India is in the midst of change. One of the biggest successes India has had, compared to other nations, is that the stock markets have risen and the currency has been stable. This has less to do with Prime Minister Narendra Modi and more to do with its central bank governor Raghuram Rajan, who, I think, is the best central banker in the world.
But there has been opposition to reforms being carried out in India. The number one priority for PM Modi should be to reduce bureaucracy. Compare the situation to China where its president Xi Jinping had absolute power: He could clean up the system if he wanted to and also had the ability to do so.
Modi, however, is more like the US president. His powers are limited by the Opposition. In India, reforms have been carried out in defence, insurance and the property market, but the country has a long way to go. The climate for business is yet to improve.
Industrialists and businessmen are starting to express a bit of unease [at the pace of reforms]. There are serious question marks about growth, whether it is freight traffic or electricity production, compared with the higher growth rates of 2006-07. Sales growth and industrial production data has been poor; auto production has been down compared with 2006-07. Overall economic growth is not near the 7.5 percent which the government has been projecting.
If China and India grow by 5 to 7 percent each year, it will be fine as this is better than what the US and UK can achieve.
The Modi government presented a sensible budget that had good things related to investment in infrastructure [tax-free bonds for infrastructure]. It also made some interesting fiscal changes to how the Centre and states should organise their finances. There were strong things relating to the impact of tax avoidance.
Capital market growth has been positive in 2014-15, with a dollar terms growth of around 25 percent. The India Capital Fund rose by 48 percent because it had large exposure to the financial sector. I was positive on India in 2013 because I was confident that it would rally once the new government came to power. In the next five to 10 years, I think I will make more money from Indian markets than the US.
But some Indian stock valuations are stretched by more than 50 percent. A 20 percent correction in India’s stock markets will not surprise me. But I am not going to sell; it is something I can live with. If you had told me that the markets would correct by 50 percent, then I would have sold some stocks and bought back later.
In terms of sectors, India’s consumption sector looks good but some valuations are high. Companies which provide services to the infrastructure sector look attractive. I am also bullish about the banking sector—both private and public. If Modi is serious about reforms, he will have to ensure that state banks operate like some private banks and fare even better.
A few prominent economists are critical about India’s [real] growth rate and Rajan, but they are bullish about the stock markets. I am not sure whether India will perform well, if you compare it to China A Shares.
We are in the midst of a global liquidity bubble where hedge funds and wealthy investors can easily shift funds from one corner of the world to another and move markets. This year, the US market has disappointed the most while European markets and Japan have fared much better. We don’t know where the liquidity bubble will shift next.
Most forecasts show that emerging markets are likely to fare negatively. I have been telling my clients that the growth of emerging markets has slowed down, including in China, and will continue to do so. But I am still of the view that if China and India try to grow by 5 percent, it would be a lot better than trying to reach unachievable targets.
Most economists believe that Rajan needs to cut rates, but I am not sure if that is what he should do. He may do it because he is under pressure. But he should concentrate on currency stability and a moderate monetary policy. I personally think he has done a great job. He has dared to criticise the US Federal Reserve; he should get a medal for that.
Regarding the PM, I think, given the difficult circumstances in which he has to run a country like India, he is doing a good job. Singapore’s late founding father Lee Kuan Yew, when he took charge, had to manage two million people. India has over 1.2 billion, with religious tensions, a powerful Opposition and where there are often vested interests which stand to benefit if they control policy and decision-making.
Besides GST reform—which will have a positive impact on India’s fiscal position and reduce the friction costs of state tariffs—the two big new laws I would like to see are the Land Acquisition Bill, passed and fully and fairly implemented, and a new Labour Law.
The Land Bill will allow factories and infrastructure projects to go ahead faster. At the moment, there is a complex process that most parties in such a land transaction are not happy with.
Besides the Land Bill, the other big impediments to growth and expansion are the very restrictive labour laws; it is very hard to fire people and labour regulations are both complex and inflexible. This is a harder thing to change, as there are many interests active in keeping the status quo.
If we see these two laws implemented, we can be more certain about a positive future for India. India has the largest and youngest labour force in the world and a cheap one, especially compared to China, and which also speaks ‘OK English’. Which company in the world would then not want to have some of its operations there?
But if India cannot achieve these two [goals], I think it will have to wait longer for the future that has been promised to them so many times by their politicians. But the future belongs to those with a young and energetic population: India has that more than anywhere else. Few other countries do.
(As told to Salil Panchal)
Check out our Festive offers upto Rs.1000/- off website prices on subscriptions + Gift card worth Rs 500/- from Eatbetterco.com. Click here to know more.
(This story appears in the 29 May, 2015 issue of Forbes India. To visit our Archives, click here.)