Matthews Asia’s Sunil Asnani does reality check of India elections outcome
The outcome of the Indian elections have been lauded in some quarters, but Sunil Asnani, portfolio manager at Matthews Asia says investors need a reality check of the situation.
India-the world’s largest democracy-just completed its marathon practice to elect its next head of state. The results of the national elections-held every five years and spanning a lengthy five-week electoral process-have indicated a landslide win for Narendra Modi and the Bharatiya Janata Party (BJP). It marks the party’s most definitive win in 30 years.
The country’s Congress-led government has been in power for two terms, and many have speculated that a victorious pro-reform party would help India spark more investment-led growth. That may, in turn, bolster many of India’s infrastructure-related projects as well as job creation.
While the markets are responding with expected euphoria over this win, we remind investors to take a tempered view as we look forward to the real challenges ahead for Modi and his party. The country continues to battle long-standing inflation, low job growth and stalled investments. Under Modi’s stewardship, the state of Gujarat responded to these issues by accelerating agriculture growth and improving its economic freedom-which involves the freedom to choose how to produce, sell and use one’s own resources.
The state’s economic freedom rose from levels considered reasonably good to the highest in India, according to a study that has grown out of the Fraser Institute’s global Economic Freedom of the World project; this project has shown an enduring empirical relationship between economic freedom and prosperity, growth and improvements in human well-being. Hopefully, if Gujarat’s success can be replicated across the entire nation, some pressing national issues could also be resolved. Let’s evaluate how much of that is realistically possible.
There are two parallel but different points of view about what can be achieved with the BJP’s rise to power. Optimists are hoping that inflation will be contained and investment reforms will forge ahead full swing in light of their win. Inflation in India has been primarily fuelled by rising food prices, which cannot realistically be contained without investing in agriculture and infrastructure, two segments which require considerable reforms. Stronger federal leadership would help, but must have the consensus of state governments, which is easier said than done, though not impossible. Even with such positive developments falling into place, real progress may still take considerable time. To be fair, Gujarat demonstrated double-digit agriculture growth from 2001 to 2010 despite its limited natural resources, compared with low single-digit growth for the entire nation. But, the other viewpoint is that given the fact that agricultural policies and, thus agrarian reforms, are within the exclusive control of the states (in legislation and execution), Gujarat’s success may not percolate everywhere. Gujarat’s industrial progress is also commendable, but the state has long been known for its spirit of entrepreneurship, and perhaps Modi was able to let this thrive simply by ensuring a free environment. Whether this model can work across India’s many diverse regions is something yet to be tested.
So, given the current rally, just how should investors think about India over the long term? We argue that it is better to focus on companies that can best chart their own destinies, and avoid the ones that are dependent on macro calls playing out. Fortunately, the Indian economy has bred plenty of companies that are not too macro-dependent. In fact, some of these companies have become stronger and better users of resources in the tough business environment.
For instance, some of India’s more successful automobile firms have done well by focusing on productivity and product quality. A consumer-focused two-wheeler company, for example, has been challenged in raising prices for almost a decade but it has responded well with productivity improvements and value engineering, as ways to preserve profitability. In another case, an auto component maker, which has a business-to-business client base, has been able to grow market share and drive pricing power throughout the business cycle by focusing on product quality and operational improvements. Both of these companies have weathered the recent auto slowdown fairly well.
Similarly, some private sector banks, which recently faced an uncertain credit environment, have also bucked the trend with a single-minded focus on high lending standards. At Matthew Asia, we attempt to find businesses that do reasonably well in bad times and flourish in good times by taking a long-term call on the economy.