Views and Insights



Despite possessing world-leading IT and pharmaceutical industries, India only registers an average national output per capita of US$1,500, highlighting at once the country’s obvious impediments and vast potential.


Doing business in India has traditionally been difficult.  Starting a business often required hundreds of government permits.  Big ticket privately-funded infrastructure investments were often held up for years by land acquisition and environmental approval issues.  Coal and gas based power plants were not supplied with sufficient fuel and constantly ran at abysmal utilisation rates.  The Bharatiya Janata Party (BJP) swept to power in the general election in April-May 2014, and their promise was basically to remove structural impediments and re-energise the country through development.

We visited India during the quarter, covering cities of Mumbai, New Delhi, Ahmedabad, Nagpur, Lucknow and Gurgaon, meeting with a range of different people (villagers, small and large business owners and government officials) in order to gauge its progress and prospects.  It is encouraging to report that the government has made sensible and coherent decisions in quick time, building momentum to tackle the more arduous problems.

Obvious observations can be made about the government’s progress thus far.  Numerous infrastructure projects stuck in the labyrinthine approval process were cleared, boosting public sector investment activities.  The long-awaited diesel subsidy and natural gas pricing reforms were implemented, removing economic distortions.  Minimal purchase price for agricultural products, politically popular, but highly inflationary, saw only tepid increases this year.

While low hanging fruit were being plucked, the current government leaders appeared to possess both the will and the capability to also undertake the more difficult reforms to lift the pace of economic development.  Aims of the key policies were to enhance infrastructure construction and to improve the ease of conducting business for the private sector.

Government-funded infrastructure spending as a percentage of GDP is low in India (less than 4%).  A persistently high budget deficit leaves little room for the government to undertake the necessary spending on vital infrastructure projects.  The solution is to lift government revenue and cut wasteful expenditure.

A Goods and Services Tax (GST) can broaden the extraordinarily narrow direct-tax base, raising much needed funds for the government to balance its books.  A GST can also remove the unnecessary complexities inherent in the State-based wholesale tax system, improving efficiencies for the logistics sector.  While the benefits have been long recognised, passage of legislation was traditionally difficult given staunch opposition from the States.  Under the current government, the GST is firmly on the agenda and implementation may occur by 2016!

The Universal Identity (UID) project can prove to be transformational in the allocation of government benefits, saving them US$12 billion a year!  More than 700 million individuals in India have already signed up to the UID and full national coverage has been targeted for mid-2015.  The ability to identify the correct beneficiaries of subsidies will enable the government to make payments directly into those recipients’ bank accounts.  This will bypass the infamous middlemen who would routinely use fake identities to secure subsidised items and then sell them into the vibrant black market.

One of the missing elements to the Indian economic story is an environment that is conducive for private enterprise to prosper.  Difficult land acquisition (for construction of factories and basic infrastructure) and rigidities in labour laws are recognised as key barriers to private sector investment.

In this context, it is interesting that some States are not waiting for a change in Central Government legislation, but have taken the initiative to streamline these procedures and are attracting business investment as a result.  Indeed, early signs suggest that some States are starting to compete with each other to attract private investment to drive industrialisation, reminiscent of China in the early days.

Regardless of the changes being enacted by the Central and State governments, the companies we own and visited are diligently positioning themselves for the opportunities ahead.  IRB, a toll road investor and construction company, is taking advantage of its competitors’ lack of funding capacity to pocket road projects that promise extremely attractive returns.  Sobha, a respected property developer with a vast land bank, is a pioneer in India to utilise prefabricated construction to shorten construction time.  Info Edge, a dominant job board and real estate Internet website, is focusing on the authenticity of listing and improving market share to maintain its dominance in this growing and nascent Internet market.  Bharti, India’s biggest mobile telephony operator, is busily putting in infrastructure to take advantage of the booming mobile data demand of the young population.  Smartphone ownership is very low and has vast opportunities ahead.

Disciplined monetary and sensible fiscal policies over the last year and a half and a falling crude oil price have reined in inflation.  Real interest rates are still at historically high levels and a reduction in rates will benefit the interest rate sensitive sectors and should help kick-start the long-awaited capital investment cycle that the country sorely needs.

DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.