India

India Otto Schade Landscape

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“Whatever you can rightly say about India, the opposite is also true” – Joan Robinson

A two-metre-tall statue of Lord Shiva—symbolised as the dance between creation and destruction—stands outside CERN in Geneva. This gift, to celebrate India’s 60-year association with the European Centre for Research in Particle Physics, is probably the best metaphor for the country of contrasts and contradictions.

Will the pandemic make or break the world’s largest democracy?

With an estimated GDP of $44.128 trillion by 2050, India is projected to be the world’s second largest economy, after China, continuing an ongoing battle for global economic dominance that started in 1 CE. The heightening Sino-Indian border tensions, which have been simmering since the 1960s, are currently edging closer to conflict¹. It is a distraction India cannot afford.

Since he became Prime Minister in 2014, Narendra Modi has launched a raft of initiatives to modernise India in the hope of attracting foreign direct investments and achieve double-digit GDP growth. Right now, compared to Facebook’s market capitalisation of $758 billion, MSCI India stands at $525 billion.

Schemes include zero balance bank accounts to empower the poor; the Digital India ProgrammeSwachh Bharat Abhiyan, a toilets and cleanliness campaign; and the Saubhagya Scheme to provide electricity to every household in India. In 2014, there were 18,452 villages without electricity.

Many projects, including the plan to build 100 smart cities, have not hit their targets primarily due to bureaucracy at the state level where policies are still poorly executed.

Like Made in China before it, India’s economic growth strategy Make in India, launched in 2014, was designed to stimulate the domestic manufacturing industry by increasing its share of GDP from 17% to 25% through international investment, innovation and enhancing skill development and at the same time creating 100 million jobs by 2022.

Home to 38 World Heritage sites, tourism and travel, one of the largest industries contributing $247 billion to GDP in 2018, is also on the agenda, as are media and entertainment.

Producing more than 2,000 films in 20 languages each year, India is the world’s largest producer of films. The industry has grown at 11% CAGR in the past four years and, even taking into account Covid-19, it is expected to hit its revenue target of $3.7 billion by the end of 2020.

Eliminating unnecessary laws and regulations, making bureaucratic processes easier and the government more transparent, responsive and accountable, has seen the country jump 14 places in the World Bank’s Ease of Doing Business Index. The new system of taxes that unified the 29 states creating a single market for goods and services may have helped.

But even before the pandemic locked down a country of 1.38 billion people, Modi had his work cut out. The 29-state country is a maelstrom of diversity with 22 languages, six officially recognised religions and home to 95% of the world’s 1.2 billion Hindus. By 2050, the Muslim population in India is predicted to exceed 310 million, making it the largest in the world.

If the riots that broke out in Delhi in February are anything to go by, Muslims seem to be the ‘enemy’ of the populist state. Like the protests in other populist-lead democracies, headlines maybe masking another agenda; reframing citizens versus government into a battle between ‘us and the enemy’.

For this reason, like perhaps in the US and UK, democracy in India is also potentially in danger.

Unlike Donald Trump and Boris Johnson, however, Modi seems to have mastered the narrative around big decisions to convince his supporters that he is brave, wise and/or fatherly, for their own good. The failed attempt to uncover untaxed wealth by demonetisation in 2016 is a good example.

Despite more than 7 million Covid-19 cases, an economy in crisis, the greatest tax shortfall in a decade (not helped by Vodafone’s controversial win against India’s tax authorities against paying almost €3 billion in back taxes²), and the loss of 21 million salaried jobs during lockdown, Modi remains popular. He has the power to effect change for good but continues to be distracted by nationalistic ideas.

With the backdrop of rising tensions with China, from where India imported almost $70 billion worth of goods in 2019, and the economic impact of the pandemic globally, Modi announced the Atmanirbhar Bharat initiative  and an associated $265 billion economic package  in May to propel the country on to the global stage.

Translated as ‘self-reliant/self-sufficient India’, the five pillars of the initiative are: infrastructure, technology-driven systems, youthful demography and demand. Equivalent to 10% of GDP, the package comes in five tranches, with the fourth tranche focusing on coal, minerals, defence production, civil aviation, power distribution, social infrastructure, space and atomic energy.

The eight fourth tranche sectors echo the 25 sectors selected for Make in India. Attracting foreign investment is at the heart of both initiatives and goes hand in hand with reducing India’s import bill. For example, the Defence Ministry issued a list of 101 military items that will no longer be imported.

Energy is another large import item. After China and the US, India is the third largest consumer of primary energy with its plans requiring even more investment in energy; 11% more by 2040, according to BP’s Energy Outlook.

Tackling the country’s heavy dependence on oil imports, more than 80%, is why mining, which currently only contributes 2.2% to GDP³, is a priority and India has large reserves of oil, as well as gas, iron ore, coal, bauxite, gold and silver.

The wedding season that traditionally starts in October and typically lasts until February highlights India’s reliance on gold imports to the tune of 800-900 tonnes annually. Adorning the 20 million brides in gold jewellery each year results in the price being impacted.

India is also has the third largest Thorium-232 reserves, which will support its planned three-stage nuclear power production programme. To boost its energy self reliance, the government has decided to auction 41 coal mines, a move that is at odds with its promise to reduce the intensity of the greenhouse emissions by 33%-35% by 2030.

At the same time, India has promised to boost its renewable energy capacity by 40%. Solar power is now inexpensive enough to compete with traditional power sources, and in 2018, generation increased by 28% globally, with India at the forefront of this trend⁴.

It means the sector could benefit from a slice of the $300 billion in inward investment predicted over the next 10 years as international firms producing solar photovoltaics, lithium batteries and solar charging infrastructure are enticed by incentives.

According a recent report India’s Turning Point, $2.5 trillion of economic value and 30% of non-farm jobs could be created by 2030 by focusing on 43 businesses in three sectors: global hubs (manufacturing, agricultural exports and digital services); efficiency engines (next-generation financial products and high efficiency logistics; and new ways of living (the sharing economy and modern retail).

Whether or not Modi wins the next election, he still has three and a half more years to steer the emerging superpower towards becoming the world’s highest-growth nation as per its potential outlined in IBM’s Indian Century: Defining India’s Place in a Rapidly Changing Global Economy.

So far, his efforts have seen foreign direct investment into grow by 13% to a record of $49.97 billion in the 2019-2020 financial year, with $14.67 billion coming from Singapore alone.

Although foreign investors can invest in India’s public markets, Modi’s various initiatives have provided a fertile ground for mergers and acquisitions, which are likely to flourish in the wake of the pandemic as valuations fall, relatively low yields on debt continue and liquidity stresses persist.

International investors are jumping on many of these sectors. Google and Facebook have collectively invested more than $10 billion in India’s Jio Platforms so that they can tap into India’s 700 million internet users and help drive Mukesh Ambani’s 5G ambitions.

Private equity behemoths KKR and Carlyle have already made deals, the latter in pharmaceuticals and technology. KKR, which has also invested in the Jio Platform, has joined Abu Dhabi’s ADIA, Silver Lake, General Atlantic, GIC and TPG to invest in Reliance Industries’ retail arm, Retail Ventures, taking the total to more than $5.13 billion.

Investment in transport, expected to grow at a CAGR of 5.9%, is essential to connect the seventh largest landmass that is home to 17.7% of the world’s population, and likely to overtake China as the most populous country by 2027.

India’s railways are one of the largest in the world, generating revenues of $27.13 billion in 2019 and growing by a CAGR of 6.2% between 2008-2019. The government has focused on investor-friendly policies⁵ to attract capital where it is promoting  694 opportunities worth $164 billion.

‘Self-reliance’ could help India’s car industry overcome supply chain issues, with auto components seeing a 6% compounded growth in turnover between 2016 and 2020. With only 20 cars per 1,000 people, the strategy to develop the industry is expected to mirror mobile phone adoption, where low usage meant India skipped the analogue phase. The aim is to make 100% of car sales electric vehicles⁶ by 2030.

One big challenge is India’s deep rooted systemic inequality highlighted by 1% owning 58% of India’s wealth—and ultra-high net worth individuals are growing rapidly—yet 60% live on less than $3.10 per day. And, of course, Covid-19 has not helped equality.

India trump card is the demographic dividend of a young and rapidly growing population. With a median age of 28.4 in 2020, more than 67% of the population is working age (between 15 and 64). Assuming literacy and skills development continue to trend upwards, then India has the workforce to support the economic growth drive.

To capitalise on this, India needs thriving cities capable of supporting 50% of its population living there by 2030. Indian cities could generate 70% of net new jobs created by 2030, produce around 70% of Indian GDP—potentially adding 1% to 1.5% to annual GDP growth—and drive a near fourfold increase in per capita incomes across the nation.

One of its most precious exports, however, has been talent. While China is busy buying strategic stakes in US and European companies, Indians are running some of the biggest global companies including Adobe, Alphabet, Microsoft, Nokia, Deloitte, Novartis, Mastercard and Diageo.

Many of the CEOs, such as IBM’s Arvind Krishna, hail from the Indian Institutes of Technology. As only 1% are admitted, these graduates not only have good work habits but are highly motivated to succeed and competitive, yet with a value system that that benefits long-term value creation.

As developed populist leaders turn inwards with anti-immigration policies, India’s highly educated graduates could be running Indian-based global companies that capitalise on the large domestic market; young and vibrant workforce; and an abundance of natural resources. From an investment point of view, India looks appealing on paper, but as investors know there have been many false dawns.

Like test cricket, investing in India is a long game.

Photo: © Niki Natarajan 2019

Artist: Otto Schade

¹ India and China are edging towards a more serious conflict, Financial Times (13.9.2020)

² Vodafone wins long-running €3bn India tax battle, Financial Times (25.9.2020)

³ India needs to unlock its natural resource potential, Financial Times (15.5.2019)

⁴ Can Solar Power Compete With Coal?, The Wall Street Journal (17.2.2020)

⁵ India plans $137bn rail investment, Financial Times (26.2.2015)

⁶ Reforms drain India’s electric car industry, Financial Times, (13.8.2019)

The views and opinions expressed in this article are those of the authors. CdR Capital Ltd is authorised and regulated by the Financial Conduct Authority. This article is for professional clients and eligible counterparties as defined by the FCA only.

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