India’s government and central bank are on a mission to rapidly formalise and increase access to finance in the domestic economy. The Modi government has introduced a universal biometric identification system called Aadhaar which aims to improve the efficiency of the Indian economy, in turn reducing the country’s dependency on physical cash transactions. Through Aadhaar, tracking the credit history of individuals will become easier and enables India’s financial institutions to lend more efficiently. Despite India being one of the world’s largest economies, cash is still the predominant form of payment here. According to Indian think tank Niti Aayog, Indian non-cash transactions are as low as11 per capita per year – one of the lowest levels among the world’s largest economies. This is due to an aversion to non-cash payments in both rural and urban areas but also a historic lack of payment infrastructure across the country.
Aadhaar as a project was always going to be complex as it sought the biometric identification of India’s population – all 1.4 billion of them. It has taken 7 years but significant progress has been made, with some 1.2 billion Indians now identifiable by finger print, DNA or retina scan. This, in turn, facilitates the opening of new bank accounts without paperwork and should help the formal tax base in India rise, in turn reducing the size of the black economy and boosting the country’s credit rating with agencies such as Moody’s and Standard & Poor’s.
The next pillars of digital transformation in India have come from the country’s financial inclusion programme, known as Jan Dhan Yojana, as well as the country’s huge shift to the adoption of mobile services. The former was aimed to expand, and make affordable, access to financial services and was launched in 2014. Since then, over 300 million fresh bank accounts have been opened permitting banking access to a much broader range of individuals across India. We believe that Aadhaar, the Jan Dhan Yojana programme and India’s emergence as the world’s second-largest internet user are reshaping the Indian economy – Aadhaar even allows users to make money transfers with their mobile phones through the use of a unique ID number.
India’s push to digitise the economy has been in parallel with the recent rollout of the government’s Goods and Services Tax (GST) bill. We believe the long-awaited GST bill represents a major milestone for the economy, with its introduction aiming to eliminate barriers to trade, remove unnecessary costs and buoy stronger growth in the long term.
The GST bill is a constitutional amendment that allows a single national indirect tax to replace a plethora of state and national taxes levied on a number of goods and services. In turn, we believe the bill should eliminate layers of internal bureaucracy and red tape in order to create a functional, streamlined single Indian market. Prior to the GST, different rates were levied at the state level creating a complex business landscape. The GST bill aims to bring more uniformity and seamlessness to business transactions for domestic and foreign deals alike and in turn will boost India’s growth.
According to a Morgan Stanley research note ‘India’s Digital Leap-The Multi-Trillion Dollar Opportunity’ the growth potential in India is huge, predicting GDP could reach USD 6 trillion by 2027 on the back of Modi’s digital push. If that happened, India would become the world’s third-largest economy after the US and China. We believe that there are also implications beyond India. The potential increase in e-commerce, financial products and investments will make India a significant market for global corporations. More importantly, if India does succeed, it will become a template for other emerging nations as well as developed markets.
Despite Indian equity valuations currently being at rich levels compared to emerging markets on a historic basis, we believe there are selective opportunities to exploit – the Indian currency has become more stable recently as has its longer-term credit rating outlook, making investing here more attractive. We believe that digitisation, demonetisation and the passage of the GST bill will further extend India’s vast potential.
As the country’s general elections approach in May 2019, any change in government could pose a risk to the pace and nature of India’s reform programme. Nevertheless, most political candidates seem to be pro-business and we believe that India’s growth engine is showing no signs of slowing. However, we feel that careful stock selection will be essential in order to reap rewards from this market as the country’s business landscape quickly evolves.
In terms of exposure to India, we favour a modest overweight position. From a sector perspective, private and public sector banks, the education sector, consultancy services, petrochemicals and selective consumer discretionary such as autos and textiles all seem interesting. Meanwhile, the expensive property sector and consumer products such as tobacco hold less appeal at present.