The recent visits to the United Kingdom by China’s Xi Jinping and India’s Narendra Modi reveal a lot about how diplomats view the world’s biggest emerging markets. The pecking order is clear to see. The Chinese president enjoyed a state banquet and overnight stay at the palace, while India’s prime minister had to slum it at Chequers and settle for lunch rather than dinner with the Queen.
Despite these diplomatic nuances, Modi’s “rock star” appearance at Wembley on Friday illustrated that the warmth felt towards India by many people in Britain is matched by investors’ enthusiasm for the Bombay stockmarket. At the end of a difficult year for emerging markets, India stands out as a beacon of opportunity in the developing world. For contrarian investors, in fact, the consensus around the Indian investment opportunity is a source of concern.
For a few reasons, investors are right to view India as the emerging market of choice. First, unlike many developing countries, India is not a hostage to the ebb and flow of the Chinese economy. As a net importer of commodities, India is a beneficiary of today’s low metal and energy prices. China may be India’s second-biggest destination for exports, but it is way behind the United States as a destination for Indian goods and services.
A difficult transition
Second, India’s economic development is years behind China’s, with enormous potential for catch-up. While the Middle Kingdom suffers slowing growth as it navigates a difficult transition from an export and investment-led economy to one fuelled by domestic consumption, India’s potential growth keeps rising.
Goldman Sachs recently predicted that India could grow at an average 9 per cent between 2016 and 2020 if it makes progress on structural reforms to its labour market, infrastructure and education. Even assuming, perhaps realistically, that Modi’s ability to cut red tape is constrained by India’s unique blend of bureaucracy and vested interests, growth should settle at 8 per cent. China could well have slowed to 5 per cent or less by the end of that period.
As with China 15 or so years ago, the numbers illustrating the Indian investment case are breathtaking. Mobile phone users jumped from 3 million to 950 million between 2000 and 2014. Internet use is following a similar trajectory, up 50 million in the first six months of this year alone and heading towards 670 million by 2020. Mobile internet is enabling India to leapfrog the era of physical retail and banking infrastructure.
When it comes to ease of doing business, Modi is making progress. Ten years ago it took 85 days to start a company, now it can be done in 30. Over the past year, 180 million new bank accounts have been created, driving financial inclusion. Around 800 government services are now available online.
Not all good news
But the recent drubbing at the polls in Bihar shows that it is not all good news for the BJP government. Reforms to speed up land acquisition and introduce a national sales tax have stalled. The prime minister’s popularity at home has been damaged by sectarian differences, which he has been slow to counter.
It is often better to travel than to arrive in investment, and India remains a jam tomorrow story. The infrastructure constraints are still significant. Power consumption per head of population in China, similar to India’s 20 years ago, is now close to four times as great. It’s the same divergent story when it comes to urbanisation and agricultural productivity.
India’s stockmarket is more expensive than most of its regional rivals and pays a lower dividend yield. Perhaps that is justified. Earnings growth is expected to be significantly faster than in most Asian countries. But investors certainly can’t be accused of being lukewarm towards India. Unlike Modi’s UK itinerary, India’s valuation is more state banquet than working lunch.
