPI index slowed sharply, with the latest figures for August significantly below the estimates of economists. The Modi administration is strongly committed to lowering the fiscal deficit of 160 basis points in 2017, ie from 4.6% of GDP in 2014 to 3% in 2017. Finally, the data of recent months indicates the reduction of the deficit the current account, which should be around 2% of GDP, or slightly below, by the end of the fiscal year.”
It should be borne in mind that so far, however, the national economy has taken the low-hanging fruit of a tree that will be difficult to climb, due to the return of investor confidence, with (at least in the first half of the year) a reinstatement of India in the propensity to overall risk. To these elements there must be added the bear market of raw materials, disastrous in Latin America, but a boon for a country relatively poor in resources. The analysis team of FIA Asset Management recall: “The election of Narendra Modi has brought a new confidence on the Indian economy. The latest figures show an increase in GDP of 5.7%, driven by strong performance in the mining, manufacturing and service, as well as by the weakness of the rupee against the dollar. Core inflation in August stood at 6.9%, the lowest figure for three years now, helped in part by the absence of pressure on energy prices and agricultural materials, both of which weigh heavily on the balance of payments.”
The long-term prospects. An essential modernization
Now the economic picture is worth moving to what are the long-term prospects: in fact, also in terms of investment on risky assets in the country, it seems necessary to understand what credibility can be spared to India, now that the opportunities for short have already been exploited, moreover, at a time when some crunch on global capital markets is felt. In this case the degree of trust in government by a majority nationalist appears high, with a key concept on which India plays the future investment, especially for the direct foreign investors. In fact, so far the national economy appeared well placed at the level of international capital flows and this huge nation was presented as yet another high beta in times of recovery and risk tolerance, as well as one of the main targets of speculation in short phases of risk aversion. However, the weakness of a giant demographic reduces to the role of developing country.
To change the situation is therefore necessary to continue a strong process of modernization of the base, which will inevitably come up against a bloated bureaucracy, political power is fragmented and contradictory, and many other obstacles. For the moment, however, the first steps undertaken seem encouraging, the fact also recognized by investors. For example, Jürgen Maier, manager in the emerging markets equity team at Raiffeisen Capital Management, said: “We believe that the plan of economic reforms Modi will put India on track to accelerate economic growth and at the same time keep the rate of inflation under control. Joint efforts have already been made to speed up the investment process. In addition, improvements have been implemented to eliminate certain rigidity of the labor market and focus on the reform of the Land acquisition Act (the law that regulates the state expropriation of land by the State, ed.) The limits on foreign direct investment have been reduced in sectors such as insurance and defense. Over the past two months, the Modi government has been especially active in foreign policy with visits to Japan, the US and other countries crucial: therefore we expect the announcement of further reforms by the end of the year. The government seems satisfied with its plan to provide a more solid basis for growth, even if it means moving slowly at first. ”
A similar picture is also outlined by Desmond Soon, co-head of Asia investment management and portfolio manager at Western Asset (group Legg Mason): “The first priority of the administration modes, as well as the easiest way to gain popularity is to revitalize the investments already approved in the last 12 months by the previous government, but never implemented due to political uncertainties. At the announcement of the Finance Act on July 14 Finance Minister Arun Jaitley has listed a series of reforms. First, the limit will be raised to the foreign ownership of companies in the defense sector, which will lead to 49%, while in the rail sector have already been implemented to raise the roof at 100%. The shift of the maximum to 49% in insurance, however, is still pending approval by Parliament. Furthermore, the same Jaitley has announced a target of 4.1% in the budget deficit, and by 3.6% in 2015-16 and 3% in 2016-2017, in addition to the intention of introducing VAT by end of year . We believe these goals to reach. In addition, the minister said that the government is going to sell a specified quantity of shares not yet in state banks, rather in need of an injection of fresh capital. These measures, however, will take time, since before the credit companies to apply for public capital markets, will solve the problem of the decision of the Supreme Court, which canceled the allocation of hundreds of exploration permits for coal. It is unlikely that in this area there are no news until March 2015. From the infrastructure India has secured funding from Japan and China to achieve high-speed railway lines, roads and ports, while the plan to build 100 “smart cities “is making significant progress in terms of acquisition of the land required and the development of cities along the Delhi-Mumbai industrial corridor. Progress has listed so far, significant improvements can already be seen at the grassroots level: the government bureaucracy has been made more streamlined with the elimination of the Committee for Planning and reducing the number of ministries. At the same time various traps and snares that prevented them from doing business in India have been removed.”
Even more financial instruments
Such a grandiose plan changes, if implemented, would also lead a revolution in supply and complexity of financial instruments available in the Indian market. Recalls Manish Shah, CEO of Comgest India, “India could become a model for emerging markets, where Modi and his government continue successfully along the path of reform. Compared to a year ago, the sentiment in the Indian stock market has literally reversed. The budget presented by the Prime Minister is a clearer sign of the change in approach than the one based on the assistance of the previous government and has led to such tangible signs of improvement in economic conditions in India as a lower rate of inflation. The main beneficiaries of the changes announced are the industries and infrastructure, with the government ready to revive weak investment demand to combat the shortage of coal, improve the rail infrastructure, power generation and distribution. In a country where 70% of the population does not have continuous availability to electricity and 15% have no access to electricity, these supply-side reforms are crucial in raising the standard of living in different regions. As projects stalled represent about 8% of the GDP of India, the expected changes are able to substantially improve the prospects for long-term growth of the economy through a multiplier effect. Funding should be improved with the creation of investment units, REIT structures of the bonds in order to attract funds for infrastructure projects in the long term. Currently there is much skepticism about the possible effects of the reforms and economic performance in general, but we believe that growth will pay dividends in the long term and therefore we maintain our focus on a time horizon of this kind.”
So a great transformation framework that bodes well is hard to tackle; not all will go smoothly and there will be setbacks and disappointments. Hans Bevers, macro research economist of Petercam Asset Management, says: “While the political and economic situation has clearly stabilized by adopting a series of measures aimed at attracting foreign direct investment to reduce the current account deficit, India is not yet out of the woods. It takes more steps to increase the degree of liberalization for business. After a promising start, in fact, there is still the risk that the reforms would experience a setback in the coming months and, thus, lose the momentum.”
Despite this, however, the black darkness seems behind the national economy in recent years has been too mortified than their otherwise relevant problems. Of course it should be noted that the enthusiasm for the reformers tend to disappear quite quickly, especially in those financial markets open to foreign capital that are characterized by high volatility and beta. The fate of India at present remains heavily binary, with prospects of either becoming a new power model like China, or relegation of perpetual underdevelopment. Whatever the outcome, the shambles will be felt strongly in the markets.