Oct 8 2015

Oracle: Remaking India

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It is no secret that the emerging market economies are currently facing some challenges. But where there are challenges, there are also opportunities.

And among the Bric countries – Brazil, Russia, India and China – there is one that stands out as a particular source of opportunity. On a macro and structural levels, India offers four compelling reasons to invest: oil, currency, growth and reform potential.

On the macro front, India is a net consumer of oil. Among the BRICs, it is the biggest importer of oil as a percentage of GDP. With the oil price set to remain relatively range-bound for the next 12 to 24 months, India is best positioned to profit from the savings.The rupee has adjusted heavily after 2013 and the taper tantrum, depreciating from its stronger pre-2013 levels. With the currency now 25 per cent below its 10-year average level, much of this depreciation has already happened.

While we can not rule out further weakness down the line, this greater upside potential means that investing now – as a local or foreign investor – should not pose the same amount of currency risk as in the past.

On the structural front, India also offers some powerful attractions for long-term emerging market investors. When looking over the 15-year period 2015 to 2030, India’s GDP growth is projected to be the largest among emerging markets – close to 140 per cent. What is more, the country is home to a young and increasingly connected population, marked by high internet and mobile phone use.

Prime minister Narendra Modi’s reforms have been slow, but tangible. My view has been, and still is, that Mr Modi is taking a long-term approach to dealing with India’s structural problems. I expect the pace of reforms to be steady and incremental. The past year has seen a number of initiatives, with some successes and some disappointments.

So what has worked? Foreign direct investment reform, coal and mining reform, project management reforms, energy reforms. And what could have gone better? The “Make in India” campaign, tax collection, the goods and services tax and land acquisition bills.

In a bid to revitalise capital expenditures and the investment climate, the government has devoted much effort to ridding India of its reputation as a difficult place to do business. It has rolled out an online e-business portal that consolidates several government services and cuts the time required to legally establish a new business entity and attract investment. Rules for environmental approvals have also been eased, and another new online system speeds up project approvals. The combined changes have already produced results, with new project announcements accelerating after a long period of stagnation.

Market-friendly regulatory changes have relaxed restrictions, allowing more FDI to flow into many sectors. The limit on foreign participation in defence and insurance investment has been raised from 26 per cent to 49 per cent. New rules have also opened up railway projects to full foreign ownership and reduced both FDI limits in construction and minimum project size, as well as budget thresholds for foreign participation.

Social welfare programmes have also been revamped. Programmes to provide bank accounts for Indian households, as well as new pension and insurance programmes, intend to reduce poverty and encourage household savings. The government has rationalised subsidies and adopted price stabilisation measures to help check food price inflation in the event of poor monsoons. Direct transfer of benefits has greatly improved the efficiency and administration of programmes helping the poor, while also saving the government money by removing the old, poorly administered subsidy system.

So India’s story is far from over. But in a country this large and this dynamic, investors should stay tuned in to the multiple factors at play. With valuations now rather stretched and trading above historical averages, the key headwinds for Indian equities are weak first-quarter earnings and negative earnings revisions. Meanwhile, reforms have neither been as bold, nor as fast, as investors had hoped. As a result, India’s equity performance, year-to-date, has fallen short of 2014.

For equity investors, the key near-term issue will still be how long it will take before corporate profits and margins start to respond to the improving economy. It is not too late to buy Indian equities, but sector and stock selection matters more than ever.

Nandini Ramakrishnan is a global market strategist of JP Morgan Asset Management