India cleans up its act

When India became an independent country on 15 August 1947, many feared that it would collapse into chaos. Instead, 70 years on, it is widely considered on track to become the world’s third-biggest economy by 2030.

India expanded at around 3.5% a year until the early 1990s, when it adopted free-market reforms that allowed growth to move up a gear. Now the annual rate is over 6%. Growth has dipped following last November’s sudden and chaotic withdrawal of two banknotes, which jointly comprised 86% of the country’s cash.

The economy will recover, however, and a lasting positive effect is that the move has “given real momentum to India’s anti-corruption campaign”, says Una Galani on Breakingviews.com. It was part of a process of clamping down on illicit wealth and creating paper trails; the government is forcing people to link their biometric data with “everything from tax returns to mobiles”.

It seems to be changing attitudes towards compliance. Last week, India reported a 25% increase in income-tax filings, more than double the growth in the same week last year. Corruption is the top problem facing emerging markets, and India is starting to “clean things up”.

Investors are quite pleased with the government for another reason too. The stockmarket has gained 30% since the current prime minister, Narendra Modi, took office. He has introduced more structural reforms, notably a national goods and services tax that constitutes “a big step towards knitting diverse provinces into a single market”, says Mihir Sharma on Bloomberg.com. The previous patchwork of different taxes and duties had hampered business.

A handful of recent state elections, meanwhile, have ensured that Modi’s governing BJP party has “practically no political rivals of consequence left”. With a free hand in parliament, the hope is that he can keep up the momentum on reform.

Even if he can’t, the outlook remains encouraging for now, with inflation and interest rates at a five- and six-year low respectively. India also has plenty of longer-term advantages, including a presence in key global industries such as pharmaceuticals and IT, and a young, big population, with an average age of 30. That should underpin consumption for years to come. MoneyWeek’s favourite India play is the Aberdeen New India investment trust (LSE: ANII).