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Singapore: Two key factors—the ongoing financial inclusion initiatives and roll-out of goods

and services tax (GST)—separates India from other emerging markets (EMs) and will ensure
that its long-term growth story is feasible, Rana B. Gupta, India equities specialist at Manulife
Asset Management in Singapore, said in an interview.

This coupled with other positives such as the scope for both central and state governments to
spend on public and private projects, on infrastructure, the country’s young population, massive
urbanization that is happening and the opportunities these create make India a fairly powerful
story, he added.

Edited excerpts:

Last week, Singapore Prime Minister Lee Hsien Loong, during his visit to India, had called
for more openness and a more trade-based economy, even as he added that the country was
not as open to business as investors had hoped for. Was he echoing the concerns of the
overall investors’ community?

Regarding investments into India, a lot of work has happened, and a lot of work still needs to be
done. There is no two ways about it. And India, as you know, has a federal structure. So, some
issues like labour, land—these are controlled by the state government. The central government
can only set up an enabling framework and work with the state governments on it.

Now, having said that, let’s look at what the central government has done towards this extent.
Firstly, it has devolved a lot of power to state governments and has actively encouraged them to
pursue what they have titled as complete federalism—this means if one particular state is going
ahead and courting investors that should create investment, jobs, growth and, therefore, other
states should also be encouraged to do that.

So, this process has started, and it will take time, but the encouraging part of this process is that it
has already started to play out and some of the states are showing good progress.

Secondly, the central government can increase public capex, and they have done so. So, if you
look at public capex to GDP (gross domestic product), this was 2.5% in 2014; that has already
been increased to 3.5% to GDP. So, a full one percentage point increment in public capex
primary led by roads.

Thirdly, a lot has happened with the indirect tax reform, namely the passing of the Constitutional
amendment bill of the GST. Needless to say, GST will make India one market, it will make
business processes much more efficient.

So the central government has been doing all this enabling work, and we believe this will
provide a framework going forward, for better and more business friendlier environment.

The dollar has stabilized and China appears to be looking better. So, is that why we are
seeing an emerging markets rally now, especially as US equities are expensive? For now, is
India just riding that rally, or are we good to attract capital on a stand-alone basis,
irrespective of how other EMs are doing?

A favourable outlook on emerging markets that surely helps. But, we believe India is quite
different from other Asian EMs in most aspects.

Firstly, the starting point is too low—the GDP per capita is quite low. India has a very large
population and massive opportunity in urbanization.

So, it is a bit different when compared with other emerging markets, and it has a lot of scope for
both central and state governments to spend on public and private projects—to spend on
infrastructure. Two more India-specific points worth mentioning here—first, there is a big thing
that is ongoing in India—financial inclusion—which is very important. This is the first time most
Indians will have access to digitally verifiable identity, and this digital platform will be hugely
empowering.

Because, given the inefficiencies in the labour market, and given success of online market places
in India, this can be the new labour market—jobs will be created and income levels will rise.

Other impact of this would be that these people, when they transact online, when they begin to
receive payments online, when they start making payments online, they will create a lot of data
trail—this will open up unserved market to financial services.

As more data is created, we believe they will become customers of financial services, and they
will also have access to financial services—this can create substantial growth. On the other hand,
people will also have access to cheaper and formal credit. And, as you would know, these people
usually borrow money from friends, but at much higher rates. So, having access to formal credit
will also help better their lives.

That’s the first major theme which is India specific.

The second India-specific major theme is GST. Now, GST will be a value added tax; so, by
definition, it will widen the tax base—the overall tax collection should improve and business
decisions should improve because a myriad of taxes now get merged into GST.

Now, if you take a pause and look at both financial inclusion and GST together, it’s an extremely
powerful tool.

As you know, in India, there is a large amount of informal economy, cash economy. By creating
these two platforms, there is more and more encouragement for this informal economy to be a
part of the formal economy. And as that pans out over the next 3-5 years, these will itself
underwrite a good healthy growth. So, to that extent, India stands out from other EMs—when
you then add the other factors—young population, massive urbanization—India then becomes a
fairly powerful story.
The India story on a macroeconomic front may be looking good, but what are the issues
that investors are concerned about?

When we highlight the potential and the ongoing reforms in Indian markets, investors and clients
sit up and take notice. But investors also want to evaluate the long-term durable impact of these
reforms.

So, there is a lot of work going into what is happening in India, and who are the real
beneficiaries. In terms of unfinished agenda, I think current policymakers—whether it is RBI, in
terms of targeting inflation or government promoting infrastructure or financial inclusion or tax
reform—they have done quite a bit. So, again, investors and our clients, are putting a lot of effort
in tracking how those reforms and initiatives which have already been taken, are being
implemented. So, from here on, it will be all about execution and implementation. There is no
big agenda that I can say is on the to-do list, and this is what the government should do from here
on, it’s all about execution and on exhibition on all themes that we have spoken about
previously—on that, the long-term fruits, the long-term growth will depend on that exhibition
phase.

How can the country ensure long-term success of its ‘Make in India policy’?

First, the ease of doing business has already improved, but it has to further improve.
Entrepreneurs have to be motivated to put capital on the ground.

A lot of effort is already on the way to achieve this, and we have seen some partial success in
terms of India moving up the ranks in ease of doing business.

I come back to what I said earlier—a lot depends on execution—so, execution on those factors
will also ensure long-term success of the entrepreneurs wanting to put more capital in India.

Because India is a big market, every entrepreneur would want to be close to that market—so, if
the current policymakers deliver on the factors we were talking about earlier, I think that would
ensure the long term success of the programme.

Looking at India from Singapore, what excites you about the country?

In an uncertain and low-growth environment globally, India offers good quality sustainable long-
term growth.

Second, this growth is pretty visible, because as I discussed earlier, the combined impact of
financial inclusion and GST will be driving it. Growth will also be driven by urbanization and
public spending, which is also pretty much visible.

If all this is executed properly, ultimately it means that government’s revenue to GDP will grow,
which means the government’s borrowings will come down, and more savings will be available
for consumption and productive investments which is always a good thing—so these are the
factors that excite us about India.
Finance minister Arun Jaitley recently listed four factors that could impact Indian
markets—a confrontation with Pakistan, US Presidential elections, impact of slowdown in
China and Brexit. Among these, what is your biggest concern?

On confrontation with Pakistan, it is a very low probability event. I think further escalation looks
pretty unlikely. On US presidential election—whether it is about the US or any other market, it is
a sort of uncertainty—this can cause some temporary volatility in the markets. India has pretty
unique bottom up drivers.

So, the drivers that we spoke about—financial inclusion, GST, or public capex where the central
government is spending on urbanization—these are all domestic drivers and they should continue
to carry on even if there is some volatility here and there. So, be it election or performance of
other markets or change of guard in some countries, even if it creates some volatility, because we
have these unique themes, our long-term growth will not be impacted. In our view, the impact of
a slowdown in China is something the Indian economy can withstand, provided the Chinese
currency, as it has been, is depreciating modestly—as long as that remains, I think it should be
OK. As far as Brexit is concerned, it can cause uncertainty on the global growth scenario. And
while it is very important and it can create some volatility in global growth, again it goes back to
my answer on the US presidential election. Those bottom up drivers are actually quite potent—
some volatility for sure, but we don’t see India getting impacted in the medium- to long-term.

For investors looking for opportunities in India, which sectors would you recommend?

As far as the key sectors are concerned—if you look at financial inclusion, that creates a better
consumer class and scope of financial services. So, therefore, on the consumer side, we are quite
optimistic on consumer discretionary categories such as autos, consumer durables, white goods,
cement and building materials. On financial services, we are bullish on mid-sized banks; we are
bullish on mid-sized non-banking financial companies who have embraced digital banking and
mobile transactions. So, basically, consumer discretionary and financials are two segments where
we are most optimistic on.

Has the Reserve Bank of India’s stance has turned dovish?

RBI had started to reduce rates more than a year ago. Market rates remained higher because the
liquidity was in deficit.

Now in our view, thi s changed in March 2016


policy where the then governor Dr. Rajan mentioned that on the liquidity framework part, he
would move to neutral as opposed to deficit default. Now to us, that was a change of stance on
liquidity framework, and if you look at it since then the rates have been coming down. Our best
indicator for rates - we look at the commercial paper three months rate - because that’s the truly
representative of the wholesale market rate rates. This was at around 9% in February 2016, and
has now come down to about 6.8%.

So that tells you how much the rates have fallen since February, between February and now. So
the point is that, RBI moved to a neutral to a easier accommodative monetary policy in February,
and the current governor is ensuring continuity. The dovish view is right in this point in time
because not only the CPI has moderated, and we expect the CPI to go to even below 5 in the
coming few months, but other macro factors like current account deficit, fiscal deficit, foreign
reserve etc, they have remained stable and have led to a stable currency. So this is the right time
to have an accommodative monetary policy.

How do you see India’s IT sector. There have been concerns that the industry has matured
and peaked and some are even predicting that the Indian IT model will not last.

IT sector overall is seeing a lot of disruptions from cloud-related technologies. Our sense is that,
because of those emerging technologies, the total IT spending may see a deflection. And in that
kind of a scenario, it will be fairly hard to sustain the growth rates in mid teens that India IT
companies were doing until a few years ago, and given the base is already so large. Our sense is
that, large IT companies are doing their best to adapt, but we still feel that growth rates will be
coming down.

What is Financial Inclusion in banking ? What is meaning of Financial


Inclusion in Indian context ? :

Financial inclusion is the delivery of financial services at affordable costs to vast sections of
disadvantaged and low income groups (for example "no frill accounts").

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