An optimistic economic story
The Passport to the New India Due Diligence Tour, hosted by Birla Sun Life and Excel Funds, gave financial advisors a chance to assess first-hand the optimistic economic story of the world’s largest democracy
Investors, businesses and regulators gave a fairly candid assessment of the challenges ahead for India, minus most of the PR spin that has come to dominate North American presentations.
A unique opportunity for emerging market investors
The effect was a credible sense that the key players are taking the right steps to deliver on bullish expectations.
“I don’t see resistance from people being a challenge,” said Tushar Shah, CEO of Aditya Birla Finance’s infrastructure business. “The challenge is growth. It’s a question of how fast we can move.”
Ajay Srinivasan, the CEO of Aditya Birla Financial Services Group, discussed the country’s “creaking infrastructure”, external security threats, problematic state banks and infamous bureaucracy. But even with the hurdles in front of it, India presents a unique opportunity for investors today, he said.
The country’s young workforce represents a “demographic dividend” to investors, if the government can meet its goal of raising manufacturing output to 25 percent of GDP.
A new wave of banking
The emergence this year of 'payment banks' – part of the first wave of new banks in India since 2003 – will create more cash savings and enable a range of new financial “micro products,” such as small individual life insurance policies. Together with lower inflation and real return interest rates, the new banks will feed a multiplier effect that will help keep growth in the 7 to 7.5 percent range, he said.
The Modi government’s imminent goods and services tax, in a country where less than 1 percent pay income tax, stands to change the view of foreign investors about the country’s commitment to economic reform, Mr. Srinivasan said. Health insurance, tourism and the emergence of private sector banks represent just some of the huge opportunities now emerging, he added.
“The India agenda has changed from a caste-based philosophy to one of economic development,” he said.
Focus on inflation
Prime Minister Modi and his BJP party won the largest majority in more than 20 years in 2014, giving them the ability to push through reforms. One of the key steps already taken has been a cooperative effort with the Reserve Bank of India to wrestle inflation under control. They are in agreement on an inflation band of between 2 percent to 6 percent and to date have brought inflation down to about 5 percent, from about 8 percent in the first quarter of 2014.
It’s become clear that the government has embraced inflation targeting and the country can expect inflation to continue to decline, likely falling into the 2 to 4 percent range in the next 15 years, said Mahesh Patil, Co-Chief Investment Officer of Equities at Aditya Birla Financial Services.
Lower, more stable rates are encouraging people to take their savings out of hard assets, such as gold, and put excess capital into their bank accounts instead. The multiplier effect on those savings is expected to help further fund growth in areas such as infrastructure development and consumer spending.
Torrid growth rate
Publicly traded Indian companies will deliver compound growth of between 15 and 20 percent over the next three years. The gains will be driven by a combination of government spending and personal consumption, as the country’s torrid GDP growth rate of 7.4 percent adds another 30 to 40 basis points in that period, Mr. Patil said.
Many outsiders question the durability of today’s reforms should the Modi government fail to extend its five-year term. But several speakers emphasized that there will be no turning back, regardless of who rules.
“There is now a understanding among political parties that conservatism is the only financial option,” said Maneesh Dangi, Co-CIO of fixed income at Birla. “In any government India will have, fiscal discipline will be the policy,” he said.
India’s prospects look “substantially better than they ever have in the past,” he said, stressing that progress will be “slow and steady.” Already, India’s growth oscillation looks less severe than what we see in the West, he added.
Best practices and governance
The corporate presentations spotlighted India’s entrepreneurship, innovation and commitment to best practices and governance. Godrej Consumer Products, for example, explained how it creates soaps, hair colour and insecticides for three distinct segments of the market: mass, premium mass and premium. Even as it expands into higher value markets in India, the company is confident it can continue to expand internationally and build a global brand.
Housing Development Finance Corp. Ltd. (HDFC), the nation’s largest mortgage finance company, boasts revenue growth north of 20 percent a year, spurred by an urban housing shortage, rising affordability and low personal debt. At the same time, the company has managed keep its percentage of non performing retail loans to 0.53 percent. For comparisons sake, it’s worth remembering that the two largest US mortgage companies - Fannie Mae and Freddie Mac – were put into conservatorship in 2008 after posting losses approaching US$15-billion.
A burgeoning housing marketing
On average, it costs 4.4 times annual income to buy a home in India today, down from 22 times in 1995. Homebuyers on average are borrowing the equivalent of US$35,900 for a home, with the best borrowing rates now just below 10 percent. However, “Tax incentives can bring the cost of borrowing down to as little as 4 percent for many families,” said Conrad D’Souza, an HDFC executive.
IndusInd Bank, a private sector bank serving about 7 million clients in India, explained how it planned to double in size over the next three years by rolling out new electronic services and linking to the country’s new ‘payment banks.’
The Modi government has allowed the creation of 23 new banks this year, of which 11 are payment banks, designed to give accounts to tens of millions of individuals previously shut out of the banking system. Innovative technologies that include biometric identification are turning cell phones into mobile ATMs and point-of-sale devices, said Sanjay Mallik, Head of Investor Relations and Strategy at IndusInd Bank.
“Everything is going to happen for first-time customers on the phone,” he said.
To give an idea of how quickly India’s financial services market is changing, Mr. Mallik pointed to IndusInd’s initiative to begin offering a variety of products online in January 2015, including personal loans. Already, 15 percent of its personal loans are now done electronically, enabling the bank to trim costs and record an ROE in excess of what Canada’s big six banks report.
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