India to push on

There is a strong long-term case for investing in India, according to Legal & General Investment Management’s global emerging market economist – asset allocation, Eric Lueth.

Lueth acknowledged that India faces headwinds in the short term, with the surprise decision to replace 85% of the currency in circulation having an impact on growth. Lueth said: “Two and a half months later cash in circulation is still 40% below pre-reform levels, the service PMI remains in contractionary territory and two-wheeler sales are down 38%. In addition, India’s banking sector is undercapitalised which weighs heavily on credit and investment.”

Against this, on the positive side of the ledger, Lueth believes that India could thrive even if the new US president, Donald Trump, implements a protectionist agenda: “India is a large closed economy with an underdeveloped manufacturing sector that should be relatively immune to Trump’s protectionist agenda. As a natural rival to China it is also on the right side of Trump’s geopolitical agenda.”

In addition, Lueth said that India generally has sound finances, with the current account balance close to zero, low and falling external debt, and an independent central bank that targets 4% inflation. And he said that progress on structural reform has been impressive. “India adopted a goods and service tax, introduced a bankruptcy law, liberalised FDI, and cut fuel subsidies. Modi’s reform zeal was displayed again with the recent currency reform. While far from perfect – the negative impact on growth was probably underestimated, and less black market money than hoped was eliminated – the reform’s medium-term impact on tax collections should be positive.”