Avinash Vazirani: The modernisation of India over the past decade
Avinash Vazirani, Fund Manager, Emerging Markets
Avinash Vazirani has managed the Jupiter India Fund since its launch in February 2008. Ten years later, he takes a look back at some of India’s key reforms from the past decade.
2009: Aadhaar – the unique identity number assigned to every Indian resident
Before 2009, nearly half of India’s population did not have any form of identification, stopping millions of Indian residents from accessing basic services including banking or insurance.1 However, in 2009 this drastically changed with the introduction of Aadhaar, a unique 12-digit national identity number available to all residents in India.
To receive an Aadhaar number, residents must provide the government with documents to verify their name, gender, age and address, as well as biometric information in the form of fingerprints and iris scans. To date, more than 1.2 billion Aadhaar IDs have been issued, covering 95% of the population.2 Aadhaar is much more than just an identity number – it has paved the way for several reforms over the past decade.
2011: Direct Benefit Transfers – benefits and subsidies paid directly into bank accounts
In 2011 Aadhaar allowed for the Direct Benefit Transfer (DBT) system, enabling benefits and subsidies to be deposited directly into recipients’ bank accounts. The DBT system aims to reduce leakages by cutting out the middleman and stopping payments from ending up with the wrong beneficiaries. The implementation of India’s social security and benefits system continues to develop at a rapid pace, and the DBT system should have been fully implemented by 31 March 2018.
The government is expected to have saved almost 750bn rupees since 2014 due to DBT.3 It should also benefit the masses too, stimulating consumer demand by allowing a greater proportion of the population to become economically active. There are already around 870 million bank accounts linked to Aadhaar4, and by the end of March it will be mandatory for banks to verify and link Aadhaar to all bank accounts.
2016: Demonetisation – a shift from physical to financial savings
In November 2016, in a surprise broadcast from the government, Prime Minister Modi announced that all high-denomination (500 and 1,000 rupee) currency notes would be removed from circulation, representing around 86% of India’s cash by value.5 This was a bid by the government to reduce levels of unaccounted-for wealth, or “black money”, and helped to formalise the financial system.
India is a predominantly cash economy, and as a result, demonetisation has caused disruption in the short term. Nevertheless, it should come with huge positive long-term implications for the Indian economy. It has encouraged people to deposit their cash reserves into the banking system, which means that people are increasingly moving savings from physical assets (e.g. property and gold) to financial assets, and has helped contribute to the shift towards digitisation.
2017: The Goods & Services Tax – transforming a patchwork of taxes into a single regime
The Goods & Services Tax (GST) was brought into law in July 2017, transforming India’s patchwork of state goods and services taxes into a single tax regime. India consists of 29 states, and before GST every time an Indian company wanted to sell goods or services across those state borders there would be taxes to pay. The complexity of this system made logistics very onerous and costly in itself. GST replaced 17 state and federal levies and now, for the first time since its independence in 1947, India is one common market.
It will take a while for GST to be fully implemented, and a number of adjustments are still being made, but we believe the long-term benefits of this landmark reform are likely to be significant and far reaching. Business should shift from the informal sector towards businesses that are already tax compliant, resulting in an increase in tax takings for the government. Logistics should also become more efficient, as taxes no longer need to be paid between states. While companies may see some benefit from lower logistics costs, we think most of the savings will be passed onto consumers, which should reduce inflation.
2018: India Stack – the largest open API in the world
Implementation of India Stack is now well underway. It is the largest open Application Programme Interface (API) in the world6, combining infrastructure for biometric identification (through Aadhaar) with digital lockers, e-signatures, digital payments and e-KYC (Know Your Customer). India Stack is made up of four layers, each of which performs a basic function and can operate independently: the consent layer (permission), the cashless layer (financial transactions), the paperless layer (documents) and the presence-less layer (authentication made possible anywhere).
We believe that India Stack will have positive implications for people at all income levels. It boosts financial inclusion for the lowest income citizens, and improves access to benefits. Wealthier citizens should also stand to benefit, as India Stack makes it easier to do business and should also lead to greater productivity levels. Finally, it provides a massive opportunity for companies to reach the masses, as it allows people to innovate using the comprehensive set of APIs, without the burden of upfront costs.
The modernisation and reforms of Prime Minister Modi’s administration are helping to lay the foundation for strong growth in India. Despite the disruption caused by some of the most recent events, such as demonetisation and the introduction of the Goods & Services Tax, the Indian economy is expected to grow at around 6.5% this financial year7, and at more than 8% next financial year (to 31 March 2019)8. This year’s fiscal deficit is estimated to be higher than originally expected at 3.5% of GDP, but we note that this year’s implementation of GST resulted in only 11 months of indirect taxes being collected, and the fiscal deficit is expected to reduce to 3.3% during the next financial year8. While it is likely that the recent series of major economic reforms will remain disruptive to India’s economy for at least the first half of 2018, we see significant benefits from digitisation and the ongoing economic reforms in India, and we are positive both on the long-term trajectory of the Indian economy and on the profitability of Indian businesses held in the fund.
The fund’s 10-year performance
Since its launch on 29 February 2008, the Jupiter India Fund has returned 188.7% compared to 75.0% for its benchmark, the MSCI India Index.
Past performance is no guide to the future. Fund performance data is calculated on a bid to NAV or NAV to NAV basis dependent on the period of reporting, all performance is net of fees with net income reinvested. Source: FE, 28.02.18.
Risks associated with the fund
The fund invests in a single developing geographic area and there is a greater risk of volatility due to political and economic change, fees and expenses tend to be higher than in western markets. These markets are typically less liquid, with trading and settlement systems that are generally less reliable than in developed markets, which may result in large price movements or losses to the fund. The fund manager may use derivatives, which carries additional risks and may result in large fluctuations in the value of the fund. There is also a risk that counterparties to derivatives may become insolvent, which may cause losses to the fund. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request.
To find out more, visit jupiteram.com
5Source: Citi, India Economics View, ‘The Demonetization Project – Macro and Market Implications’, 15 November 2016
6Forbes website, 09.04.2017
8Source: India Union Budget 2018-19, http://www.indiabudget.gov.in/ub2018-19/bs/bs.pdf
Important Information: For Investment Professionals Only. Not for use by Retail Investors. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given. The views expressed are those of the Fund Manager at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM.
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All figures correct as at 30.09.2019.