8th November 2013
As the Indian stockmarket reaches an all-time high and the country launches a rocket destined for Mars, Caroline Keen, co-manager of the Newton Asian Income Fund, takes a closer look at India’s battle to regain a firm economic footing.
“Despite the recent recovery of the local stockmarket, the situation is far from rosy on the ground in India,” says Keen. “Over the summer, the Indian rupee had been plunging on concerns over the current account deficit and quantitative easing tapering talk, the central bank was fumbling to put in place liquidity measures, and to top it all, ahead of the elections (after a long period of policy paralysis), the government has been frantically pushing through populist measures such as the Food Security Bill. Indeed, India has a spring 2014 election scheduled, although there is a question as to whether it will result in any meaningful change for economic growth in the near term. The current government has not been aggressive in passing or implementing necessary reforms to support growth,” she adds.
“The macroeconomic backdrop remains mixed despite the recent liquidity injections. GDP growth forecasts for fiscal year 2014 remain at 3.7% at the low end (from 9.75% in 2010), the latest second quarter reading was 4.4% – for all the talk of China’s hard landing, India is having a challenging time too,” she explains. “Many sectors of the economy are slowing – even biscuit sales growth – the largest and previously most robust category in branded consumer foods, has slowed from 12-15% to below 5%. Meanwhile, infrastructure remains desperately lacking – there are around US$100bn of stalled projects. New roads are cracking and falling apart just a few months after opening. Meanwhile, India remains at the mercy of the global liquidity cycle because of its reliance on short-term portfolio inflows to fund its current account deficit. Recent market reactions to externally driven events have exemplified this point.”
“A higher pace of fuel price reform is also needed, not just looking at cheaper ways to import oil (importing more from Iran is reported to save them US$8.5bn).” Keen continues: “India consumes around three million barrels of oil per day. The rupee depreciation is not helping – it is estimated that every one rupee fall in the exchange rate adds an extra Rs80bn (US$1.3bn) to the Fuel Subsidy bill. Reform is urgently needed if the government is to bring both its subsidy bill and budget deficit under control.”
“Business sentiment is weak, unsurprisingly, with the elections causing uncertainty. However, one silver lining is the resilience of the rural economy after a strong monsoon,” she says. “Furthermore, despite the downbeat economy India retains some very well-run companies, led by well-educated management, with an entrepreneurial spirit. As far as we are concerned, the most attractive long-term investment cases remain the private hospital operators and consumer companies focused on innovation with distribution capability. We remain happy to steer clear of the financial sector, and wholesale funded banks, in particular, given their vulnerability in this environment,” Keen concludes.