Recent economic reforms announced by the Indian government may attract interest from potential investors but is now the time to start investing in India?
Foreign Direct Investment rules, which control access to India for foreign investors, were relaxed earlier this month in five sectors, including multi-brand and single brand retail, civil aviation, power trading exchanges and broadcasting, making it easier for foreigners to invest in the sub-continent.
This relaxation involved a divestment programme, which allows foreign companies to buy a stake of state-owned companies.
The measures aim to address the country’s weakening growth outlook by reducing the fiscal deficit and kick-starting private investment.
Ashburton investment manager Craig Farley says some of the reforms will have a positive effect on the economy.
He says: “The Indian government desperately needed to shake the ‘policy paralysis’ monkey from its back.
“The FDI moves are important because they show the government is taking action. This should improve business confidence and sentiment, which is very low. Also, the affected sectors require a lot of investment and foreign investment will allow companies to become more competitive.”
Motilal Oswal co-head of equities Taher Badshah, who works at the firm that runs the £10m Gemini MOSt India fund, says the reforms will revive sentiment and attract capital flows to India.
Badshah says: “We expect the measures to be effective in shedding the image of a government steeped in coalition quagmire, indecisiveness and ineptitude and move to that of a pragmatic actor willing to bet its political fortune for the purpose of taking bold steps on the economy.”
Avinash Vazirani, manager of the £234m Jupiter India fund, says India’s political system still poses a big risk to the economy. He says aside from the recent FDI reforms, the Government has made a number of promises about the economy that it has not followed through on.
Vazirani says: “The biggest risk to the economy is bad politics. There is a lack of decision-making at the centre of government as there is a weak federal government and stronger state governments. The government and bureaucrats know what ails the economy and what needs to be done but are unable to push anything through. I am unsure about how long this will last as the next elections are not until 2014.”
The Indian stockmarket is trading at quite depressed levels, which reflects these problems in the economy.
This means investing in India is attractive for investors, says Vazirani.
He says: “Companies in India are cheap and are getting cheaper. You have got a real polarisation in companies, where there are 20 stocks which are very expensive and everything else is cheap. I buy a mixture of both.”
Vazirani says the rupee has been allowed to free float, where the exchange rate is determined by the supply and demand of the currency on the international currency markets.
He says: “The Reserve Bank of India has let the currency free float and that has the effect of weakening the currency against a stronger US dollar. That provides a degree of monetary stimulus, while the government has also just started doing monetary easing.”
This will stimulate the economy and improve the environment that Indian companies are operating in, which should allow them to grow their earnings.
Aberdeen Asset Management senior investment manager Adrian Lim says currency weakness has eroded developed world investors’ returns.
He says:“The effects of currency on returns this year and last year have been huge due to the depreciating rupee against developed market currencies. The consensus is that currency will trade around the current levels of around 88 rupees to the pound, plus or minus 5 per cent, over the next 18 months, as when there is gearing in the sovereign balance sheet, the currency will depreciate in relation to external currencies. “
He says the effect of currency moves can be turned to investors’ advantage by buying companies that pass inflation on to consumers, like consumer staples. He adds companies that get hard currency inflows from foreign clients can insulate investors against the weakening rupee.
Lim says: “We like certain companies that operate in the IT space, like in software engineering, as the state does not own or manage companies in that sector and most clients are from abroad.”