Earlier in 2015 we published a debate between Simon Down, one of our fixed income portfolio managers who had recently travelled to India and Andrew Holland, CEO of Nikko Asset Management's joint venture with Ambit Investment Advisory. (https://www.nikkoam.com.sg/articles/2015/07/india-our-debate-on-key-issues)

Since this discussion there have been elections for the state of Bihar, which saw the ruling BJP dramatically lose the state. Analysts are divided about the importance of this loss, some extrapolating this to a country-wide deterioration in support for Prime Minister Modi and others feeling that local or caste issues were a critical factor in the result. The other major event has been a state visit by Prime Minister Modi to the UK. Our investment management teams have again come together to update their views given these new issues.

Simon: We'd had a huge focus on Modi in recent weeks with the UK visit. Modi himself I think summed up the event by hailing the 'special relationship' that the UK and India have, stating that it was 'a great partnership between two great nations' with both nations 'united by the scale of our ambition'. There are 1.4 million people of Indian ethnic origin living in the UK and this visit was clearly designed to cement the historical, cultural and business links between the two countries. There were £9bn in commercial deals signed during the visit, with 20 different deals, the largest a £1.3bn investment into India by UK mobile firm Vodafone. Other deals were on the finance side with a number of major insurance companies looking to enter joint ventures and partnerships with Indian firms to take advantage of reforms to open up the financial sector. Notably, Bupa, a major UK healthcare provider, announced it was applying to increase its holding in its Indian distributer, Max Bupa to 49% from 26%.

In terms of future business, UK Prime Minister Cameron focused on supporting Modi in efforts to improve Indian infrastructure which will propel India into its next stage of development. Modi on the other hand focused on trade between the two countries, stating that the UK was 'India's gateway to Europe'.

I'd say that the visit was very much a success and although there were some protests against Modi these were limited and didn't detract from the visit. How has the visit been perceived from within India itself, Andrew?

Andrew: Prime Minister Modi's focus on his foreign trips has been to revive India's dormant foreign policy as well as attract foreign capital to boost domestic economic growth. In this context £9bn in commercial deals signed during the visit is substantial. These deals are also intended to send out a message to the international community that India is open for business and progressively the government will do whatever is required to ease entry of foreign investments in to the country. Further, despite Vodafone's retrospective tax troubles in India, this new investment announcement is a welcome sign.

This outward focus has already borne fruit with FDI rising to US $19 bn in the Jan to June 2015 period (+30% YoY). Having said that, the economy has yet to feel the impact of these FDI flows regarding economic growth and the trickledown effect. Overall the government wants to showcase India as the next big market and hence investment destination especially in the context that global investor sentiment towards China has been on the wane due to a meaningful and protracted slowdown.

Simon: With regard to the election in Bihar, the financial community seems to be very divided on its importance. Bihar is obviously one of the poorest states in India with the highest population. How important were local factors, such as the state's lack of investment, to the result? Any country-wide implications that you see?

Andrew: In my view, the outcome of the Bihar elections was disappointing. Both political and business community commentary was critical of BJP's lost opportunity to consolidate strength in the upper house of the Indian Parliament.

However, this negative outcome will only push the government to make more aggressive moves on the economic reforms front. To put things in perspective, the government post the Bihar election has announced State Electricity Board (SEB) debt restructuring, FDI reforms across sectors, higher spending on railways and relief for stuck road projects. We also saw the pay panel report being submitted which suggests a nearly 24% hike in compensation for central government employees. These measures are intended to boost economic growth and specifically address infrastructure spending and consumer sentiments, however, these measures will only bear fruit in the medium to long term.

From here on we would focus on the government's tact in arriving at a consensus on key economic reforms like GST and Land Reforms Bill in the impending winter session of the Parliament. Notwithstanding the same, we will continuously see policy announcements by the government at regular intervals.

Simon: Coming back to the reform agenda Andrew, I've been pretty encouraged by moves to sell a stake in a number of key state owned companies and infrastructure holdings. Then we've also had news that the government will compensate developers for delays in highway projects. Is this real progress as India moves down the reform pathway towards their target of moving to the top 50 in the World Bank's 'Ease of doing business' survey, or is it just a quick fix to stem criticism that reforms aren't moving along quickly enough?

Andrew: Divestment has been on the current as well as previous Government's agenda for a long time now. It is highly encouraging to see this finally materialize. Indeed, the government needs to consolidate its fiscal position to keep the markets happy and therefore disinvestment proceeds would aid public spending.

It is important to understand that the delays in highway projects for which compensation will be provided were caused by a) non-availability of land; and b) lack of clearances by the Ministry of Environment and other departments rather than attributable to the developers themselves. The Government has consistently expressed its commitment towards building roads and highways as part of its development agenda and have set ambitious targets. Whilst this move may seem smartly timed, I am convinced that this is in line with what the Government has been consistently maintaining.

Looking ahead, passing of key reforms like Land Bill. GST Bill and Bankruptcy Bill will to a large extent determine how we progress on the World Bank's 'Ease of doing business' Survey rankings. In this context, we may be 24-36 months away from any meaningful improvement in our ranking. Overall, expectations of a fast reform agenda may have been dashed especially in light of the "maximum governance, minimum government" promises, and instead a more gradual and incremental approach is being adopted.

Simon: Thanks Andrew. From our global perspective, India continues to be one of the most attractive fixed income emerging markets in our view even after having one of the highest total returns in 2015. Thus, we will keep a keen eye on this key market and continue monitoring the issues that you've raised.