Baillie Gifford’s Snell: Modi’s timing in India ‘could not be better’

Baillie Gifford Asia Pacific ex Japan equity manager Roderick Snell says the arrival of new Indian prime minister Narendra Modi puts India in a strong position over the next two to three years but warns that the economy still faces major challenges over the longer term.

Although Snell describes the preceding Indian government as “one of the most inefficient and corrupt” seen in the country over the past thirty years, he does point out that more recently it has helped to lay the foundations for reforms that can now be taken forward by Modi.

Combined with a narrowing current account deficit and signs of improving growth in India Snell argues that Modi is currently in a strong position to bring about significant changes in the economy.

“For all their uselessness over the past eight years, last year when India was really up against it the Indian congress actually put in place some pretty sensible reforms around fuel and rail prices. These were former sacred cows that were never touched,” he says.

“The Indian economy is also picking up and the current account deficit is coming in a lot so really Modi’s timing could not be better. Plus he is the right person having come from outside of the political background where getting things done is his main objective.”

Further improvements can also be brought about by Modi going forwards, adds Snell, such as the continuation of stalled infrastructure projects which should bring brighter prospects for the Indian economy over the next two to three years.

He says: “I think over the next two-three years India is in a very strong position. A lot of simple things can be done which will make a big difference to the country.

“Once a few of the many stalled infrastructure projects, which are not difficult to get moving, are started up again this will mean that banks no longer have bad loans on their books which in turn means they can lend more and people can therefore borrow more, so it is a virtuous cycle.”

However Snell also predicts further hurdles for India over the longer-term. He adds: “India still have some very serious challenges to face and after these two to three strong years the outlook is more questionable.

“India is not a country set up for systemic changes and has the challenge of running a democracy across so many different states and religions while it still also has regional parties too.

“It is not a country where it is easy to put through changes rapidly. For example sorting out some of the very restrictive labour laws in the country will be very difficult, while it will be hard to wean people off things like the very poor minimum wage guarantee scheme, particularly when you want to be re-elected in five years?”

Snell started building the Baillie Gifford Pacific fund’s current 13 per cent exposure to India around twelve to eighteen months ago with some names designed to benefit from the improvements in domestic economy while other stocks have also been able to perform well against poorer economic conditions in the country.

He gives the example of Indian IT outsourcing companies which currently make up around 5-6 per cent of the fund’s overall exposure to India but actually benefitted from poor performance in the Indian economy and the weakening Rupee because the majority of their revenues are derived from the US and Europe.

More recently however the fund has also added to stocks such as natural resources company Sesa Sterlite which Snell argues should benefit from the restarting of infrastructure projects in India under Modi.