Currying your favour – India – Asian Equities

Prime Minister Narendra Modi may have raised investor interest in India but bureaucracy is still holding them back, Malavika Santhebennur writes.

Businesses and investors showed renewed enthusiasm for the land of Bollywood, cricket and food.

This could be attributed to the year old government of Prime Minister, and son of a tea merchant, Narendra Modi.

Modi's promise to cut bureaucratic red tape excited the business world, but a behemoth task lay ahead. As old files were being discarded, agencies found files dating back as far back as the British colonial rule.

In a recent Money Management column, Payden and Rygel's associate economist, Siddharth Saravat, wrote that Modi cut around 30 committees that had been established by the previous government to settle disputes between ministries, "a symbol of policy paralysis".

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Modi had the smallest office and cabinet in 16 years.

Saxo Capital Markets', Van-Petersen, was a big-time India bull due to various factors, including the Modi government, and the young demographics.

More than half of India's population was under 25, and more than 65 per cent were under 35. By 2020, the average age in India would be 29 years, compared to 37 for China, and 40 for Australia.

"India is where China was 10 years ago, and India also is a lot more isolated than - let's say - Singapore or Hong Kong," he said.

"That's not to say they're not going to be affected, but they're just a lot more resilient than some of these other emerging markets."

India also has huge infrastructure capital expenditure needs for the next few decades. They are also net beneficiaries of lower commodity prices.

"India tends to do very well when energy and oil is lower. I think oil is going to be lower for longer, given shale in the US and Iran is coming online," he said.

"I look at India and I think it's going to be very hard to mess up India on a three, five, to a 10-year perspective; a lot harder than what could potentially go wrong in places like Malaysia, or Indonesia."

Red tape maze

But India could be years behind China in terms of making it easier for other countries to invest there, State Street Global Advisors', Mark Wills said.

While China was trying to break down the barriers to foreign investment, India was years behind them in terms of market access for both equities and debt.

"It's a very, very, very bureaucratic country, and talking to anyone who's tried to do business there, it's just unbelievably difficult to get things done," Wills said.

One of India's biggest obstacles was its various states, which to some degree, have incredible amounts of power.

"The phrase vested interest probably got invented in India. There are a huge number of vested interests," he said.

AB's director of research — Asia ex-Japan Value, Rajeev Eyunni, said the danger for India was that expectations from the Modi government had been set at such high levels, that they may be running ahead of reality.

"India is a large country and making changes is not that easy," he said.

Eyunni said that while consumption has been fairly resilient in India, fixed asset investment has been slow, with lack of investment in some of the infrastructure sectors.

"That's led to imbalances in the economy in terms of there's actually under capacity and not in terms of overcapacity in sectors in India," he said.

But Eyunni saw opportunities in the cyclical sectors and stocks in the medium-term as they were quite cheap due to the slowdown in domestic capital expenditure.

Click here to read Part 1 of this feature: Asian dragon lost its fire?
Click here to read Part 2 of this feature: Looking beyond China