The Importance of Structural Reform


August 18, 2016 [India, Economy, Goods and Services Tax]

India’s tax reform could create a nice tailwind for the country’s economy, companies and investors for years to come.

House of Parliament, Delhi, India

Emerging market investors are generally aware of the long-term penetration opportunities that exist across multiple sectors. Whether it is credit penetration as a percentage of gross domestic product (GDP), beer consumption per capita, or number of malls per million inhabitants, etc., better demographics in the developing world provide ample opportunities for growth. It is for that reason that we often see large multinational companies investing significant resources in establishing their brands across many developing countries. However, poor macroeconomic management, government corruption or ill-conceived policies often negate the benefits of favorable demographics, resulting in growth rates that may hover well below potential for many of these countries. This brings us to the importance of structural reforms. Whether it is the telecommunication reform pushed by President Enrique Peña Nieto in Mexico or state-owned enterprise (SOE) reform promoted by Xi Jingping in China, structural reforms can pave the way for more efficient utilization of resources, greater incentives for corporate investments, productivity gains, and, ultimately, faster economic growth. The dynamic also raises the potential for higher shareholder returns.

India’s Structural Reform Push

I was in India for a slew of meetings with government officials and corporate executives two weeks ago, coinciding with the approval by the Lok Sabha (India’s Lower House of Parliament) of a constitutional amendment paving the way for passage of long-anticipated “Goods and Services Tax” (GST) legislation. India’s current taxation system is a complicated web of local, state and central government taxes, making it quite difficult to conduct business. In fact, Deloitte’s 2014 Asia Pacific Tax Complexity Survey ranked India as the second-most complex tax jurisdiction in the region, second only to China. The study also noted that 81% of survey respondents believe the Indian tax regime has become more complicated over the preceding three years. The convoluted nature of India’s tax structure has resulted in inefficiencies across several areas of the economy. For example, executives from a large consumer staples company I met with noted they have built distribution centers across all Indian states to circumvent the tax difficulties that arise from moving goods from one state to another. Others have simply resorted to not paying taxes.

GST, Finally

GST discussions in India are not new. In fact, the first wave of GST talks took place in 2000, when then Prime Minister Atal Bihari Vajpayee, a member of the now-ruling Bharatiya Janata Party (BJP), proposed the creation of a committee to study the GST model and develop the back-end infrastructure required for implementation. Due to political infighting and disagreements between the federal and state governments, passage of the bill was stymied for the past decade. However, BJP Prime Minister Narendra Modi, alongside Finance Minister Arun Jaitley, seem to have broken the political logjam and gathered enough legislative support to pass the constitutional amendment bill by both the Lower House and Rajya Sabha (Upper House) earlier this month. From here, it will need to be approved by 15 of the 29 states before the president can notify the GST Council, which would then move to iron out the specific details that would make the bill revenue neutral to the government.

Details and Implementation will be Key to Long-term Success

The government has set an ambitious target for implementation of the bill with the expectation that a GST framework could be in place by the beginning of the next fiscal year, in April 2017. However, political commentators, economists and GST experts we met in Mumbai and New Delhi expect the implementation to take longer, as the complicated process of deciding on specific tax rates for several goods and services will likely last longer than the government anticipates. Nonetheless, we view the ultimate implementation as a clear positive for the Indian economy, providing the legislation isn’t watered down significantly. Reserve Bank of India officials told me they think the implementation of GST could add 1% to trend economic growth. Over time, that’s a meaningful increase, especially for a country that’s adding a net 12 million workers annually to its 500-million-strong labor force.

We Remain Constructive on the Long-Term India Opportunity

We recently wrote a piece highlighting the low level of penetration of financial services products in India. Truth be told, these types of penetration stories can be found across several sectors in India, and emerging markets more generally. The 2012-2014 period was difficult for India as the country experienced a significant economic slowdown, inflation hit double digits and the current account deficit reached levels as high as 5% of GDP. India has benefited in recent years from stronger macroeconomic management and, as an energy importer, lower fuel prices. We believe the potential implementation of GST could add momentum to the pace of economic growth for years to come, providing a nice tailwind for our India investments.

Important Information
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit Read them carefully before investing.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Investments carry risks, including possible loss of principal. Additional risks may be associated with investments outside the United States, especially in emerging markets, including currency fluctuations, illiquidity, volatility, and political and economic risks. Investments in small- and mid-capitalization companies may increase the risk of greater price fluctuations. Investments in the Fund are not FDIC insured, nor are they bank deposits or guaranteed by a bank or any other entity.

Please see our glossary for a definition of terms.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

Thornburg mutual funds are distributed by Thornburg Securities Corporation.

Thornburg Investment Management, Inc. mutual funds are sold through investment professionals including investment advisors, brokerage firms, bank trust departments, trust companies and certain other financial intermediaries. Thornburg Securities Corporation (TSC) does not act as broker of record for investors.