Indian Prime Minister Narendra Modi has now been in power for a year. Many were hoping he would deliver on his campaign promises with rapid reform and austerity to bring the country’s spending under control.
But those dreams have already faded.
Modi has turned out to be a gradualist, more of a Dwight Eisenhower than a Ronald Reagan. He is continuing to spend, albeit with less vigor than previous administrations.
Yet, the Indian economy is growing so rapidly that it doesn’t seem to matter. Change will be forced on the system, whether or not the government legislates it.
You see, the previous government of Atal Bihari Vajpayee, which led from 1998 to 2004, truly opened up India economically after 50 years of socialist Congress Party rule.
Vajpayee sped up reforms the last couple of years he was in power, and the economy responded nicely. Then, in a stunning act of ingratitude, the Indian electorate threw out Vajpayee in May 2004.
The electorate replaced him with Prime Minister Manmohan Singh, who was mildly reformist, but dominated by party barons of the Congress Party.
Congress’ second term, for all intents and purposes, lasted from 2009 to 2014, and resulted in a spiraling budget deficit. On a consolidated basis (including the regions), the deficit crept close to 10% of GDP!
On Course for Gradual Change
Today, Modi’s government has moved in the right direction, but slowly.
He has been greatly helped by the collapse in oil prices, which have boosted India’s oil-poor economy, and its balance of payments, which is always a problematic area, given India’s overspending.
The oil price collapse also enabled Modi’s government to eliminate the subsidies on diesel oil, a large, wasteful budget item when oil prices were high.
However, the February budget didn’t reduce wasteful expenditures much.
The central budget deficit will be 4.1% of the GDP, according to The Economist’s forecasters. The overall deficit, including provincial governments, will be around 7% to 8% of the GDP, in spite of the country’s rapid growth.
More importantly, perhaps, is that the country still ranks only 142nd out of 180 on the World Bank’s Ease of Doing Business Index, below a lot of countries that are both poorer and more troubled.
The IMF estimates India’s growth from 2015 to 2016 will reach a stellar 7.5%, slightly higher than China’s. The current account deficit is projected to improve to an average of 1.5% of the GDP, after peaking at 4.8% in 2012.
So, although the government’s reform pace is modest, it may not matter.
Stake Your Claim
You see, investment is once again rising towards 30% of the GDP.
India seems to be again poised to move up the scale towards a modern high-income economy. Although micro-reforms in the business climate are essential if long-term progress is to be made.
The Indian market has been overvalued for several years, and has moved up further in local currency terms recently. Although, in dollars, the MSCI India Index is up only 5.2% in the past year.
Nevertheless, with the economy performing so strongly, earnings multiples have tended to decline, so the index P/E ratio is currently only 17 below that of the S&P 500. It’s still high in absolute terms, however.
Thus, a modest holding in India seems highly desirable right now.
The iShares MSCI India ETF (INDA) trades on a moderate P/E of 17, albeit with a dividend yield of only 0.64%. It’s big enough at $3.5 billion, but has an expense ratio of 0.68%. This is somewhat high for an index fund and reflects the difficulty of Indian investment. But as it offers a broad, indexed approach to the Indian economy, it should probably be a first stop.
More interesting is the Market Vectors India Small-Cap ETF (SCIF). This ETF attempts to match the Market Vectors India Small-Cap Index, thus giving exposure to medium-sized Indian companies, which are impossible for U.S. individual investors to buy directly.
As you’d expect, its expense ratio is somewhat higher at 0.85%. But, at $270 million, it still appears large enough for adequate liquidity. SCIF even offers a slightly higher yield at 0.97%, and its P/E ratio is only 12 times, indicating that Indian small caps may still be a bargain.
Few Indian companies have full listings on the New York Stock Exchange, but one I like is Tata Motors (TTM). TTM has a very successful range of small, cheap cars suited to its domestic market, but it also owns the British luxury producer Jaguar Land Rover – a highly profitable investment in recent years.
TTM is trading on only 10.4 times trailing earnings and 8.8 times prospective 2016 earnings. It’s a very interesting hybrid bet on Indian growth, and the global luxury auto market. As you would expect given its heavy capital investment, it only has a 0.3% dividend yield.
Finally, the best-priced of India’s large business process industry is WNS (Holdings) Ltd. (WNS), which offers all kinds of business administration and process services worldwide. Its historic P/E is a little high at 24 times, but its prospective P/E is only 14 times.
While a richer India would threaten its cost base (though there are few countries with lower-cost, English-speaking labor), it would also make doing business with the country easier, enabling it to provide better client service and reduced costs.