Economic Growth

• India’s real GDP growth is expected to remain over 7% in the coming years while the inflation is expected to remain stable around 4%. The nominal GDP growth of India over last 20 years has averaged about 11.7%.  If you extrapolate this growth to 2017 GDP, India will become a $5 trillion economy by 2022/2023 which will make it the world’s third or fourth largest economy, thereby making it an important investment destination.  India was the 10th largest economy at beginning of 2014 and now is the 6th largest global economy.

• India’s Inflation is under control at about 4% and is expected to remain stable.

• Indian IPO market is on the rise with 38 IPOs being introduced in 2017.

• Moody’s upgraded India’s sovereign rating after 14 years to Baa2 with a stable economic outlook.

• Fastest growing economy with a growth rate of 7.4% for 2018 which is expected to rise to 7.8% by 2019 – IMF.

​

​

What are the ways to invest in India?

ETF’s

• Given the complexity of investing in India from offshore jurisdiction and given the need for ID and tax issues, the easiest way to invest in India is to invest in Indian ETFs which tracks the benchmark indices. 

• However, most ETFs on India are benchmarked against the Nifty 50 Index (in USD terms) and this index may not truly represent overall growth stories in India or the domestic demand focus. One has to note that Nifty comprises of 50 stocks while there are > 5700 stocks listed on National Stock exchange (NSE). A number of nifty constituents are in government owned companies or companies focused on global growth like the IT sector.

• Most good quality single manager funds have significantly outperformed the Nifty index over a longer period of time.

• The Nifty index constituents are being changed far too often in recent years so the index has lost some significance and the volatility in this index is in the range of 18-20%.

• Most India ETFs are not very liquid so may not be an option for institutional investors.

Actively Managed Funds

While investing in ETFs is a simpler option for individual investors, generally most institutional investors including endowments/foundations prefer to invest with managers who give them exposure to broader variety of Indian companies.  However, before investing into India focused funds, one needs to understand their investment style and philosophy and be comfortable with the same. There are about 60 such India focused single manager funds.  Most India focused funds tend to invest in small-cap / illiquid stocks or in so called value stocks, such as cheap stocks, which generally results in investing in value traps more often than not.  Also, small-cap / illiquid stocks tend to be a lot more volatile and such funds’ performance get affected if there is redemption pressure In difficult market conditions.

​

Challenges India faces/Risks to Investing: 

1. India has been a land of hopes and promises and has always looked good from a longer term point of view; however, investors have been disappointed in the past.  The disappointment is mainly driven by the nature and vibrancy of Indian democracy and bureaucracy, policy reforms and measures being delayed or simply blocked in implementation. This also causes a lot of volatility and cyclicity to the Indian growth story.  Mitigants: One should focus only on where the true secular story of India lies and which is devoid of any policy related benefits.

2. Fiscal deficit: Indian policy makers in the current and even the previous administration have been quite prudent in the path to fiscal consolidation. Current Fiscal deficit stands at 3.3% of GDP and the aim is to bring it to 3% of GDP.  Increasing tax compliance and measures towards formalization of the economy in recent years are helping to improve Government revenues.  Mitigants: Government has shown significant resolve in keeping fiscal deficit levels to targets spelt out in Union Budget and has so far not resorted to populist measures of reducing taxes on crude oil which will impact fiscal deficit targets.

3. Currency risk and Current account deficit: Current account deficit for 2017 was at 1.5% of GDP and it’s expected to be around 2.6% of GDP on account of rise in oil prices. It is important to note that over a longer period, Indian currency has depreciated about 3.6% on annualized basis, though the depreciation is not linear but in steps. Investors should factor in this INR depreciation in their return expectations.  Mitigants: Indian rupee has been one of the weakest currencies in Asia, depreciating about 12% for 2018. However, effect of rising Oil prices around USD 80-90 per barrel has now been factored in, in terms of effect on both current account and fiscal deficit and current levels of Rs 71-72 should be attractive for investors to look into entering India. Yes, definitely any strength in Oil above $90 /barrel would lead to further weakness in INR in the short term. 

4. Political risk: General Elections are due May 2019. Investors are concerned whether the current regime led by PM Modi will return to power. PM Modi’s regime is widely seen as being much less corrupt, having implemented some strong policy measures which are meant to help the economy. It is widely expected that PM Modi will return to power albeit with a reduced majority. Indian electorate is quite unpredictable and it is anybody’s guess at this stage.  Mitigants: India has been a story of two steps forward, one step back but the private sector’s especially good quality companies continue to generate strong growth and returns for their shareholders and that will continue. Over the years, good quality Indian corporates have learnt to continue to thrive, not because of the government but despite the government.

5. Valuations: Given the growth environment, strong domestic equities culture and limited availability of good quality companies, the Indian Equity market always looks expensive generally relative to other emerging markets.  Mitigants: The market corrects in a straight line on account of various extraneous events like politics, currency, corporate scams/bankruptcies, global sell-offs, geopolitical concerns etc. These are the times when opportunity presents to an investor to buy good quality stocks at reasonable valuations. Most of the times these stocks recover pretty quickly because the domestic institutional investors also tend to then migrate to such good quality stocks. As such, it is either prudent to buy and hold good quality stocks for the long term or enter the Indian market when there is a sense of crisis to build a portfolio of good quality stocks at reasonable valuations.