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Indian economics: on the right track

According to Avinash Vazirani, indian stocks have been a bright spot within emerging – and developed – markets in recent months...

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However, as global economic concerns continue to drive sharp swings in investor sentiment, Avinash Vazirani, India specialist fund manager within Jupiter’s emerging equities team, believes a series of improvements in India’s economic and political picture have created a benign environment in which businesses can thrive.

Recent data confirmed that India’s overall rate of economic growth is continuing to increase, helped by a series of reforms and initiatives from Prime Minister Narendra Modi’s government, aimed at streamlining an historically inefficient business environment while lifting hundreds of millions out of poverty. The latest round of quarterly company results were generally in line with or better than market expectations, and, for many companies, robust profits reassured investors and sparked strong share price rallies. This was in spite of a trend in which foreign financial institutions have been selling Indian stocks; a similar trend for increased buying by domestic Indian institutions has more than made up for this.

And while current low oil prices benefit oil-importing economies like India’s, a rebound in the oil price, even back up as high as $50 or $60 from recent 12-year lows below $30, would not be a major cause for concern. Variable government taxes on petrol and diesel mean that even with the global oil price below the $60 level, the cost of fuel for consumers has stayed in the same range, and so the benefit to India’s consumer sector of sub-$60 oil has not been meaningful.

Having been swept to power as India’s first majority government after 30 years of coalition and stalemate, the Modi administration has been able to achieve much. However, the running has not all been smooth and its landmark Goods and Services Tax (GST) Bill, designed to harmonise a patchwork of state taxes to enlarge the tax base and improve efficiency , failed to win Parliamentary approval amid echoes of the old era. However, on the political side, the broader news is undeniably good. The government has shown its commitment to policies that will enable state banks to improve their risk profiles. A recently-passed real estate bill also promises to sweep away decades of inaction and frustration within land development, and yet in its latest budget the government maintained its focus on ensuring that its borrowing target remains the same, despite pressure from higher state salaries and pensions across the board. All this is strong evidence that things continue to move in the right direction. (Meanwhile, the consensus view, given the procedural rules of the political process, is that in spite of current opposition, the GST Bill will be passed within the year.)

Business activity is up and inflation is now looking set to stay low in the longer term, not merely as a result of lower oil prices but because of the lower underlying costs of doing business in India. The Reserve Bank of India’s decision in April to cut its benchmark interest rate by a quarter percentage point to 6.5% is welcome and the result of lower-than-expected inflation in recent months. While I had hoped for a cut as early as mid-March following the budget, this further drop in Indian rates should enhance the operating environment for businesses and help to cement the positive change from which India continues to benefit.

Of course, there is no way of knowing how events on global markets will unfold, nor the extent to which global investor sentiment – either positive or negative – will permeate India’s stock markets. The decreasing importance of international institutional investors on India’s markets should help to minimise its effects over time, but it would be foolish to pretend that as one of the world’s major markets, India was insulated from the wider world. However, from a domestic point of view, it seems fair to say given the rate of progress we continue to see, that India’s economic development – and investment environment – remain firmly on the right track.

Avinash Vazirani , April 12

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