Will India do well in 2017?

With a population of 1.3 billion, a lot of young people and a growing middle class, India has long been a compelling investment opportunity. But what has made our FundCalibre experts collectively identify the region as a stand-out growth pick this ISA season?

We asked Prashant Khemka, manager of Elite Rated Goldman Sachs India Equity Portfolio, for his thoughts.

Modi’s reform mandate strengthened by state elections

“In India, all legislation needs to be passed in both houses of parliament in order to become law. Prime minister Narendra Modi’s Bharatiya Janta Party (BJP) leads the National Democratic Alliance (NDA) coalition, which has had a strong majority in the lower house since the 2014 general elections. But the upper house has been more fragmented, which, in our opinion, has made it harder for the government to pass crucial reform bills.

“On 11 March 2017, the results of legislative assembly elections were announced in five states. The most closely watched of these was Uttar Pradesh, India’s largest state.

“The BJP won a clear majority there, surpassing even the highest exit poll predictions. In Goa and Manipur, although the BJP finished a close second, it is likely to form the government with the support of other regional parties.

“These results are likely to swing the seat share in the Upper House in favor of the NDA, and could potentially lead to faster passage of legislations and support continued reform momentum.”

Higher tax revenues

Prashant mentions two key changes he thinks will positively impact the government’s tax revenues over the coming years. The first is the national goods and services tax bill, which was passed last August in both houses and will be implemented from 1 July 2017.

The second is the demonetisation process Modi undertook in November last year, when he surprised Indians by demonetising 500 and 1000 rupee notes in a bid to crack down on corruption and black market money. People were forced to hand over their notes to banks within a very short time frame or risk losing the money completely.

“The two denominations accounted for 86% of all the money in circulation,” Prashant says.

Given India remains such a cash-driven economy, this did lead to businesses around the country reporting an immediate slowdown in sales. The move also saw India equities fall by around 9% from the date of the announcement until the end of the year; however, the market has since recovered and data for the first quarter economic growth in 2017 is indicating a more modest slowdown than was initially feared.

“What the move has done is provide tax authorities a wealth of data on income for individuals and businesses,” Prashant says. “This has resulted in notices to 1.8 million bank account holders for explanations in instances where significant deposits have been made.

“While this in itself does not necessarily mean complete disclosure of income going forward, it would be hard for these individuals/businesses to go back to under-reporting income to the same extent. Hence, we believe tax compliance will improve from the previous low levels.

“We believe the move, coupled with the implementation of the goods and services tax this year, has the potential to make it harder to evade taxes due to enhanced intelligence at the disposal of the tax authorities.”

The FundCalibre team says

There’s lots of good news coming out of the region after the first quarter of 2017, but it’s important to invest in India with a long-term view.

It is a higher risk investment and you need to be comfortable with some yo-yoing in the value of your savings with the aim of achieving higher gains over several years.