From Mumbai’s slums to business boardrooms, Indians appear to be uniting behind Prime Minister Modi’s drive to attack corruption, reduce red tape and streamline business applications, further reinforcing the improved growth prospects for the country.
Modi’s own modest background no doubt fuels his vision to help the poor. Last November, his surprise decision to replace the nation’s entire stock of 500 and 2,000 rupee notes caused significant disruption, especially for those in the countryside. But in Mumbai at least, most people have accepted it as one of many steps on the road to a wider and fairer tax net, and a reduction in widespread corruption.
The next test of Modi’s popularity is the Uttar Pradesh State elections which conclude in mid-March. Most consumer companies adjusted to the demonetisation with relative ease but we will find out soon if the wider audience still approves. Perhaps a more significant step is the proposed introduction mid-year of a unified Goods & Services Tax, or GST, to replace the existing myriad of central and state taxes. The GST will create a common market of India, and further widen the tax net, bringing in many smaller firms for the first time.
Category-leading consumer companies like Godrej and Britannia are delighted at the prospect of a level playing field with the non-tax paying players, as well as improved manufacturing and distribution efficiencies. The unbranded share of market is estimated to be over 80% in edible oils, over 70% in dairy products, and over 30% in paints. Market share gains for companies like Marico’s branded oils and Berger Paints seem inevitable.
India’s countryside is becoming more connected through Kendras (Hindi for ‘centre’) where people can access communications and financial services. Although privately-run they play a part in the government’s push for social inclusion. I visited the Vakrangee Kendra in Malad, northern Mumbai, and found people queueing to obtain their biometric identification cards, or Aadhaar. Well over one billion have been issued so far; coverage is estimated at 92% in the State of Maharashtra and is presumably higher in the city itself.
The effect will be transformational. The charity Reality Gives estimates that about 40% of Mumbai’s 22 million people live in the city’s slums. Many among the stream of new arrivals from the countryside or other parts of the country will join them. All realise the increasing value of the Aadhaar, which also allows for the opening of a bank account into which government benefits and subsidies can be paid.
The Vakrangee Kendra also sports a dual-screen Amazon logo-ed desk, staffed by an operator who can help those unable to read. Customers select from the usual array of products, pay with an Aadhaar, confirmed with a fingerprint, and goods are delivered to the Kendra in due course. This facility brings new customers on board, and also hugely simplifies and reduces the cost of last mile delivery. Both e-commerce and organised retail are still at early stages in India, but bank account-linked mobile payment, fuelled by demonetisation, is a significant enabler.
With such a large proportion of India’s population housed in makeshift dwellings, the provision of low cost housing is another key policy of the Modi government. The new Real Estate Regulation Act will help reform this highly fragmented and distrusted sector. After visiting the notorious Dharavi slum it is understandable why many are reluctant to move from what is a vibrant and familiar, albeit basic and extremely cramped community, but in the longer term urban redevelopment is inevitable.
Affordability in Indian housing has never been better, demand never greater. Multiple subsidies are available under the Pradhan Mantri Awas Yojana, or Homes for All scheme. The latest is a contribution of up to Rs330,000 (around £3,000) towards the cost of a house. Coupled with generally lower interest rates and existing mortgage tax relief, this can result in a low-income mortgage, typically Rs2mn (c.£20,000), costing a mere 2.4%. A leading mortgage provider in this segment, Indiabulls Housing Finance, recorded mortgage growth of 35% in the last quarter, despite demonetisation.
While Modi might be overtly focused on poverty reduction, he continues to eschew outright populism. India enjoys favourable demographics, but with 29% of the population under the age of 14, it needs to generate sustained economic growth. The government operates from an increasingly well controlled fiscal position, which is likely to improve further as the tax net widens. This could result in something of a virtuous cycle, which may push India’s GDP growth rate into double digits.
Rob Brewis
Rob co-founded emerging markets investment boutique BDT Invest LLP in London in 2000 and remained a partner and fund manager there until joining Aubrey in 2014. While at BDT he co-managed a number of emerging market portfolios as well as the BDT Asian and Oriental Focus Funds. Prior to that Rob spent ten years in Hong Kong as an Asian fund manager with Credit Lyonnais International Asset Management, a company later bought by Nicholas Applegate and then Colonial First State, where Rob ran the North Asian investment team as well as managing the Asian Special Situations Fund and a number of single country funds investing in India, Pakistan, Indonesia and Thailand. An engineering graduate from Cambridge, Rob began his career in 1988 at Thornton Management in London.
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