In power in India for a decade, Narendra Modi is seeking a third five-year term during the legislative elections which will take place from April 19 to June 1. The Hindu nationalist has a good chance of being reappointed at the head of the fifth world power in terms of GDP, despite numerous gray areas: proximity to local magnates, theocratic drift and recently, scandal surrounding the financing of his party , the BPJ. From an economic point of view, however, Christopher Dembik, investment strategy advisor for the Swiss management company Pictet AM, considers the results of the septuagenarian Prime Minister rather positive. India has become essential for international investors. But the challenges remain, as far as the country is concerned: gigantic.
L’Express: On the economic level, how have Narendra Modi’s actions translated over the last ten years?
Christopher Dembik: Overall, the measures taken have been very good, except for his mistake of abruptly demonetizing the country in 2016, which weighed on the economy for two or three years. The striking point, emphasized by Modi, is the stability of growth in the long term: over fifteen years, it is around 5% per year on average. This is explained by the structure of the economy. It has the particularity, compared to other emerging countries, of being very diversified and little dependent on the public sector. We have the vision of a predominantly manufacturing and technological activity. In fact, it is mainly based on a network of SMEs and microenterprises, which account for 30% of GDP and more than 40% of exports. This singularity reduces the volatility of growth compared to countries very dependent on oligopolies or the public sector. With one drawback: these small structures do not have access to credit, which slows down their investments.
Another important factor is that Modi has tried, through his policy, to reassure investors in the long term. It is very good to attract capital to a country that has potential, but it must also remain over the long term. To achieve this, it is important to guarantee respect for property rights but also to be attentive to the taxation of capital gains and shareholding. The Prime Minister has taken many steps in this direction, including allowing foreign investors to hold more than 50% of the capital of a company in the defense and insurance sectors. India is an exception in this respect, and this is a major signal. Add to this a very strong State, with little presence in the economy but which uses incentives, and you obtain a very positive cocktail for investors.
How is this strong State a driving force?
The State drives the projects, but always thinks in a logic of public-private partnership. For example, in infrastructure, 70 airports have been opened under Modi, both regional and international. The Prime Minister plans to open 70 more during his next term. The State is an instigator, very powerful because it chooses the measures it wishes to push. But at the same time, it leaves room for the private sector, including foreign operators, to co-invest. An example, in the railway: in ten years, the extremely dense Indian network has been almost completely electrified, up to 94%. To give an order of magnitude, in Europe, we are at 56%, while Indian railways are just as old as in developed countries.
Who are these foreign investors who are banking on Indian potential?
Financial investors arrived quite late and not necessarily in a very relevant way. Faced with China’s difficulties, they chose to play India. However, these two countries are very different, both in terms of economic structure, stock markets, degree of state intervention and currency stability. But the financiers made this arbitration. For this, they agreed to a large premium, with Indian stocks trading at very high valuation levels.
Among those who invest in the real economy, for example in infrastructure, taking advantage of public-private partnerships largely supported by the State, there are mainly Americans. Europe is positioning itself but with a long delay. And China is very little present.
Comforted, for example, by the opening of a first Apple Store last year, some foreign investors are targeting India because it has become a middle-income country. On the stock market, the two stocks that have shown the best performances recently are a local equivalent of Booking and a home meal delivery company, signs that a middle class is developing. India is no longer seen only as a production center but also as a consumer market. However, the risk is to see it remain stuck in this status of middle-income country, given the size of the population and the great disparities that exist.
Indian growth is sustained. But does it create enough jobs?
The informal economy remains large, with a very young population, which may pose a challenge in the short term. Beyond the difficulties of job creation, there may above all be a mismatch in qualification levels. We observe this in China, where the unemployment rate is higher among the most qualified. India could find itself facing the same problem. In terms of public policy, it is impossible to create the right jobs at the right time. Furthermore, the caste system remains a real obstacle to economic development, not to mention the unrest linked to religion in certain regions. The social difficulties facing the country are numerous.
Is it realistic to expect India to take over from China as the world’s factory?
The same thing was said about Brazil in the 2000s, and it was a failure. Even though India is experiencing undeniable rapid development, decades of reforms are still necessary. Especially since it is a welcoming land for investments, which needs good external dynamics to function well. It is not an economy that invests abroad, unlike China.
We are still seeing major smartphone manufacturers opening factories there…
Yes, there is a phenomenon of friendshoring [NDLR : délocalisation entre pays amis] which is taking place, it is true, but it remains marginal. Even if the cost of labor remains attractive, these producers have more interest in settling in Vietnam, as they are less concerned about working conditions. Furthermore, India does not provide financial incentives in this area, which limits the movement.
Is the protectionist nature of Indian policy, with high import taxes for certain products, likely to deter certain investors?
As long as there is some form of stability and the laws do not change overnight, investors know that this protectionism has to be done. Today, almost all states do more or less. In Europe, this translates into standards, which sometimes prove more restrictive for a company than paying simple customs tariffs.
Has Modi encouraged digital modernization?
Strongly. Since coming to power, he has supported the development of the program called India Stack. This platform allows you to connect to all state services, in open architecture, meaning that any application can connect to it. The objective is to try to reach the entire population as well as businesses. Not only to make payments but also to remit social assistance or transfer documents. India Stack has encouraged the emergence of numerous companies, an ecosystem has been created, backed by this platform. India was able to count on its pool of engineers to support this movement. The weight of the digital sector has jumped to 22% of GDP. This is a real success, especially for a country of more than a billion inhabitants. This also explains why investors view India and Modi favorably, despite its less glorious aspects.
His authoritarian side is not prohibitive?
Modi brings stability, and even visibility over 5 or 10 years with his airport projects or the rise of digital technology. For investors, the democratic character or not of a State is not a subject. They sweep under the rug angry subjects, such as collusion with certain conglomerates or religious drift.
What are the major challenges of the next term?
First, access to credit, on which Modi has not acted sufficiently. All these SMEs have very limited access to bank financing. Of course, there is microcredit, it’s very good. But that’s not enough for a company that wants to grow. Especially since if the Indian economy one day opens up further, by lifting certain protectionist barriers, small businesses will have to consolidate their cash flow, with sufficient lines of credit. In addition, an entire section of the economy is impoverished, far from any digitalization.
Demographics are also a major challenge. A young, increasingly qualified population who cannot find jobs corresponding to their aspirations is a factor of social change. This is the analysis that is made on Egypt, with very pessimistic perspectives. Interestingly, no one comes to this conclusion regarding India. For the moment.
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