It’s Prime Minister Narendra Modi’s second go-round leading one of the world’s largest economies. After years of being in fourth place on the big emerging-markets drama scale—a good place to be actually—India is starting to garner attention again. Though not in a good way.
Since his party won easily in May’s elections, the good news for Modi has dwindled. The Wisdom Tree India Earnings (EPI) exchange-traded fund, one of the most liquid ways to buy Indian equities, is up only 0.7% while the benchmark MSCI Emerging Markets Index is up over 7%. India is far and away the worst of the BRIC stock markets this year.
What’s the problem with India?
Modi’s newly appointed Finance Minister Nirmala Sitharaman is a former Defense Minister and the replacement for Arun Jaitley due to health issues. She presented her first budget on July 8. Rathin Roy, a member of the prime minister’s Economic Advisory Council, pointed out in an op-ed that the Finance Ministry’s own economic survey—released the day before the budget—had estimated 2019 revenues of $227 billion. That was one full percentage point of GDP lower than the budget estimate of $252 billion.
“Her figures revived anxieties about the credibility of government data,” says Amitabh Dubey, an analyst at TS Lombard, an independent investment research provider.
Investors have been skittish since this new government has taken shape.
Granted, India’s budget always makes U.S. investors in India skittish, so this is not exactly a shocker. The undperformance of India could have brought investors back on pricing alone. There are some pro-market standouts in this year’s budget. However, for every tax cut, there seems to be a tax increase. At least one of those increases will turn off foreign investors.
The new budget gradually reduces corporate taxes but increases marginal income tax rates. It lowers barriers to foreign investment but raises tariffs on imported goods and hikes taxes on foreign portfolio investors, an obvious negative.
The budget included some concrete steps to deal with bad debts at state banks but threw no bones to the agricultural sector, which is stagnant.
The Modi government has promised to ease labor laws, making public sector land available for private industry and new privatizations in the first 100 days of his second term. Investors should wait for specifics and timelines.
One government-affiliated economist told TS Lombard that Modi is subject to various pulls and pushes on the policy front, but is clear about the need for economic growth and structural reform.
A newspaper editor who strongly supports Modi told Dubey that real reform will occur only when it is forced on the country by an economic crisis—and that India was due for one, Dubey wrote in a report to clients this week.
“Investors should await clarity in the coming months on what steps the government will take to ease labor laws, reform the banking system and privatize state-owned enterprises,” writes Dubey, TS Lombard’s political analyst for India.
One asset up for grabs is Air India.
Dubey says investors in India should be prepared for “a continuation of past policies, namely a mix of reform, state control and … populism.”
Kenneth Rapoza for Forbes