Practical analysis for investment professionals
05 June 2018

Eight Charts: India Ascendant

India’s economy will experience the ordinary progress of a century over the next decade.

That sentence is as true now as it was in 1952 when Donald B. Macurda wrote of investment opportunities in India for the CFA Institute Financial Analysts Journal.

The appeal was humanitarian, but also prophetic.

He wrote that the country “should logically become one of the world’s great steel centers,” and today it is. The prediction that “the Indian industrial ball will gather an accelerating momentum that could be enriching to all concerned” has also aged well.

This is because of pro-growth policy, not political personality.

India’s economic liberalization was really sparked during a balance of payments crisis in 1991. Ten years later, the Asian Development Bank’s chief economist observed that the need for continued work had become an item of widespread political consensus. To place the change in context, consider that the weighted average tariff on an imported product was 76% in 1990 according to the World Bank. It was 29% a decade later, and 6.2% in 2016.

That’s more a rebirth than a liberalization.

These compounding efforts have a straightforward result: India isn’t playing catch-up anymore. It’s the world’s seventh-largest economy, and in some ways it’s already well ahead of “developed” places.

In early 2017, Sloane Ortel estimated that a minimum wage earner in New York City spends 1.5% to 2.5% of their discretionary income on banking fees. In India, anything above 0% is an outlier. The Pradhan Mantri Jan-Dhan Yojana (PMJDY, Scheme for People’s Wealth) provides not just free bank accounts to all citizens, but also free overdraft insurance. That makes capital formation easier, and it’s just one of a few hundred reasons why 8% GDP growth seems plausible for the next 20 years.

So don’t be surprised if the economy starts running a little hot.

India’s inflation rate printed below 2% in the summer of 2017, but has since risen significantly. The most recent release puts consumer prices up 4.58% from a year ago, and the year-on-year change has been well above the RBI’s target of 4% since November of last year.

The 1 July 2017 introduction of the national Goods and Services Tax (GST) is not least among its drivers. The 18% tax it collects on services is a significant hike from the 14.5% duty that was previously imposed on 28% of the CPI basket.

Fiscal policy is also likely to be accommodative until elections to India’s lower house of parliament, the Lok Sabha, in spring 2019. Local and national government social and infrastructure spending tends to spike in these pre-election periods.

And of course, there are commodity prices.

India imports 86% of its crude oil requirement: about 1.5 billion barrels each year. That means rising crude prices have nearly a one-on-one impact on India’s import bill.

It’s less stark than it seems at first. Refined petroleum is India’s largest single export. The country sent 207 million barrels abroad in 2016, making it the world’s fifth-largest supplier behind the Netherlands and netting $29.5 billion, 9% of the country’s total export trade.

For the Indian consumer, oil prices never fell. The government responded to the 2015 selloff by raising taxes on diesel and petrol. This increases reserves and can always be cut in the future. It’s also a footnote compared to some of the government’s other policy reforms.

The informal sector accounts for roughly 40% of India’s 2017 output and employs almost 80% of its labor force.

The government seems determined to get rid of it.

India has digitized its financial plumbing, cracked down on cash, and issued a new national tax scheme largely to tamp out “black” money, or untaxed earnings on the black market. Many of these businesses are relatively low quality, and can be expected to lose share or cease operating without the ability to flout wage laws and avoid taxes.

This is a tailwind for listed companies. Market leading franchises have long been gaining share from these informal operators. Soon they will operate in a uniform national market with much less illicit competition.

The money habits of individual Indians are also headed for a significant change.

About 95% of India’s wealth is invested in physical assets: 77% in real estate with the balance in durable goods (7%), and gold (11%).

The remaining 5% is invested in financial assets. This share is already growing and looks set to go further. Households put 45% of their income into financial assets in 2012. The proportion is now around 58% and looks poised for more expanision.

This will materially strengthen India’s capital account if it continues.

There are risks to the rosy outlook, of course.

A primary one is the sometimes lackluster credit discipline of Indian lenders. “India’s bad loan/twin balance-sheet problem is widely known and so far intractable,” David Keohane wrote last year.

Historically, Indian companies have been weighed down by debt-laden balance sheets and the public sector banks that have financed them have been saddled with non-performing assets. In large part, this is because India’s bankruptcy code did not make it easy for creditors to reach economically viable arrangements. The Insolvency and Bankruptcy Code (IBC) of 2016 has materially strengthened the insolvency framework with an efficient legal structure to enforce debt service obligations.

It’s difficult to overstate the importance of this. The Asia Securities Industry and Financial Markets Association (ASIFMA) estimated that India’s corporate bond market was worth about 15% of  GDP in 2017. That’s tripled from 5% five years earlier, but is still much lower than neighboring Malaysia, where outstanding corporate bonds were worth 40% of GDP. Deepening this market will help to finance much-needed infrastructure projects and also provide banks with a bit more breathing room.

There are plenty of reasons to hope it works, but it may be a process. About two weeks ago, a Reuters headline blared, “India State Banks’ Bailout Stumbles as Losses Mount.” And Moody’s just cut their estimate for India’s 2018 GDP, citing a combination of higher oil prices and tighter financial conditions.

And then there’s the same old risk: Investing is hard.

Finding multibagger investments in India is a tricky affair because accounting quality and corporate governance standards vary wildly across companies and over 60% of the market cap of the frontline index, the NIFTY, is in highly regulated sectors like banks, telecoms, metals, power, infrastructure, and pharmaceuticals.

However, India had 5,615 listed companies in 2017, according to the World Bank. That’s more than any other market on the planet: The United States had just 4,336. The top decile of these firms has historically delivered 10-times returns over 10-year horizons.

That’s a 25% compound annual growth rate. Foreign investors have participated in this growth story enthusiastically, which has kept India among the most expensive emerging markets based on trailing price/earnings multiples.

The standard question to ponder towards the conclusion of an article like this is: What inning are we in?

In India, though, the game is cricket, not baseball. One inning can last as long as four baseball games, and there are either two or four of them. The longest game in history lasted nine days. And that’s really the point. An allocator encountering India today faces an unusual and alluring confluence of factors. The MSCI Emerging Markets Index has only an 8.5% weighting to this fast-growing, cyclically attractive, and tailwind-laden economy.

The outlook is strong enough that we’ve gotten almost to the end before mentioning India’s outrageously favorable demographics, swift digital rebirth, and booming middle class.

That’s because we’re not done talking yet. CFA Society New York hosted this essay’s authors on 7 June 2018 for an evening of wide-ranging, no-holds-barred discussion. If you’ve read this far and you’re a member, you can view the Livestream broadcast.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/Alex Robinson Photography

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About the Author(s)
Sloane Ortel

Sloane Ortel publishes The Sloane Zone, an email newsletter that comes when you least expect it and makes more sense than it should. She joined CFA Institute's staff as a sophomore at Fordham University, and was instrumental to the global growth of Enterprising Investor as a collaborator, curator, and commentator over the subsequent eight years.

Saurabh Mukherjea, CFA

Saurabh Mukherjea, CFA, is the CEO of Ambit Capital. Under his stewardship, Ambit Capital has been rated the Most Improved Brokerage House in India by Asiamoney for six consecutive years as well as the Most Independent Brokerage for three consecutive years. Mukherjea was also voted the top strategist in India by Asiamoney in 2014, 2015, and 2016. He is the author of a number of bestselling books, including Gurus of Chaos and Unusual Billionaires.

Vikas Khemani, CFA

Vikas Khemani, CFA, is president and CEO of Edelweiss Securities. He has over 20 years of financial services experience and leads wholesale capital markets at Edelweiss, including such businesses as investment banking, institutional equities, prime brokerage, and research. At 30, Khemani became the youngest member of the Edelweiss Management Committee. Edelweiss is a leading diversified financial services company in India with interests spanning corporate and retail credit, wealth management, asset management, capital markets, and life insurance.

Sunil Singhania, CFA

Sunil Singhania, CFA, is the founder of Abbakus Asset Management. He was the first person from India to be nominated to the CFA Institute Board of Governors, and is currently chair of its investment committee. Prior to establishing his current firm in 2018, he was global head, equities, at Reliance Capital where he oversaw equity assets and provided strategic inputs across the Reliance Capital Group of companies, including asset management, insurance, AIF, and offshore assets. Singhania was also the founding president of CFA Society India, formerly the Indian Association of Investment Professionals.

Navneet Munot, CFA

Navneet Munot, CFA, is executive director and chief investment officer of SBI Funds Management, a joint venture between the State Bank of India and Amundi. He oversees investments of over US $30 billion across various asset classes in mutual funds and segregated accounts. Prior to this role, Navneet was executive director and head, multi-strategy boutique, with Morgan Stanley Investment Management, and chief investment officer, fixed income and hybrid funds, at Birla Sun Life Mutual Fund.

7 thoughts on “Eight Charts: India Ascendant”

  1. Savio Cardozo says:

    An interesting and cogent article. As an expat of Indian origin I think that a major impediment to this outcome is India itself, which, from my experience, can best be described as managed chaos – the traffic being symbolic of this.

  2. john says:

    And for those who don’t do twitter?

  3. Francis says:

    A good read thanks – the comment about corporate bonds issuance being lower than “neighbouring” Malaysia made me smile.

  4. Anil Venherkar says:

    Nice article, worth a read!

  5. Gopalakrishnan says:

    very good article. Let us share .

  6. Sameer Somal says:

    Thank you for the thoughtful context and excellent charts! Looking forward to more thoughtful articles on a subject near and dear to CFAI. Very helpful and informative : )

  7. Promit Sengupta says:

    Good read, special thanks for covering scenarios dates back 1990,which indeed a good enough time to see cycles and making scenes to see our progress..

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