Tim Erskine-Murray
Between 2003 and 2010 (excluding 2008) Indian GDP grew in a range of 7.8% and 10.5%; by fiscal year 2013 growth had slowed to 4.8%. There are now fears that the high growth years were an aberration and that India will return to the ‘Hindu rate of growth’. India’s problem is in many ways the inverse of China’s; while China must rebalance from an investment-led to a consumption-led economy, India must move from consumption to investment.
However, investment is a political issue and India is perhaps best understood not as a single country but as a collection of heterogeneous states, with the added complexity of caste and religion. There remain only two national parties, Congress and the Bharatiya Janata Party (BJP), both of which can only govern with the support of disparate regional parties. Corruption has been an issue and so the scrutiny of an energetic free press has meant that decision-making has slowed as procedure is rigorously pursued, following the scandals of recent years.
As a result of this paralysis, there is now around a 13% power shortage, rising to 18% at peak periods. However, gas-fired power plants are only operating at about 40% capacity, because the government has pegged gas prices at artificially low levels, discouraging exploration and production. Coal India is sitting on huge inventories, because of the lack of rail infrastructure, and as a result, India had to import 100m tons of coal last year despite sitting on reserves of around 290bn tons. In fiscal year 2013, foreign direct investment into India contracted 38% year-on-year to US$22.4bn, while India ranked 132 out of 185 in the World Bank’s ‘Ease of Doing Business’ survey.
Underdeveloped hard and soft infrastructure and a tortuous project approval process has meant that both foreign and domestic corporates are unwilling to invest and banks are currently limited to scrambling for refinancing opportunities, rather than making new corporate loans to fund investment. The incumbent government has made some progress in terms of reducing diesel subsidies and attempting to reform the loss-making State Electricity Boards, but execution remains patchy and there is concern that priority will be given to populist measures ahead of an election, due by April 2014.
The market is hoping for an early election in which the BJP will take power led by Narendra Modi, who has enjoyed a successful, though controversial term as Chief Minister of Gujarat. Given the success of the previous BJP government (1999-2004), whose reforms laid the groundwork for much of the subsequent growth, a Modi win would be taken very positively by the market. However, given the unpredictability of Indian politics, another Congress government, or even a coalition of regional parties, cannot be ruled out.
Whatever the outcome, there is a sense that a growing, urban middle class will not give up its aspirations and that the ‘New’ India is here to stay. Nevertheless it is likely that further progress will be in fits and starts and given the social and political complexity only crises may provoke consensus.
Tim Erskine-Murray is investment manager, Asia Pacific equities at Kames Capital
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