India a year after Modi's election: The bullish case

Almost a year after the world's biggest democracy sent a reform-minded, pro-business candidate to its top political office, the bulls still have a case to make in favor of India—at least in the longer term.

Narendra Modi's election whipped up an optimism that soon played out in India's markets. The BSE Sensex, India's chief stock index, shot up roughly 40 percent after his election last year. But things have cooled a lot in 2015, with the Sensex lower by 1.8 percent year-to-date.

Indian Prime Minister Narendra Modi.
Lakruwan Wanniarachchi | AFP | Getty Images
Indian Prime Minister Narendra Modi.

But in the longer term, the bulls are still making a case for India. The nation is likely to become an increasingly important source of labor for global corporations. It has the best demographics among the big emerging-market countries, said Jim O'Neill, the former Goldman Sachs Asset Management chairman who famously coined the term "BRIC"—a catch-all for Brazil, Russia, India and China. A strong domestic market and a credible legal system are factors that make India slightly more balanced than China, he said.

"India has fantastic demographics. With urbanization in its early stages, size of the working population and productivity, India has great growth potential," said O'Neill, now a visiting research fellow at leading European think tank Bruegel.

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China's market is the world's hottest so far this year, but the Asian giant has seen double-digit slumps in its manufacturing jobs, prompting some market-watchers, including Barron's on Monday, to question how long the China bull can last.

India is expanding its supply of labor, and that's likely to draw more foreign direct investment into the country. According to Boston Consulting Group, India's hourly wage in the manufacturing sector is 92 cents, compared to $3.52 in China. O'Neill said by 2030, India's nearly 500-million-strong labor force could grow by an amount equal to the combined labor force of France, Germany, Italy and the United Kingdom.

Where is India's economy headed?
Where is India's economy headed?   

"India has a labor opportunity and can see substantial investment throughout the next 30 to 40 years," said Rafiq Dossani, director of Rand Center for Asia Pacific Policy. "Europe, USA and Japan are very keen to look at India as an alternative for labor."

Another reason the $2 trillion economy could draw in more foreign investors is Modi's relatively pro-business stance, particularly a campaign called "Make in India" that aims to boost manufacturing by improving national infrastructure.

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Deepak Bagla, managing director and CEO of Invest India—a firm that aims to drive investment to India—said that "Make in India" opens 25 sectors of the Indian economy to foreign investment.

"'Make in India' covers virtually everything," Bagla said. "It is difficult to find a situation where a foreign investor cannot invest."

"Make in India" is supplemented by Modi's "Minimum government, maximum governance" policy, which is directed at reducing the size of India's huge bureaucracy, which O'Neill characterized as a major roadblock for the country

The more bearish case

All that said, India faces huge hurdles and is unlikely to overtake China as an investment hub anytime soon.

Complexity in the Indian government system restricts access to many of the economic sectors that are open to investment under "Make in India." Being a democracy, India requires considerable effort before it can open its framework to allow anywhere near the rate of investment that China can draw, O'Neill said.

"India is a highly decentralized nation with a lot of state power, as well as different political influences," he said, "and it would take considerable efforts to organize India's workforce in the way China has found it so easy to do."

According to a United Nations report, foreign cash inflows to India stood at $35 billion in 2014, while China was the leading draw for foreign money with inflows of $128 billion.

No 'wow' factor

India's highly anticipated national budget, released in February, dampened the interest of foreign investors, according to the Wall Street Journal.

O'Neill said while nothing was hugely amiss with the budget, it lacked a "wow factor" that the Indian and international public had foreseen. Investors had hoped for something in the budget that would signal a friendlier business environment, but didn't see any huge changes.

India ranked 142 among 189 countries for the ease of doing business, according to the World Bank Group's "Doing Business" rankings, benchmarked to June 2014. By comparison, China stood more than 50 points ahead at number 90.

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"It is definitely difficult to start and run a business in India," said Anubhav Gupta, senior program officer at Asia Society Policy Institute. "Obtaining land rights, dealing with construction permits (where India ranks 184 in the World Bank rankings), enforcing contracts and taxation are all big issues."

Gupta praised the "Make in India" campaign is, but said it's hobbled by a lack of infrastructure and requires more substantive policy reforms behind it. Power failures are another major issue that India needs to tackle in order to boast a robust manufacturing sector, he said.

"India would love to be the next China in terms of manufacturing, but other than having a similar population, I cannot think of any other realistic reason how this could happen," O'Neill said. "It needs to progress so much to be in the same league as China."