Tax-Competitive India To Be Focus Of Foreign Investors, Says Mark Mobius

With India cutting corporate tax rates, Mobius believes foreign investors would increase their exposure to the nation.

Mark Mobius speaks at a conference in Las Vegas, Nevada. (Photographer: David Paul Morris/Bloomberg)
Mark Mobius speaks at a conference in Las Vegas, Nevada. (Photographer: David Paul Morris/Bloomberg)

With India cutting corporate tax rates on domestic businesses to stimulate economic growth from a six-year low, veteran emerging-markets investor Mark Mobius said foreign investors would increase their exposure to the nation.

“India stands pretty high in the EM (emerging market) pack,” Mobius, partner and co-founder of Mobius Capital Partners LLP, told BloombergQuint in an interaction. “Till now, our fund’s exposure to China was a little higher than India, but now we may see India surpassing China.”

That’s also because India is now competitive on taxation vis-à-vis most of its Asia peers, according to Mobius. “India has now become a much more profitable enterprise compared with Indonesia, Malaysia and other countries,” the veteran investor said, adding that “calls for a re-rating are most likely”.

Mobius, who left Franklin Templeton Investments in 2018 to set up Mobius Capital Partners, dismissed concerns on the fiscal implications of the tax cut as India is in a relatively strong financial position. “Just remember, now with this tax cut, you’re going to see greater productivity, more production and more economic activity.”

He said the Reserve Bank of India must take the government’s cue on lower rates. “I think it’s going to be quite positive (the effect of corporate tax cuts) and by the way, I think the central bank should be lowering rates in line with what other countries are doing,” Mobius said. “It’s very important to not only have lower taxes but also lower interest rates.”

In the long run, India should issue large tranches of government debt to the international market to maintain a strong financial structure, he said.

Mobius said his fund would focus on manufacturing, consumer and infrastructure sectors in India. “We believe infrastructure spending is going to be increasing in India and those companies that feed into the infrastructure spending would be very good,” he said. “Also, as you know, we’re always interested in the consumer space and with the per capita incomes going up this will be a big beneficiary.”

Watch the interaction here:

Read the full transcript here:

Indian indices clocked their best one-day gains in over a decade on the back of the surprise corporate tax cuts announced by the finance minister. This is one of the biggest booster shots the industry has received so far. As a foreign investor, how do you read these developments?

I read it very positively because it’s a great move and it shows that the (Narendra) Modi government can take really aggressive striking moves to improve the situation in India. That’s very good news.

Do you see corporates possibility improving very significantly on the back of these tax savings? And would you then compare this to the time when corporate taxes in the U.S. were cut from 35 to 21 percent?

Well, the impact in the U.S. was very positive and the same thing will happen in India, in my view. It will be positive, it will give a big dose of optimism to the business community in India and generally to foreign investors. So, I think it’s a tremendous move on the part of the government. Now, what’s needed is, to follow up, to clear away some of the bureaucratic hurdles that people to invest—particularly for the small and medium size companies. If they do that, their combination would be quite tremendous.

Does this call for an India re-rating according to you? The pushes are now strong and hard to make sure we are inline with the other countries with similar tax structures?

I think it should recall for a re-rating of India. I think a lot of people are concerned about the whole budget maybe too taxed and you’ve had a big problem with the budget for example, the deficit or the GDP. But India is not in trouble in that regard. India has got a pretty strong financial situation regards the government’s concern. I also believe the government should be issuing large trenches of government debt to the international market. That’s what will help India a lot to improve the structure in the long term.

Do you see because of a lot of this, foreign money is finding its way back to Indian shores?

Definitely, because now it becomes a much more profitable enterprise. If you go into India with these taxes being so less, you must remember that when foreign investors look at India, they can pair India to Indonesia, Malaysia and other countries around the world but particularly in Asia. Now India is competitive as regards to taxation vis-à-vis these other countries.

Do you also see more money being put to fuel capital expenditure in the private sector and the additional leeway that companies now have can be used to reduced prices as per industry level for volume growth?

Yes, that’s one thing, but you must remember that it’s not only a matter of cutting prices but also increasing productivity. Companies can now invest more in more productive equipment and increase efficiency in their manufacturing which again will feed into prices enabling them to reduce prices.

The finance minister also is giving a push to manufacturing. Do you think India can make its mark in the global manufacturing supply chain?

Definitely. There are tremendous opportunities for India, but India has to follow what the Chinese did, what the Koreans did and all the other countries where they’ve set up special export processing zones so that exporters can import raw materials for their processing and then export into the greater world. More of that has to be done to enable companies to come in and become very big manufacturers because we must remember India has got a lot of labour, a lot of skilled labour capable of doing excellent export work.

We’ve spoken a lot about positives. Does the impact of this in the stimulus on the fiscal math worry you? Earlier on, in the past you’ve said that even if the government brings a fiscal deficit of five percent, it will not bother you a lot.

Yes, that’s what I feel. I don’t think it’s a worry. Just remember, now with this tax cut, you’re going to see greater productivity, more production and economic activity which in turn, will bring in more tax dollars—the so-called Laffer curve (which correlates tax rates with government revenues) comes into play here. I think it’s going to be quite positive and by the way, I think the central bank should be lowering rates in line with what other countries are doing. I don’t think a lower rate would be detrimental to the Indian economy. It’s very important to not only have lower taxes but also lower interest rates.

In light of that, are you expecting the RBI to lock step with other central banks in terms of rate cuts when it meets in October?

I hope so. I hope they get that message if they compare themselves with other countries around the world, particularly in the region, you’ll note that Indian rates are high and that shouldn’t be the case. There’s no reason why India can’t do better with lower interest rates because it’s a competitive world and you’re seeing that on a global scale; lower and lower interest rates.

Mark, will you be looking to increase your holding in India equities now? Is there comfort on the valuations now and a clear outlook on the earnings growth as well?

That’s right. (I am) seeing companies do two things. One, increase their dividend payout and two, invest more in the business; invest more in labour-saving equipment, more efficiency and greater application of new techniques to their manufacturing and their distribution.

Which sectors would you be focusing on now?

We’ll be focusing on manufacturing to begin with because we believe that with the infrastructure spending that’s going to be increasing in India, those companies that feed into the infrastructure spending would be very good. Consumer (facing sectors), as you know, we’re always interested in the consumer. Per capita incomes are going up so that’s another area. In the financial area, with this interest rate cut, hopefully a lot of the loan situations—bad loans would be able to be paid back and solidified and that will help the banking system as well.

Within the emerging market basket, where does India stand now post these announcements?

India stands pretty high. Up to now, in our fund, China is a little higher than India but now we may see India surpassing China. It depends on what opportunities we find in the Indian market.

Is China opening up its markets a deterrent to big money coming into India according to you?

Not really. You must remember, China hasn’t completely opened up. There’s still a lot of restrictions on what can be done and of course, the large-cap stocks will benefit the most because large institutional investors would be the one that would be mostly allowed to enter the Chinese market, so it’s a mixed bag. We’re interested in those medium and smaller companies and that’s where there’s going to be opportunities in India.

Any major risks that you see in the medium-term which could you know probably put a spanner in the works to the India growth story?

Yes, I mean if the Modi government doesn’t follow through with cutting bureaucracy and cutting the difficulties businesses are facing, particularly small- and medium-sized businesses have in doing business, than there could be a negative for the Indian economy.