Hermes writes that India is neither whale nor minnow

Gary Greenberg, (pictured) Head of Hermes Emerging Markets, has written a paper assessing India’s ability to modernise and truly emerge.

He writes that while the futuristic architecture and glass towers of Shanghai and Seoul defy old stereotypes about emerging markets, investors heading into Mumbai from the airport, confronted with searing poverty and pollution, could be forgiven for questioning the talk of Asia’s economic miracle taking root in India.

“We would encourage them to take a broader view: although corruption and inequality remain endemic, there are signs of profound long-term change,” he writes.

“India continues to juxtapose the medieval with the hypermodern. Under the progressive influence of Prime Minister Narendra Modi, promising structural reforms are being introduced that should enable this emerging market to blossom.

“Administrative, legislative and supply-side reforms are taking place at a national level, but India’s federal system means that progress within states is key. Modi’s attempts to foster ‘co-operative federalism’ to spur state-driven projects are gaining traction. India’s impressive growth is largely being generated through greater investment in agriculture and national and state infrastructure. However, the nation is still constrained by weak industrial production, corporate credit, exports and freight traffic.

“Progressive India favours well-run, quality companies that are focused on innovation and are exposed to structural trends. Conglomerates relying on subsidies or short-term cyclical drivers may prove to be risky investments as the country emerges.”

Greenberg writes that India is neither a minnow or a whale and while still emerging, it is built on solid foundations.
“The country’s presence is felt in Asia as a strategic counterweight to China and its voice in the G20 is starting to be heard. Although its 8.5 per cent weight in the MSCI Emerging Market Index remains modest, this masks the significance of the many Indian companies that compete globally in reach, quality and management skill.
“Although India’s emergence may appear sluggish compared to China’s, a number of factors create the potential for the kind of sustained growth that can make it a true rival to its neighbour, if only in investment terms.
“India has an enviably young working-age population and a growing workforce. But unlike China, it is in no danger of getting stuck in the middle-income trap, as it lags significantly in terms of per capita income. Its low levels of urbanisation and industrialisation are potential drivers of growth, as are government initiatives to improve health and education, all of which can benefit from advancing technology.

Although India has underperformed the emerging markets universe this year and corporate earnings have been disappointing, we think the foundations for a 21st century economy are being built.”

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Beverly Chandler
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