Insights into India June 2015

Economic Background

There are many tailwinds behind the Indian economy today.  India is by far the single largest beneficiary of lower commodity prices.  This is no better demonstrated than by the Current Account Deficit (CAD) which has fallen from 5% of GDP in 2012 to 1.4% of GDP in 2015.  Foreign Direct Investment (FDI) is growing rapidly and now more than offsets the CAD suggesting a better balance of payments scenario than at any time in living memory.  In addition, significant fiscal improvement is underway with the overall fiscal deficit (State and Central) heading towards 5% of GDP, the bottom end of the 5-10% 20-year range. This is partly driven by lower populist handouts to the rural poor, but also efficiency gains through schemes such as the direct benefit transfer (DBT) where subsidies are paid directly to the beneficiaries, cutting out the middlemen and associated “leakages”.  Furthermore, the RBI has its foot firmly on the throat of inflation.  Despite recent rate cuts, Dr. Raghuram Rajan remains an extreme hawk and real interest rates remain close to decade highs.

Improvement in India’s much maligned infrastructure is also making some progress.  Delhi now has 6 Metro lines, Mumbai is finally starting its second.  Roads have been one of the more consistent areas of delivery and new highways do seem to be popping up across the country.  Perhaps most importantly India’s power deficit is falling.  This is partly due to Coal India which has finally got its act together and India is now awash with the black stuff, allowing all those idle power plants built in the last cycle to burst into life.  But also renewables and especially solar are exploding.  Solar Power is potentially transformational for India and it is not surprisingly getting strong government support in terms of land provision and offtake infrastructure.  Subsidies are currently about half those in China and will soon no longer be necessary as grid parity approaches.   India has the added advantage that solar resources are well spread across the country so can be localised, minimising transmission costs.  The positives are multiple and will be reflected in external accounts, fiscal accounts, productivity, pollution, health and more over the next decade.

This is not to downplay the many challenges facing the Modi government as we are frequently reminded of its high profile failures such as passing the Goods & Services Tax (GST). The reality is perhaps better reflected in growing FDI and the obvious competition between the more progressive states to become “the next Gujarat”.  The Bihar elections were won by the decade long incumbent who heads up what is India’s fastest growing state, and they were never going to lose.  However the result seems to have re-energised the Modi camp’s reform agenda and, for example, a raft of foreign ownership restrictions were relaxed immediately after.

Behind the scenes there are also a number of more “micro” initiatives afoot such as improved financial inclusion (190mn bank accounts opened in the last year) and direct benefit payments to the needy, largely thanks to the 925mn Aadhaar unique identifier cards issued, and mobile payment systems using India’s 900mn mobile phones, of which 150mn are smartphones.

Consumer Trends

Overall we remain convinced that this will continue to present a strong background for both economic growth and particularly the consumer market, driven by the underlying structural drivers of positive demographics and the steady process of urbanisation.  Within this there are some interesting trends.

New Competition.   A combination of good local talent, loads of Private Equity financing and a receptive audience is spawning a wave of new, local brands which the incumbents need to be wary of.  Vini Cosmetics’ new deodorant brand FOGG has stormed to near 20% market share in only 2 years on the basis that it contains no gas, hence more deodorant, and therefore better value.  Patanjali, a relative newcomer promoted by yoga guru Ramdev, is currently outspending some of the major FMCG companies on advertising and winning share with its basically packaged, natural foodstuffs, often at 15-30% lower prices.  Local style snacks and casual dining company Bikanerwala (unlisted) seems to be doing better than some of the western QSR chains.

Ayurvedic Products.  No doubt helped by events like Nestle’s troubles with Maggi Noodles, but also promotion from the likes of Patanjali, natural/healthy/herbal is top of the wish list for those who can afford to make that choice.  Ayurvedic is an Indian traditional medicine approach, which has always been at the heart of Dabur and Emami’s products.  This should continue to benefit them but competition is rising.  Unilever have launched Lever Ayush in the segment.

E-commerce.  Ecommerce is at a very early stage, perhaps most impacting the electronics retailers for now, but will of course grow rapidly.  The big difference between India and China seems to be that e-commerce has arrived even before India got any real modern retail infrastructure built out.  In addition the Indian urbanisation model involves many more towns spread across a wider area, and not the mega-cities down the East Coast of China whose population density lends them so well to e-commerce.  As such India is less of a binary outcome, complicated all the more by tricky foreign ownership rules.

Celebrity Endorsement.  India’s Star promotion culture seems to be waning marginally, partly due to overkill and partly due to social media allowing an alternative and closer direct contact with the stars.  That said it remains the favoured choice of most product launches, and TV is likely to remain the dominant advertising medium for now as the only real way to reach all of those 1.3bn consumers.  Zee Entertainment is still in the prime seat for this.


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