Marking a huge milestone in Modi’s reform pathway, the goods and services tax (GST) was passed on 3 August. The new bill is expected to come into effect in April 2017.
The GST will create a single indirect tax rate, creating the world’s largest single market with 1.3bn consumers.
The Ministry of Finance has said that the tax could boost GDP by up to 2% per annum from increased export competitiveness, more efficient allocation of production resources and lower costs/greater profits.
That would lead to pushing India up world GDP rankings over the coming years, but investors would need to have patience, Andrew Holland, CEO of Nikko AM’s joint venture with Ambit Investment Advisory, and Simon Down, one of Nikko AM’s senior portfolio managers in London, wrote in a paper on the recent reforms in India.
In their view, implementation is critical. The full benefits of the GST could take years before they are revealed in full, as corporate consolidation will take time, they noted, as well as the development of the single market.
“With inflation turning upwards and the economy stimulated by the 7th Pay Commission, the central bank is now unlikely to cut rates further, but the high level of yields still makes India attractive from an income perspective for investors given its relatively low volatility relative to its emerging market peers,” said Holland.
The duo noted that the Rupee will be supported by the positive measures, but the central bank will limit gains and attempt to build FX reserves. This could change, however, if India becomes successful in growing its exports and the country can move towards a trade surplus, according to Holland and Down.
While they believe the equity markets look fully valued for now, they still see value in pharmaceuticals. Meanwhile, they contend it could be wise to look for a better entry point than current levels.
“If there is a correction though we believe that this would provide a very attractive opportunity for investors who are looking at the long term story and are able to wait for the full benefits of the GST to impact the economy,” Holland said.
