India – the fundamental investment case

Bottlenecks’ that have hampered India’s development are easing. India is playing catch up, and is catching up fast. Election of Narendra Modi has rebooted stalled projects, sparked new reforms. India’s domestic economy and growing middle class are the key long-term drivers. Local companies are increasingly competitive; corporate governance is improving, according to Avinash Vazirani, manager of the Jupiter India Select SICAV fund.

What is unique about India?

Its population. At 1.3bn, it accounts for nearly a fifth of the people on earth. As well as being huge, it is also remarkably young. While developed nations struggle with ageing citizens, the majority of Indians are under 35 (nearly 70%) and the median age is 27. And while its society and economy are developing fast, India is still a long way behind the West on its development path.

Is India catching up?

Yes. Some data helps to give an idea of just how fast. Take internet access: in 2010 there were less than 20m internet subscriptions. By the end of 2015 there were 350m, and this is expected to more than double to 730m by 2020 [1]. Or there is the penetration of air travel: in the UK, people take two flights per year on average. People in less developed Asian countries, like Thailand, fly a little less than once a year. In India the average is currently just 0.08 flights per year [2]. But Indian incomes are rising fast and the country’s urban middle class (defined as people who earn between $10 and $100 per day) is expected to grow from around 50 million people today to reach 475m people by 2030 [3].

I believe India’s catch-up process will continue to produce business opportunities and drive rapid economic growth. In fact, it is already happening. In 2015, India’s economy grew by 7.2% [4], a pace that exceeded even that of China.

What about the ‘bottlenecks’?

The catch-up process is not a new one, but for many years the pace of India’s development was hampered by ‘bottlenecks’ i.e. obstacles to growth, primarily a lack of adequate infrastructure (either physical, such as railways or roads, or social, such as healthcare and education) and outdated and overly restrictive laws. In the past, a series of coalition governments struggled to generate the political momentum to fix these problems. But the election in 2014 of President Narendra Modi’s business-friendly government with an outright majority and a mandate for reform of these crucial areas has been a major positive for India. In addition to re-booting stalled projects, the Modi government’s initiatives in financial inclusion have been a particular success; linking bank accounts, social security and health insurance to unique biometric information for the entire population. This has already begun to lift millions out of poverty while bringing vast swathes of the country out of the shadow economy and into the formal banking system.

In addition, Modi’s government has made good progress towards replacing a hugely inefficient patchwork of local state sales taxes with a single Goods and Sales Tax, whose implementation promises to radically improve the efficiency of all levels of business in India.

What type of business stands to benefit?

In years past, global investors in India looked primarily at its services exports, favouring businesses that used India’s relatively cheap, educated and English-speaking domestic labour force to service global client bases typically within the IT and telecoms industries. Today, I believe that the real, longer-term story lies in India’s domestic economy and growing middle class.

Are local companies competitive?

Yes. Today, India has a wealth of innovative, high-quality companies that are ready to answer the changing needs of Indian consumers. Its stock market is huge and diverse, comprising over 4,000 listed companies with a total value of $1.2trn. They range from dynamic local airlines that can cater to the ongoing explosion in air travel, to innovative pharmaceuticals companies that are competing with global names on their own terms. Corporate governance, which has been a bugbear in the past, is steadily improving, and India is already rated higher than China [5] for the way its companies are run on average.

How can one access this growth?

As stock-pickers with long experience of investment in India and a strategy with the flexibility to invest in medium sized as well as bigger, much better known businesses, we believe we have the ability and expertise to build a diversified portfolio of stocks that targets not just the established businesses of today but the companies we believe will be the giants of tomorrow.