Game changing reforms awaken a giant in India

published 6 March 2015

732-train-634 — All aboard: India is set to steam ahead

The most positive recent development in the global economy "is the re-awakening of the Indian giant", says John Hulsman in City AM. The government expects growth to climb to 8% next year, making India the fastest-growing major economy in the world now that China is slowing.

And while the annual budget, which has just been announced, left some major reforms, such as liberalisation of the labour market, for later, it was still "unambiguously business-friendly [and] more than good enough" to keep India moving in the right direction.

One key theme is infrastructure, where capital expenditure is set to increase by 25%. Spending on highways will more than double and a third more will go on railways. This will be paid for by slowing the pace of the ongoing fiscal squeeze. With lower oil and commodity prices keeping a lid on subsidies the government pays consumers, this looks like a gamble worth taking, says the FT.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

It also bodes well that the government has rationalised the "chaotic tax system", the FT continues. From April next year a nationwide general sales tax (GST) will replace "a patchwork of taxes and fees imposed at state level". Business reckons the GST "is a potential game changer".

You can see why, says economist.com. By establishing a genuine common market across the country and dismantling local protectionism, it could add up to 2% to national income. Other measures include a reduction in corporation tax from 30% to 25%, accompanied by the closure of "a dizzying array" of loopholes and a pledge that retrospective changes to taxes will be avoided.

Making the tax regime "simpler and more rational will boost investment and create jobs". Meanwhile, a new e-business portal will act as a one-stop shop for 14 of the permits required to start a business.

All this points to higher economic and profit growth in the years ahead, while the current backdrop remains favourable. With inflation under control, there is scope for the central bank to cut interest rates further. After several years of lacklustre profit growth, broker Kotak is pencilling in a 17% increase in earningsat India's top 50 companies this year.

The benchmark Sensex index isn't cheap on a forward price/earnings ratio of 19, but MoneyWeek's favourite India play, Aberdeen's New India Investment Trust (LSE: NII), is on a 7% discount to net asset value.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.