Perhaps no politician is uncontroversial, and this also applies to Modi. In terms of economic policy, he has really brought the country forward in the last ten years. He has provided a stability that did not exist before. During these ten years, Modi has implemented very important reforms that should put India's growth on a more solid footing for the coming years. This has generated a lot of confidence there, regarding not only the economy but also India's international position. The country feels more respected than in the past. This is not solely due to Modi, but of course also a result of the changed geopolitical situation. However, he has managed to utilise this very well.

He will continue to focus on stability for his chosen economic course. This means that the public budget will still be managed soundly. Modi has been very successful in increasing government revenue. By consolidating taxes, by collecting taxes more efficiently. The unusual thing is that he has spent taxes differently than previous governments, which often focused on social programs to ultimately win votes. Modi has not done this. He has spent the increased state revenue on infrastructure initiatives in particular. A very clear change.

Before Modi, it was definitely one of India's weak points. And a lot has changed in the last ten years. In terms of the expansion of the road network, the expansion of the rail network and electrification of rail infrastructure, the modernisation and expansion of airports. And if you look at urban areas, the expansion and new construction of metro lines in many cities. A great deal of money is being invested here. If you look at the budget figures, you can see on that government revenues and expenditures have increased, and that within expenditure the percentage of spending on infrastructure has also risen sharply.

Of course, there are still call centres in India. The leading IT outsourcing companies still come from India. But they are already much more advanced than the relatively simple call centre management that they started out with. India is now also a leading nation in IT consulting, digitalisation, and the export of digitalisation. It is fair to say that without India and the Indian IT services sector, digitalisation would probably not be possible at a reasonable cost in our country either. A lot is being outsourced there.

We have had very large locations in India, for instance in the IT sector, for at least 15 years or even longer. There are many companies that have outsourced business areas to India. What is new under Modi is that he has created incentives to develop India as a production location, in addition to IT services. The basic idea is to import less and produce more in India. In the mobile phone sector, in the electronics sector, and now also in the semiconductor sector. The manufacturing of mobile phones has really taken off in the last seven or eight years. India has now developed into an exporter of smartphones.

The first company to be there was Samsung. But Apple suppliers are now present in India as well. I think Apple now produces 15% of its iPhones in India, and the target is 20% to 25% in the next few years. The location is therefore being massively expanded. Phone manufacturers such as Samsung have actually entered the Indian market because the demand for mobile phones in the country itself has risen rapidly. But in recent years, and also because they are looking for alternative locations to China, they are also producing for export.

Of course, demographics are a factor. India is a growing country with a large workforce. One goal of the Modi government is to train them accordingly, and give them the necessary skills. This has definitely not been a strength of India in the last few decades, and they are now working on it. As you have already mentioned, labour costs in India are still comparatively low when you compare them with most other emerging countries. They are cheaper than in China, even cheaper than in Vietnam. This also makes India a very attractive country. And politically, too, India is certainly a location that is closer to the western world than China, for example.

The market is of course relatively expensive on a P/E basis compared to practically all other emerging markets, and probably even compared to most stock markets worldwide, perhaps with the exception of the USA. But on the other hand, this is nothing new. If I go back 20 years, even then we were talking about the Indian equity market being expensive. So it's a market that has always been structurally expensive. We have always had a valuation premium in India over the last 20, 25 years.

Companies in India are on average more profitable than the average of the emerging markets. In addition, profits have not been as volatile as in other markets. There are a lot of companies that are consistently very profitable, and can therefore justify higher P/E ratios. In addition, we have always had very high demand from the Indian market itself.

Twenty years ago, it was practically impossible for an Indian to invest outside India. Now, this is somewhat more relaxed and possible within certain limits, but you still have a market that has very, very strong local demand. India is one of the markets where the best returns have been achieved in absolute terms over the last few years. Not just over the last three years, but over the last 20, 25 years. If you look at these long time series, the Indian market has performed better than the emerging markets as a whole, and also better than China, for example. So India has been one of the markets where local and international investors could always make very good money over the last few decades.

That's always difficult to say, of course. I wouldn't say that it will only go up in a straight line over the next five years. A certain amount of volatility is normal. And we can and will certainly see corrections in the Indian stock market over the next few years. Nevertheless, we are still positive. If you look at the next two or three years, we have growth rates of just under 20% for the earnings prospects of the top companies. In the mid and small cap sector, expectations are even higher. If this profit growth can be realised, we are not worried about valuations. We do not see an overvaluation in the Indian market, but view it as still at a reasonable level.

This reflects the fact that the broad economy is growing, that many companies can generate good profits. It is not just a few large companies that are driving the stock market. In fact, we expect the basis for earnings growth to broaden even further in the coming years. Internet companies in India, for example, were relatively late to go public. The smartphone boom started later than in other emerging markets, and with it the opportunity to offer or sell internet services to broad sections of the population. This is an important difference between emerging markets and industrialised countries. The Internet boom here started with computers, laptops and tablets, but in most emerging markets it is mobile phone-based.

We invest in the entire equity market, but of course we focus on certain sectors. One is in the financial services sector. We have a relatively high weighting in the banking sector, but now also in insurance and other services. The reason for this is relatively simple. Credit growth in India remains high, at around 16% to 17% this year. This should continue for a while, as the penetration of banking services is still relatively low. So there is still plenty of room for improvement. In addition to credit growth.

In banks from the private sector. The public banking sector still has a market share of 60% to 70%, but the private sector will take market share away from the public sector. We are also investing in the consumer sector. Basic consumer goods, but also increasingly in the non-basic consumer goods sector. There are some interesting companies here. Nestlé, for example, has a subsidiary that is listed in India. Unilever has a subsidiary in India. And then there is Diageo, the largest spirits producer in the world. It also has a subsidiary on the stock exchange in India.

United Spirits. This is a very fast growing company that we have in our portfolio. When Indians drink alcohol, they very often drink spirits. India is now the largest importer of Scotch whisky. But they don't just import whisky, they also make a lot of whisky themselves, even for international markets. United Spirits is a good example of what is no longer basic consumption. The same applies to clothing. We have a company like Trent, which mainly sells local brands, mainly for women. Trent is also the joint venture partner for Zara.

India is a market that is growing very, very fast and is in a phase where broader sections of the population are entering the middle class and have more money left over for consumption. That is one important investment theme. One of our other focus areas is the Internet sector, which is still young in India. We were one of the first to have our own internet analyst in the team.

The largest position at the moment is ICICI Bank and the second largest position is Larsen & Toubro. This is a conglomerate that is particularly active in the infrastructure sector. Of course, we are also trying to invest in the infrastructure sector, as this is one of the areas where we see a lot of growth. And Toubro is involved in major infrastructure projects such as the construction of metro networks.

Claus Born is Senior Vice President and Institutional Portfolio Manager for Franklin Templeton Emerging Markets Equity, based in Frankfurt. In India, Franklin Templeton manages assets of 12 billion dollars. Born has more than 20 years of experience in emerging equity markets. Before joining Franklin Templeton in 2000, he was a business analyst at Mannesmann Eurokom.