Regional Heavyweights Weigh in on India’s Future

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Nov. 13 – With PepsiCo announcing this week that it will invest US$5.5 billion dollars in India by 2020, PepsiCo CEO and Chairman Indra Nooyi remarked that India has fallen from a ‘must-invest’ to a ‘must-deal-with’ country.

Alongside these remarks, India’s Congress-led government lashed out at Goldman Sachs on Friday for what Anand Sharma, Minister of Commerce and Industry, called the investment firm’s “eagerness to mess around with India’s domestic politics.”

Goldman Sachs recently upgraded its assessment of India’s economy on the expectation that opposition leader Narendra Modi’s Bharatiya Janata Party (BJP) will be victorious in the upcoming general election. After a decade in power, this is something India’s ruling United Progressive Alliance (UPA) is very nervous about.

In light of these bold remarks by regional economic heavyweights, determining the UPA’s actual economic record remains tricky.

PepsiCo CEO Indra Nooyi’s opinion of India reflects that held by many foreign businesses struggling to walk the fine profitable line between opportunity and problems of political corruption, stagnant policy reform, and retrospective legal changes.

“‘Must invest’ means it’s a destination and GDP is growing. ‘Must deal with’ means there are infrastructure issues, the taxation policy is not clear or transparent. So people are saying, ‘Do I have to deal with India?’” India-born CEO Nooyi said. “There have been issues in India. No questions about it… Our hope is that the system will right itself. India is a country with huge potential.”

Unlike Goldman Sachs, however, Nooyi refused to be drawn into a political discussion.

‘I am not into the political aspect of India, but I just think India has been a secular democracy forever and all that we want as investors in India is stability in the country,” she stated.

The Goldman Sachs note titled ‘Modi-fying our view: raise India to Marketweight’ (a play on Narendra Modi’s name) cites six key reasons for India’s upgrade including “optimism over political change, led by BJP’s prime ministerial candidate Mr. Modi.”

A number of notable arguments are made in the Goldman Sachs report:

“A BJP-led government may be beneficial for the investment demand pick up, in our view. Currently the macro challenges that India faces in terms of external fiscal imbalances, high inflation, and tight monetary policy are being dominated by expectations of political change, specifically that the BJP-led National Democratic Alliance (NDA) could prevail in the next parliamentary elections that are due by May 2014.

“Equity investors tend to view the BJP as business-friendly, and the BJP’s prime ministerial candidate Narendra Modi (the current chief minister of Gujarat) as an agent of change. Current polls show that Mr. Modi and the BJP as faring well in the five upcoming state elections, which are considered lead indicators for the general election next year. Even though the actual general election outcome is uncertain, the market could trade this favorably over the next 2 quarters, which argues for modifying our stance.”

Other reasons Goldman Sachs cites for the upgraded outlook include the let up of external pressure cycles, early signs of cyclical pick up and structural improvement, and an overall improved earnings outlook.

Biting the Hand that Feeds

In addition to signs of investment demand pickup and strong foreign inflows into Indian equities, many of Goldman Sachs’ observations can arguably be attributed to the current UPA government. On the whole, however, many investors view the BJP as more business friendly.

The UPA’s sagging pole numbers come as a surprise for some who see its significant US$20 billion per year investment in rural Indian healthcare and education as a key selling point when taken with recent signs of economic recovery. With many of these funds creating a new middle class in semi-urban and small towns, India’s emerging middle class is increasingly being drawn in by the BJP’s economic policies and more business-friendly appeal. For a Congress that has traditionally relied on its pro-farmer policies for the rural vote, fast economic growth and a widespread perception of corruption and policy drift may indeed lead the UPA towards defeat at the polls in 2014.

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