“Whilst investors have been pre-occupied with China, another Asian powerhouse has experienced a precipitous decline over the last few weeks,” Smith said. “India’s main market, the BSE, has fallen 14% since the first week in August – underperforming the FTSE Asia ex-Japan index by over 3%, and raising the uncomfortable possibility that the market has finally caught up with stunning failures in Prime Minister Modi’s reform agenda.”
“In August, PM Modi capitulated on all-important land acquisition reforms,” Smith continued. “India has suffered from a dearth of capital investment over the last decade, in no small part due to red tape. Even the government finds it very difficult to procure land for much needed infrastructure projects. Goods and services taxation is also unfathomably complex, as it is currently set by myriad local authorities. Reform here has been on the agenda for ten years, but PM Modi set himself a deadline for April 2016 to simplify the tax at a national level. With many items still needing clarification and a lack of consensus from state governments, this deadline looks unlikely to be met,” he added.
Smith noted that while the Indian rupee fell at the time of the capitulation on land reform, the stock market had held up well so far and ‘appeared immune’ from the rout in other emerging markets.
This raises important questions about the basis on which much of India’s rise over the last couple of years has been predicated, according to Smith.
“India is certainly not without its bright spots. It is a commodity importer with a low exposure to China, when compared to other emerging markets; just 4% of total exports,” he said. “And it enjoys relatively high export exposure to the US and a recovering Europe, and reasonably strong domestic macro fundamentals that help immunise India from Fed rate hikes. But the reform agenda is way off track, so we continue to monitor developments. Meanwhile, we suspect that India is in for a more volatile time over the next 12 months.”
