Financial inclusion, GST will drive next phase of growth: Rana B. Gupta
By Joji Thomas Philip
Fri, Oct 14 2016. 12 14 AM IST
The India equities specialist at Manulife Asset Management says the country’s young population and the massive urbanization and the opportunities these create make India a fairly powerful story
Singapore: Two key factors—the ongoing financial inclusion initiatives and roll-out of goods and services tax (GST)—separates India from other emerging markets (EMs) and will ensure that its long-term growth story is feasible, Rana B. Gupta, India equities specialist at Manulife Asset Management in Singapore, said in an interview.
This coupled with other positives such as the scope for both central and state governments to spend on public and private projects, on infrastructure, the country’s young population, massive urbanization that is happening and the opportunities these create make India a fairly powerful story, he added.
Last week, Singapore Prime Minister Lee Hsien Loong, during his visit to India, had called for more openness and a more trade-based economy, even as he added that the country was not as open to business as investors had hoped for. Was he echoing the concerns of the overall investors’ community?
Regarding investments into India, a lot of work has happened, and a lot of work still needs to be done. There is no two ways about it. And India, as you know, has a federal structure. So, some issues like labour, land—these are controlled by the state government. The central government can only set up an enabling framework and work with the state governments on it.
Now, having said that, let’s look at what the central government has done towards this extent. Firstly, it has devolved a lot of power to state governments and has actively encouraged them to pursue what they have titled as complete federalism—this means if one particular state is going ahead and courting investors that should create investment, jobs, growth and, therefore, other states should also be encouraged to do that.
So, this process has started, and it will take time, but the encouraging part of this process is that it has already started to play out and some of the states are showing good progress.
Secondly, the central government can increase public capex, and they have done so. So, if you look at public capex to GDP (gross domestic product), this was 2.5% in 2014; that has already been increased to 3.5% to GDP. So, a full one percentage point increment in public capex primary led by roads.
Thirdly, a lot has happened with the indirect tax reform, namely the passing of the Constitutional amendment bill of the GST. Needless to say, GST will make India one market, it will make business processes much more efficient.
So the central government has been doing all this enabling work, and we believe this will provide a framework going forward, for better and more business friendlier environment.
The dollar has stabilized and China appears to be looking better. So, is that why we are seeing an emerging markets rally now, especially as US equities are expensive? For now, is India just riding that rally, or are we good to attract capital on a stand-alone basis, irrespective of how other EMs are doing?
A favourable outlook on emerging markets that surely helps. But, we believe India is quite different from other Asian EMs in most aspects.
Firstly, the starting point is too low—the GDP per capita is quite low. India has a very large population and massive opportunity in urbanization.
So, it is a bit different when compared with other emerging markets, and it has a lot of scope for both central and state governments to spend on public and private projects—to spend on infrastructure. Two more India-specific points worth mentioning here—first, there is a big thing that is ongoing in India—financial inclusion—which is very important. This is the first time most Indians will have access to digitally verifiable identity, and this digital platform will be hugely empowering.
Because, given the inefficiencies in the labour market, and given success of online market places in India, this can be the new labour market—jobs will be created and income levels will rise.
Other impact of this would be that these people, when they transact online, when they begin to receive payments online, when they start making payments online, they will create a lot of data trail—this will open up unserved market to financial services.
As more data is created, we believe they will become customers of financial services, and they will also have access to financial services—this can create substantial growth. On the other hand, people will also have access to cheaper and formal credit. And, as you would know, these people usually borrow money from friends, but at much higher rates. So, having access to formal credit will also help better their lives.
That’s the first major theme which is India specific.
The second India-specific major theme is GST. Now, GST will be a value added tax; so, by definition, it will widen the tax base—the overall tax collection should improve and business decisions should improve because a myriad of taxes now get merged into GST.
Now, if you take a pause and look at both financial inclusion and GST together, it’s an extremely powerful tool.
As you know, in India, there is a large amount of informal economy, cash economy. By creating these two platforms, there is more and more encouragement for this informal economy to be a part of the formal economy. And as that pans out over the next 3-5 years, these will itself underwrite a good healthy growth. So, to that extent, India stands out from other EMs—when you then add the other factors—young population, massive urbanization—India then becomes a fairly powerful story.
The India story on a macroeconomic front may be looking good, but what are the issues that investors are concerned about?
When we highlight the potential and the ongoing reforms in Indian markets, investors and clients sit up and take notice. But investors also want to evaluate the long-term durable impact of these reforms.
So, there is a lot of work going into what is happening in India, and who are the real beneficiaries. In terms of unfinished agenda, I think current policymakers—whether it is RBI, in terms of targeting inflation or government promoting infrastructure or financial inclusion or tax reform—they have done quite a bit. So, again, investors and our clients, are putting a lot of effort in tracking how those reforms and initiatives which have already been taken, are being implemented. So, from here on, it will be all about execution and implementation. There is no big agenda that I can say is on the to-do list, and this is what the government should do from here on, it’s all about execution and on exhibition on all themes that we have spoken about previously—on that, the long-term fruits, the long-term growth will depend on that exhibition phase.
How can the country ensure long-term success of its ‘Make in India policy’?
First, the ease of doing business has already improved, but it has to further improve. Entrepreneurs have to be motivated to put capital on the ground.
A lot of effort is already on the way to achieve this, and we have seen some partial success in terms of India moving up the ranks in ease of doing business.
I come back to what I said earlier—a lot depends on execution—so, execution on those factors will also ensure long-term success of the entrepreneurs wanting to put more capital in India.
Because India is a big market, every entrepreneur would want to be close to that market—so, if the current policymakers deliver on the factors we were talking about earlier, I think that would ensure the long term success of the programme.
Looking at India from Singapore, what excites you about the country?
In an uncertain and low-growth environment globally, India offers good quality sustainable long-term growth.
Second, this growth is pretty visible, because as I discussed earlier, the combined impact of financial inclusion and GST will be driving it. Growth will also be driven by urbanization and public spending, which is also pretty much visible.
If all this is executed properly, ultimately it means that government’s revenue to GDP will grow, which means the government’s borrowings will come down, and more savings will be available for consumption and productive investments which is always a good thing—so these are the factors that excite us about India.
Finance minister Arun Jaitley recently listed four factors that could impact Indian markets—a confrontation with Pakistan, US Presidential elections, impact of slowdown in China and Brexit. Among these, what is your biggest concern?
On confrontation with Pakistan, it is a very low probability event. I think further escalation looks pretty unlikely. On US presidential election—whether it is about the US or any other market, it is a sort of uncertainty—this can cause some temporary volatility in the markets. India has pretty unique bottom up drivers.
So, the drivers that we spoke about—financial inclusion, GST, or public capex where the central government is spending on urbanization—these are all domestic drivers and they should continue to carry on even if there is some volatility here and there. So, be it election or performance of other markets or change of guard in some countries, even if it creates some volatility, because we have these unique themes, our long-term growth will not be impacted. In our view, the impact of a slowdown in China is something the Indian economy can withstand, provided the Chinese currency, as it has been, is depreciating modestly—as long as that remains, I think it should be OK. As far as Brexit is concerned, it can cause uncertainty on the global growth scenario. And while it is very important and it can create some volatility in global growth, again it goes back to my answer on the US presidential election. Those bottom up drivers are actually quite potent—some volatility for sure, but we don’t see India getting impacted in the medium- to long-term.
For investors looking for opportunities in India, which sectors would you recommend?
As far as the key sectors are concerned—if you look at financial inclusion, that creates a better consumer class and scope of financial services. So, therefore, on the consumer side, we are quite optimistic on consumer discretionary categories such as autos, consumer durables, white goods, cement and building materials. On financial services, we are bullish on mid-sized banks; we are bullish on mid-sized non-banking financial companies who have embraced digital banking and mobile transactions. So, basically, consumer discretionary and financials are two segments where we are most optimistic on.
Has the Reserve Bank of India’s stance has turned dovish?
RBI had started to reduce rates more than a year ago. Market rates remained higher because the liquidity was in deficit.
Now in our view, this changed in March 2016 policy where the then governor Dr. Rajan mentioned that on the liquidity framework part, he would move to neutral as opposed to deficit default. Now to us, that was a change of stance on liquidity framework, and if you look at it since then the rates have been coming down. Our best indicator for rates - we look at the commercial paper three months rate - because that’s the truly representative of the wholesale market rate rates. This was at around 9% in February 2016, and has now come down to about 6.8%
So that tells you how much the rates have fallen since February, between February and now. So the point is that, RBI moved to a neutral to a easier accommodative monetary policy in February, and the current governor is ensuring continuity. The dovish view is right in this point in time because not only the CPI has moderated, and we expect the CPI to go to even below 5 in the coming few months, but other macro factors like current account deficit, fiscal deficit, foreign reserve etc, they have remained stable and have led to a stable currency. So this is the right time to have an accommodative monetary policy.
How do you see India’s IT sector. There have been concerns that the industry has matured and peaked and some are even predicting that the Indian IT model will not last.
IT sector overall is seeing a lot of disruptions from cloud-related technologies. Our sense is that, because of those emerging technologies, the total IT spending may see a deflection. And in that kind of a scenario, it will be fairly hard to sustain the growth rates in mid teens that India IT companies were doing until a few years ago, and given the base is already so large. Our sense is that, large IT companies are doing their best to adapt, but we still feel that growth rates will be coming down.