India: the benefits of being radical?

Fri 10 Nov 2017

By Brian Dennehy

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According to Modi’s opponent Rahul Gandhi, Prime Minister Modi locked his cabinet in a room and gave just four hours notice before overnight withdrawing 86% of the Indian currency from circulation.
 
According to some it was a dramatic attempt to purge “black money” from the economy.
 
Initially the impact was to force much greater use of digital payments.  Though cash has begun to dominate again in many areas, digital payments are still twice as great as before this action.  As the black economy subsides, fewer people will avoid tax.  But there will also be much greater efficiencies.
 
For example, a significant proportion of Amazon deliveries used to be “cash on delivery”.  Now that proportion has reduced from 65% to 40%, and as this trend continues so greater efficiencies will follow.
 
This radical action (along with India's biggest ever tax reform: the Goods & Services Tax) notably slowed the Indian economy over the last year, and caused significant hardship to many.  But Modi’s popularity soared, as he targeted “anti-national and anti-social elements”, AKA the corrupt, of all shapes and sizes.  A landslide victory followed in one State, and the State elections before year-end will be very telling.
 
The latter results could be significant catalysts for the Indian stock market breaking upwards.
 
Despite the economy slowing, stocks are already close to new highs, but also quite expensive.  The market has continued upwards, despite selling by foreigners, because a proportion of those new bank deposits have found their way into equities. 
 
The net effect of radical government action has been an increase in confidence (despite the pain for many) derived from strong leadership.  In the words of the FT (far from supportive of India in the past):
 
“India’s government has proven its taste for radically reworking the economy”
 
They suggest that those who aren’t put off by the expensive valuation should be buyers of the stock market.
 
If the upcoming election goes the way of Modi, look for the Indian market to break higher still.  (As an aside, keep an eye on Japan too – also looking to break upwards – more next week).
 

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