Reform is the secret of India’s growth

Notably, Foreign Direct Investment (FDI) restrictions have been reduced or eliminated in a wide range of sectors including defence, real estate, civil aviation and construction. As a result, India experienced record inflows from foreign investors in 2017 and once again featured in the list of top host countries for inbound FDI in 2017, receiving an estimated US$45 billion in investment during the year. Interestingly, half of the nations on this list are emerging market countries, and many will also be able to trace increases in FDI inflows to the implementation of specific reform measures.

Undoubtedly, the headline reform measure from emerging markets last year was in India.

“The introduction of the Goods and Services Tax (GST) in July 2017 marked a new era in India’s economy by replacing more than a dozen federal and state levies” said Kim Catechis, Head of Emerging Markets at Martin Currie (Legg Mason) “In doing so, it effectively unified its US$ 2 trillion economy and 1.3 billion people into one of the world’s biggest common markets.”

By fundamentally simplifying the tax structure, the measure is expected to make it easier to do business; to lower the tax burden (and increase consumption rates); reduce the likelihood of tax evasion, improve government revenues and potentially boost GDP.

But maybe the best example of the ambition of India’s reform programme is Aadhar – the largest biometric ID database in the world – which aims to give every one of its citizens an official, verifiable identity. It has the distinction of being the only non-US technical system in the world that has more than one billion users.

Upon taking power in 2014 Prime Minister Modi committed to building on this system, and pretty swiftly supplemented it with a financial inclusion programme dubbed Jan Dhan, which to date has created over 300 million new low-cost bank accounts using the Aadhaar IDs. Added to this is a mobile payments app which runs on the government-created United Payments Interface.

As a result, the possibilities for digital banking through the Aadhaar initiative are immense. Following on the back of 2016’s demonetisation process (where around 86% of the country’s cash was removed from circulation), the ‘remonetisation’ of the country is increasingly characterized by a move towards online transactions, paving the way for a boom in digital payments and e commerce.

“Modi’s government not only has an ambitious digital strategy, but there is a rapid growth in internet use in India, principally via mobile phones” Catechis said “Plus, major initiatives, such as the 2016 demonetization, Aadhar biometric ID system, ‘Jan Dhan’ financial inclusion programme and mobile payments app ‘Bharat Interface for Money’ are all laying the foundations for the accelerated growth of India’s online economy.”

“India is at an earlier stage in its e-commerce journey than China and the country’s lower per capita income is a drag, but the long-term business arithmetic in a country of over 1.3 billion people is compelling. We expect to see a widening of the types of goods bought online (currently heavily weighted towards electronics and apparel) and a greater participation by the country’s vast rural population.”

The tailwinds coming from reform that we are seeing in India are evident across many emerging markets. However, with so many differences in reform initiatives and outcomes, there is a wide dispersion in the benefits accruing to emerging market countries and companies.

“Reducing trade barriers, improving capital flows, developing infrastructure or enhancing institutional frameworks are vital drivers of long-term economic and social change” said Catechis “We therefore believe an active investment approach, focused on stock-driven fundamental analysis is by far the best way to unlock this opportunity”.