India’s monsoons are a powerful metaphor for the way Goldman Sachs’ Prashant Khemka views India.
They not only reflect the volatile storms that can engulf the country’s stock market, but also highlight the government’s struggles to move the economy onto a more modern footing.
When it comes to market turbulence, Khemka seems to have weatherproofed his $1.4 billion (€1.2 billion) Goldman Sachs India Equity fund admirably, as he has managed to maintain his Citywire AAA rating for more than a year.
The fund’s three-year numbers back this up, with a 72.1% return to the end of March, compared with 40.8% from the MSCI India index.
On the second point, Khemka, who runs several other funds at Goldman Sachs Asset Management, including the Goldman Sachs BRICS Portfolio, is both frustrated by and positive on the present government, especially when dealing with agriculture.
‘India’s agriculture sector is still very dependent on the monsoon, although much less than it was three decades ago,’ he says.
He is relieved the government is trying to address the problem through its recent budget, where it announced subsidies for rural areas and better infrastructure.
‘Irrigation facilities have improved but the last two monsoons were a reminder that much remains to be done.’
Trials of taxation
While the government is trying to support the rural population by helping them to better utilise the rain to grow more crops, Khemka thinks it could do more for the urban-based financial sector, which would boost the economy.
‘India has a very good growth rate of 7% or so over various time frames. But there is no reason why it could not have grown as fast as, or faster than, China. Why has it grown at 7%, rather than 9% or 10% or higher?’
One of the ways India’s economy could expand is through urbanisation. Agriculture currently employs more than half the population, but only accounts for about 18% of the country’s GDP. However, Khemka says one of the biggest problems facing the country is the structural framework for commerce.
‘To grow much faster we have to make it easier to do business in India. ‘But “business” is a bad word here and no political party wants to call itself pro-business.’
While the government is taking steps to resolve the problem, Khemka thinks it could do a lot more. Simplifying the maze of tax regulations is a case in point.
‘Companies are doing their best, but the government could remove many impediments. It is making some headway, and its proposed changes to the common goods and services tax probably represent the biggest single reform of the past decade, since the bank shake-up in the early 90s. This would mark a big step forward in facilitating economic activity.'
‘It is not about paying lower taxes, but making the system more convenient and effective. The hours and hours highly productive people spend wrestling with complicated regulation could be utilised instead for economic activity,’ he says.
Making the right call
An area where India has surged ahead is the mobile and telecoms industry and Khemka believes this is one area where the government has made a real difference.
‘Mobile telephony has been a big contributor to the country’s growth over the last decade or two, but growth alone does not ensure gains for equity investors. Return on incremental capital is more important and this is one sector the government has got right,’ he says.
‘It has achieved its objective here by encouraging competition. Prices in India are one of the lowest in the world. This competitive environment is healthy for consumers, who were paying hundreds of rupees per minute to make long-distance calls two decades ago.’
This industry is booming as more and more people use mobile phones to access the internet, so why does Khemka have no holdings in the sector? He thinks competition is good for consumers, but bad for him.
‘Competition in India is so intense that returns on capital barely cover the cost of capital over the cycle. For this reason, we have struggled to find good investment opportunities in the sector.’
In contrast, Khemka prefers companies showing growth potential. One area he believes holds more promise than mobile telecoms is the IT industry. He has 17.9% of his India Equity fund allocated here, which represents the portfolio’s second-largest sector allocation.
Meanwhile, the biggest single-company holding is Bangalore-based software engineering and outsourcing services provider, Infosys, at 8.8%.
‘The Indian IT industry continues to grow in double digits and is taking a share of global IT budgets from the big players. While growth is not as strong as the 20% levels in past years, the sector is much bigger than it was 10 or 20 years ago and is now around the $100 billion mark,’ he says.
‘At this size, its current rate of growth is no trivial task and is faster than the global IT services industry as a whole. There will be specific instances from the last 10-20 years of companies moving their resources away from India back to the country where they are domiciled, but that trend is much smaller compared with the size of work that is being offshored by other companies to India.’
This is an extract of an article which originally appeared in the May edition of Citywire Selector magazine.