Alger Emerging Markets Outlook

OUTLOOK 5/8

India’s digitalization disintermediation is fast and furious, with a national identity card facilitating financial inclusion and demonetization, and the GST forcing the informal market to formalize.

government spending on existing projects should continue and the public sector bank recapitalization could accelerate credit just in time for the election cycle. Rural India continues to be a government focus. Rural areas account for the majority of the labor force (and voters) but only 15% of GDP due to inefficient production and suboptimal farm sizes. Modi has discontinued a number of agricultural subsidies and has reduced annual price hikes for crops despite two very poor monsoon seasons in 2014 and 2015. It is not known how the government will reach its target to double rural incomes by 2022. In the meantime, Modi needs a strong showing among voters next year in order to enact additional reforms. Possible actions could include increasing crop price hikes, improving the targeting of rural subsidies for items such as food, fuel, and kerosene, and making additional improvements to rural infrastructure, including electrification and sanitation. Education reform is also possible. The government has already announced “Bharatmala,” which will involve building 52,200 miles of roads with a $100 billion USD equivalent budget. India’s digitalization disintermediation is fast and furious, with a national identity card facilitating financial inclusion and demonetization, and the GST forcing the informal market to formalize. Greater data accessibility and lower prices now exist thanks to India’s newest mobile entrant, Reliance Jio, with its inexpensive 4G service. This has catalyzed competitors to upgrade their networks and lower tariffs, starting a virtuous cycle. Many investors view India as the “last” big internet market with a population over 1 billion and a millennial population burst coming by 2020. There are approximately 350 million smartphone users in the country but a much smaller percentage transacting via their mobile phones. Only a small number of mobile applications are utilized today given the limited memory space on currently available phones. That will change over time as pricing, language, and logistics are addressed. China’s Economy Continues to Be Driven by Government Policy China continues to be a policy driven market. In October, the Central Party Congress (CPC) strengthened the president of China, Xi Jinping. China continues to rebalance its economic growth model as GDP expansion is moderating. The economy grew at an estimated rate of 6.8% in 2017 and is likely to grow at a slower rate in 2018 with fixed investments slowing much faster than consumption is increasing (See Figure 5). 0 5 10 15 20 25 30 2016 2014 2012 2010

2018

Source: Bloomberg

5 Year-Over-Year Change (%) Figure 5 China Fixed Asset Investment 10 15 20 25 30

30

25

20

15

10

0

2010

2011

2012

2013

2014

2015

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2017

5

Source: Bloomberg. China fixed asset investment is based on year-over-year changes in investment in or capital expenditures on fixed assets such as buildings, plant, equipment, machinery, etc. These investments are normally made by businesses (or occasionally government).

0

2010

20