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A fresh breeze of reform blowing through India

Our close-up view of India’s rising middle class gave us a glimpse into the huge potential for economic growth and associated investment returns into the future.

A few of my colleagues and I have just returned from a week long investment trip to India. We arrived in Mumbai on the evening of 19th November to find that two things were top of mind for the city’s citizens.

The first was that British rock band Coldplay and US rapper Jay Z were in town. They performed to an estimated crowd of 80 000 at the first annual Global Citizen Festival held in India. According to newspapers, entry level ticket were priced at Rs5 000 (about R1 000) and went up to Rs35 000 (R7 000). However about 80% of the concert goers had won the right to attend in competitions where they had pledged to commit to the sustainable development goals adopted by the Global Citizen Festival.

Global Citizen Festival is an advocacy group for ‘social good’ which was launched in the US in 2012. The objective of the organisation is to persuade millennials to commit to challenging the scourge of poverty. The date of the concert was planned to coincide with World Toilet Day, which is of particular relevance in India as 37% of the population still defecates in the open, a major public health, early childhood development and sanitation problem responsible for 1 in 10 deaths in India.

The Swachh Bharat Mission (Clean India Mission) was launched by the Government of India in 2014. The Mission is the country’s largest-ever drive to improve sanitation with the aim of ending open defecation by 2 Oct, 2019, Mahatma Gandhi’s 150th birth anniversary. And so it was that as we drove past the concert venue, it was not the sounds of music that strayed over the venue’s fences, but appeals for an end to open defecation.

Returning to our hotel after our evening meal and after the concert had ended, we saw thousands of young people socialising in the streets and the hotel precinct hoping to catch a glimpse of Jay Z who was rumoured to be staying in the hotel. The combination of the popularity of Cold Play and Jay Z, the particular cause embraced by the organisers and mingling with some of the 80 000 young, well-educated and socially aware young people combined to form a first impression of a modern and rapidly urbanising India.

This impression was further reinforced in our interactions during the following week with people we met. We heard anecdotes of start-up businesses, young professionals returning to India, declining corruption, increasing internet penetration, massive e-commerce growth and an overwhelming desire to be part of the Indian success story.      

Our close-up view of India’s rising middle class gave us a glimpse into the huge potential for economic growth and associated investment returns into the future. This was perhaps best summed up by Mr Arun Kumar, the M&A editor of The Economic Times, when he said that “Nobody can afford to ignore India”.

The second thing that we became aware of was the queues at all the ATMs.

Our guides informed us that on November 8th, the Reserve Bank of India had announced with only a few hours’ notice, India’s two largest denomination notes, the 500 and 1 000 Rupee notes would no longer be legal tender. The Reserve Bank of India sent out this notice to newspapers:

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ₹ 500 and ₹ 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

This is necessitated to tackle counterfeiting Indian banknotes, to effectively nullify black money hoarded in cash and curb funding of terrorism with fake notes.

An estimated 86% of the value of total currency was effectively invalidated overnight. Anyone with outstanding notes was obliged to deposit them in a bank (potentially incurring a tax) or exchange the notes for replacement notes in strictly limited sums. Old notes could also be used to pay for petrol, government hospitals, railway and airline booking counters and for services at a few other state departments. During the course of our visit to India it was announced that old currency notes could also be used by families planning a wedding.

The move is expected to result in the demise of cash hoarding, increased tax revenue and the opening of more bank accounts. We saw long queues at banks, with patiently waiting people. Some ATMs had ‘No Cash’ signs posted on their walls.

While opposition parties castigated the Modi government for the mismanagement of the surprise move, it was applauded by all the people we met. Yes, they acknowledged, there would be significant short term inconvenience, but all supported the objective which was to crack down on black money transactions, get more people into the formal economy (and therefore the tax net) and to tackle the problem of counterfeit notes, government corruption, drug trafficking and terrorism financing.

The demonetisation move did not come out of the blue. The Government of India announced an amnesty in terms of which black money holders could come clean by declaring the assets, paying the tax and a penalty between 1 June and 30 September this year. The government warned that failure to come clean would result in more punitive consequences.

Over the next few days we could not start a meeting without first discussing the merits and demerits of demonetisation and whether or not this initiative would harm Prime Minister Modi’s chances of a second term of office. We were told of all sorts of ways whereby cash was kept out of the banking system. It is apparently the norm, for example, for property to be transferred at rates ‘topped up with cash’ so that true values are not reflected and lower transfer taxes paid.

Other recent reforms introduced by Prime Minister Modi include the GST Bill, discussed by the Upper House of the Indian Parliament in August this year. This proposed legislation will ensure that general sales tax across provinces will be uniform. It is expected that the successful implementation of GST could add up to 2% to India’s GDP.

For us, as South Africans, this often-expressed, enthusiastic confidence in a government, coupled with growth enabling, investor friendly reforms was at once striking and sobering. It stands in stark contrast to fears of credit down-grades and appalling figures of wasteful expenditure in state departments, revealed by our auditor general. Whilst I am under no illusions that India still has a very long and challenging road to walk, it is enormously encouraging to see both the government and ordinary people pulling together to achieve the dream of a prosperous India for all its citizens.  

Imagine the possibilities in Africa and South Africa if we had a government and private sector that was committed to building and growing Africa and SA for all Africans, committed to removing corruption and self-interest and making our country move forward for the benefit of all.

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