India – An insider view Q3 2017
In the summer of 2017, our investment team intern, David Beggs, visited India. We thought it would provide a fascinating insight into the latest developments in one of the world’s largest economies:
Myself and seven other students from Newcastle University and Boston University undertook a 6-week internship programme with the Reserve Bank of India (RBI). RBI has a much wider mandate than central banks such as the Federal Reserve or the Bank of England. In addition to the traditional functions of a central bank, RBI plays a key role in driving India’s development agenda. There is a national focus on financial inclusion, promoting financial education and literacy and making credit available to productive sectors of the economy including the agricultural sector and small and medium industries. To this extent, the RBI has a number of training colleges across the country, which it uses to provide programmes and training for Indian bankers. During my internship programme, I was based at the ‘College of Agricultural Banking’ (CAB) in Pune, which dates back to 1969.
Along with a partner, I undertook a research project on improving ‘Farmer Producer Organisations’ (FPOs) access to finance in India. We developed a credit rating tool, which could be used by bank managers to assess FPOs, and presented our work to the Chief General Manager of the CAB and senior faculty members. This would provide an insight into India’s working culture, which differs significantly from the UK. Phone calls are readily answered during presentations and questions do not wait until the end of the presentation. Our planned 20-minute presentation ended up lasting well over an hour!
My time at RBI coincided with an exciting time for India and I was able to witness a number of significant events, including; the election of a new President, the launch of the ‘Goods & Services Tax’ (GST) and the Indian stock market touching all-time highs. The GST was launched overnight on July 1st and it overhauled the country’s fragmented tax system by harmonising the patchwork of national, state and local levies with a single unified VAT system. In the lead-up to July 1st there were widespread fears of chaos and disruption, which covered the local newspapers – however in my experience these predictions did not prove to be far accurate. This reform has been in the works for a decade but has finally been pushed through by Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) who are the first party in the country’s history to govern without the need for coalition support.
Another crucial development in India has been the demonetisation of Rs500 and Rs1,000 notes which took place in November 2016. Around 86% of cash in India became non-legal tender overnight, creating shockwaves throughout India. Demonetisation aimed to reduce the amount of corruption, bring tax evaders onto the books and address the issue of counterfeit notes used for terrorism. The jury is still out on the success of demonetisation in reaching these aims. In my experience, I found India to remain very much a cash based economy, despite efforts to promote digital payments.
The demonetisation process and the introduction of the GST have resulted in some short-term pain for the Indian economy. At 5.7%, the economy grew at its slowest pace for three years in the April-to-June quarter as many firms were unsure how to price their products ahead of the GST launch. There is likely to be more pain in the short-term as this shock factor works its way through the system. However, in the medium to long term the GST is expected to be a positive with the IMF stating in 2017 that the GST could push India’s medium-term GDP growth rate above 8%.
My time in India led me to be optimistic about its outlook. India finally has a stable political situation with pro-market economic reforms being pushed through, inflation is low and RBI policy is conducive to growth. India’s demographic dividend is also set to arrive in the form of a fast-growing workforce. By 2050, India’s workforce is expected to have grown from the current 674m to 940m. With these conditions in place, India will almost certainly be the main driver of global growth over the next 50 years and it was a pleasure to experience this dynamic nation first hand.