Shashank Savla

Why we remain underweight India despite reform progress

Shashank Savla

The approval of the Goods and Services Tax (GST) bill in August was an important step for India, and contributes to us holding a positive medium-term outlook for the country. However, in the near term, high equity market valuations mean that we still struggle to justify a significant allocation to the country. India remains one of the more expensive markets within the region, trading at 17.3x forward price/earnings ratio compared to 13.5x for the broader Asia Pacific ex Japan market. For now, we continue to see better opportunities in the rest of the region, and as such we continue to maintain our underweight position in India. 


One of the criticisms levelled against the Narendra Modi government has been the apparent lack of ‘big bang’ reforms since his significant victory in the national elections in May 2014. This was alleviated when the Indian Parliament approved the GST bill. The bill, which has been in the making for more than 10 years, was unanimously approved by the Upper House after the government amended certain provisions at the behest of the Opposition Congress party. 


The GST bill aims to create a unified market in India with a comprehensive indirect tax to replace the plethora of different state level taxes. It will improve administration, reduce taxation and facilitate faster movement of goods within the country. GST will also encourage the unorganised sector to be more tax-compliant and will increase the government’s tax revenues while reducing the black economy. Companies which have multiple warehouses for tax considerations will be able to rationalise operations and reduce costs. We believe the medium and longer term impact of the GST bill will be positive, with some studies forecasting between 100-200bps improvement in the GDP growth rate.


The bill’s target implementation date of April 2017 seems ambitious, but achievable. One of the most positive aspects of the GST approval process is that the government has shown its willingness to work with the opposition parties to generate a consensus, which bodes well for the future. 


To be fair, the Modi government has managed to undertake several smaller reform measures prior to this. Foreign Direct Investment limits have been increased for many sectors, diesel prices have been deregulated, a national bankruptcy law has been approved and an inflation targeting monetary policy has been initiated. The key going forward will be the speedy and effective implementation of all these measures. There are certain contentious measures, such as the Land and Labour reforms, which will prove much more difficult than the GST, in our view, and are unlikely to be passed in this government’s tenure. 


In addition to the fruitful Monsoon session of Parliament, the Monsoon season this year was more typical following two years of droughts, boosting rural incomes as well as reducing food inflation. A pick-up in rural demand will also help corporate earnings delivery which has been weak for many quarters, especially compared to the over-optimistic consensus expectations following Modi’s election two years ago. Private capital expenditure continues to be weak but has been partly offset by the government’s increased spending on infrastructure. 


The Fund currently has two holdings giving exposure to India: HCL Technologies (software services) and Singapore-listed Religare Health Trust (which operates in the Indian healthcare sector). We remain vigilant to any pull back in valuations which allows us to add exposure and enact our positive medium term assessment of India’s economy.

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Originally published on 20 October 2016.

Tuesday, March 14, 2017, 1:14 PM