Article

Money flows into India

Over the last decade under the direction of Prime Minister Narendra Modi, growth has been good. He is expected to win again at the general election in May.

| 5 min read

India has been having a good time. As Western investors worry about the authoritarian politics of China, so they look to the other Asian giant as a possible place for investment. India is a democracy, has a recognisable rule of law with checks and balances on government conduct and has more catching up to do with Western levels of investment and living standards. As a result. India has been receiving plenty of inward investment and has been developing larger and more liquid investment markets.

Over the last decade under the direction of Prime Minister Narendra Modi, growth has been good. India has reduced its balance of payments deficit by exporting more and has built up its foreign exchange reserves.

The Reserve Bank of India has been allowed to get on with restraining inflation to around 4-5%, with some volatility owing to food prices and harvests. India has developed more business process services as an export, grown its pharmaceutical manufacturing capability, expanded electronics and engineering, and developed a larger technology sector. Government has digitalised tax collection, simplified and consolidated sales tax and improved some infrastructure.

Finances and inflation

The central bank estimates inflation will come down to 4% in the year ahead, where they want it to be. They think the economy can grow around 7%. They have hiked rates to 6.5% and will keep them there for a bit longer to complete the job of bringing inflation down from 5.6% to 4.6%. They may also withdraw a bit more liquidity to assist. The young workforce is getting better trained and being attracted to higher value-added activities as the economy grows. Agriculture is down to 16% with services around half the economy.

There will be a general election this May. Mr Modi is expected to win again, with a reduced majority for his BJP Hindu nationalist party. Hindus are 80% of the population, with Muslims at 14%. In the past, Mr Modi’s favouring of Hindus has caused some criticisms. He calls India Bharat or Hindustan. He is currently building a temple to Ram, a Hindu deity, to reinforce the loyalties of his supporters. In his own constituency Hindus have just won a court case giving them some access to a mosque which they claim is a shared religious site. These mosque and temple disputes are quite common. Mr Modi supporters think this is good background to the election campaign.

Satisfaction with Mr Modi’s leadership has remained high despite his long period in office.

He currently faces angry farmers. In 2020, farmers protested new laws and negotiated a settlement where the government would guarantee minimum prices, work to double their incomes and offer some loan waivers. Some farmers think the government has not fulfilled all its promises, pointing to farm products not protected by the price guarantees and to lax enforcement of them. The agriculture minister remains in negotiations. Otherwise, satisfaction with Mr Modi’s leadership has remained high despite his long period in office.

Mr Modi is projecting India more onto the world stage. He has used the BRICs gatherings and the G20 to be more involved in world conversations. He has sought to maintain friendly or working relationships with both the US and Russia. Both have gone along with this, wanting India’s support or trade. His relations with Pakistan are poor with a flare point over Kashmir, and not great with China. Generally, India wants to keep trade routes open, to avoid sanctions and keep out of other people’s wars.

India's stock market

The stock market has generated good returns for a decade, with an 8.5% return per year on the iShares India exchange-traded fund (ETF). The leading sectors represented are:

  • Financials: 24%
  • Information technology: 13%
  • Consumer Discretionary: 12%
  • Energy: 12%
  • Industry: 8%
  • Consumer staples: 8%

The current rating is quite high, but so it has been for some time. People are prepared to pay a premium for access to fast growth in a democracy obeying many of the rules of international business and finance in preference to the risks of China and the authoritarian countries of the emerging world.

Holders of Indian shares can keep their positions for the longer term. The country is so far delivering growth and transforming its economy. More people are moving up the income scale, able to consume a wider range of products and services. More people are gaining skills allowing them to work for the higher value-added firms.

Mr Modi has been good for business and is generally well thought of for his economic activities, despite criticisms of some of his approach to religious diversity and civil liberties. India does pose far less issues over governance and the attitude of the state than China.

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Money flows into India

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