India: Gateway House

Here are my meeting notes from the Gateway House meeting.   I took extensive notes.  Given the high profile nature of the participants, they ask that I not attribute their comments but instead simply share my meeting notes:

They compared Indian politics to that of the U.S.—everyone quarreling with everyone else.  However, Prime Minister Modi is in the true presidential mode.  He has established the clearest relationship with the U.S. in India’s history.  There are certainly many differences, but India would like investment and technology from the U.S.

SEBI, the Securities and Exchange Board of India, is well respected and has been successful in creating an environment for efficient stock exchanges that are world-class in trading and settlement.  Investor protection in India is solid, but one of the challenges of investing in India has been “regulatory arbitrage.”  India has been nervous about monopolistic institutions, and so it has instituted multiple regulators.  The Reserve Bank of India, SEBI, insurance regulators, and pension regulators are competing to regulate some areas.  This will slowly change, as non-RBI regulators will ultimately consolidate.

From left: Blaise Fernandes, Neelam Deo, W.S. Ravishankar, John Lunt, Amit Bhandari, Sharmadha Srinivasan, Sameer Patil, Manjeet Kripalani

The RBI deserves a lot of credit for managing events outside its control.  Central banks need cushion, and the current policy makers at the RBI have done a good job of building a cushion.

There are several key geoeconomic trends to consider:

1—The price of oil will swing the economic fortunes of India.  They are very happy with energy prices at their current levels.  Oil will have a significant impact on the economy, given the India’s status as a large energy importer.

2—Excess liquidity in the global financial system is of concern to India.  For example, China’s markets have doubled while the economy is slowing.  Liquidity can evaporate in a hurry.

3—India is dependent on global growth.  India is reliant on the Information Technology sector, and this sector is vulnerable to global growth.

In India’s domestic economy, consumption is the mainstay.  The rural economy will remain soft.  They have experienced 7-8 years of government pampering with subsidies and wage programs.  The urban economy is just coming out of 5-6 years of high inflation.  The propensity to spend is still in the early stages.  If the main growth engine is not consumption, then it will rely on investment.  Private investment will take time, so the “big game” in town will be public expenditures.  The government is in a better position to act, but institutions that need to execute the plan are over-leveraged corporations. In short, the government will be inclined to spend, but the ability to execute the plan is in question.

In foreign policy, the entire world is hedging against the rise of China.  India is no exception.  Hedging against China does not mean that India will actively oppose China.  They still want Chinese investment.  China and India have the longest undemarcated border in the world.  There is a sense that China uses this as a pressure point.  This hedge against China, underlies India’s shift towards the U.S. and its allies (like Japan).  Everyone is attempting to balance the global situation.  India is concerned about U.S. and Chinese military support of Pakistan.  India and the U.S. will never be “allies,” but they will continue to experience a convergence of interests.  Clearly, this Indian government is being more assertive, but Modi needs to balance the economic and the political.

India is sensitive to security and potential terrorism, particularly given its history with Pakistan.  India is still impacted by the Mumbai terrorist attacks of 2008.  There is also concern about the rise of ISIS, and their ability to use social media to gain recruits in India.  There is little sense of urgency to engage with Pakistan.  There will be a surge in interest in the domestic defense industry, as the government will attempt to shift away from its status as the world’s largest arms importer.

Energy security is a clear concern in India.  It relies on coal for its electricity, and 80% of this coal comes from one firm.  It relies on petroleum for transportation, and 60% of this comes from West Asia.  This dependency creates risks.  There is hope that energy will use low energy prices to diversify away from a dependence on oil from the Middle East.

When we talked about expectations around Prime Minister Modi’s government, it was highlighted that the expectations of financial markets don’t matter.  The small percentage of the population that invests and reads English newspapers can take care of themselves.  It is the 700 million Indians that voted for Modi that he will worry about.  The lives of most of these people are very different than the average Indian “investor.”  In their view, markets do not reflect “India.”  It is important to understand what the 700 million are looking at, and not what the stock market is looking at.

The insights from this group were incredibly valuable, and provided balance and perspective from the industry professionals that I met with.

For your reference, I've listed a sample of articles authored by the Gateway House representatives with which I met.

Manjeet Kripalani -

Neelam Deo -

Rajni Bakshi -

Sameer Patil -

Amit Bhandari -

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Special thanks to Brennan Staheli, Peter Johnson, and the Lunt Capital team for their contributions to this report.