India exchange-traded funds, such as the iShares MSCI India ETF (BATS: INDA) and the iShares S&P India Nifty 50 Index Fund (INDY), have recently been outperforming broader emerging markets benchmarks, a trend that could continue as India increases its tax reform efforts.
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Earlier this year, INDA, INDY and rival India ETFs disappointed, even amid low oil prices. As a net importer of oil, India's economy was expected to benefit from lower crude prices. That trend could be starting to materialize. Although some of the well-known India ETFs still trail the MSCI Emerging Markets Index on a year-to-date basis, over the past 90 days, India ETFs are winning.
In an historic vote of 2030, India's upper house, the Rajya Sabha, passed the 122nd Amendment to the constitution, paving the way for the introduction of a goods and services tax (GST). To date, this represents one of the flagship reforms of the Modi era, according to a note from iShares Head of U.S. Investment Strategy Heidi Richardson.
INDA and INDY sport price-to-earnings ratio north of 20, which makes India appear expensive relative to the MSCI Emerging Markets Index, but Indian stocks currently trade at multiples that are in line with historical averages.
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Valuation likely is not investors' primary concern with Indian stocks. Familiar issues such as high inflation and slow-moving government reforms are the considerations for foreign investors when mulling stakes in Indian stocks or ETFs.
If the bill passes, a newly-formed GST council will then shepherd the process, which will include overhauling and replacing a complicated existing tax system and the practical implementation of how various exemptions and state-level differences will work in practice. The GST council, chaired by the finance minister, will set the final tax rate. It will likely be at least a year before the necessary legislative processes are in place to enact the tax, added Richardson.
INDY And INDA On The Rise?
INDY allocates a combined 37 percent of its weight to banks and computer software makers. Automotive, tobacco and healthcare stocks combine for 22 percent of the ETF's weight.
Efforts to reform India's tax system are seen by market observers as a long time coming and a positive for boosting GDP and potentially foreign investment.
Over the long-term, the establishment of a GST and the accompanying tax code reforms are likely to be a benefit to the Rupee, local rates, and the nation's GDP and equity markets. In the short term, there may be a temporary uptick in inflation and/or potential short-term headwinds to growth as the new code is implemented, said Richardson.
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