Here’s how and why India’s economy will amaze
India's diverse economic growth drivers are positioned positively for the next decade and are coalencing to boost the country's long-term growth trajectory, to the benefit of the Indian equity market. The analysis by Robeco's Asia-Pacific Equities Team
India's growth trajectory is moving to a new and higher plane, which is likely to stimulate investment in Indian equities. India's GDP grew to $3.75 trillion in 2023, up from $2 trillion in 2014, and the country is now the world's fifth largest economy, overtaking the UK in 2022. According to IMF projections , India will be the fastest growing large economy in 2024, with GDP growth forecast at 6.3% compared to 4.5%, 1.4% and 1.1% respectively for China , the Eurozone and the United States. Ongoing reforms, including massive investment in infrastructure, are expected to boost total factor productivity and the manufacturing sector's share of India's GDP. Furthermore, India is experiencing rapid digitization which is democratizing credit in the economy by giving a larger share of the population access to financial services, unleashing India's latent entrepreneurial spirit. Underlying these two factors is India's demographic advantage. By 2030, 77% of India's over 1.5 billion population will be Millennials and Gen Z working-age adults.
DEMOGRAPHY AND DIGITALIZATION DRIVE THE GROWTH OF CONSUMPTION
According to a joint study by the World Economic Forum and Bain Consulting, domestic consumption in India, which now powers about 60% of GDP, is expected to quadruple by 2030. This growth in consumption will be supported by a young population (in 2030 the average age of the country will be 31) and growing, which will rapidly urbanize. It will also be driven by rising household incomes, which will transform India into a middle-class-led economy.
Morgan Stanley projects that the middle class with annual incomes of between $10,000 and $35,000 will double to nearly half of the population by 2031, providing hundreds of millions of people with meaningful disposable income for the first time. Among the main emerging economies, India is also the least urbanized country: only about 35% of the population lives in cities. In our view, urbanization is a strong driver of economic growth, robust investment and consumption. Urbanization requires large fixed capital investments for housing construction and transport links and this trend is ongoing with strong growth in investment.
According to the Indian government, 54,000 km of highways have been built since 2014, including high-profile projects such as the new Delhi-Mumbai Expressway (nearing completion). Electrification of the country's vast rail network is now at 90%, while two "Dedicated Freight Corridors" are under construction, along the West and East coasts, designed to increase speed and reduce costs for transport users railway. In 2023, the government allocated $122.3 billion, or 3.3% of GDP, double the average level of the previous decade.
RAPID DIGITALIZATION IS DEMOCRATIZING THE ECONOMY
According to the World Economic Forum, Internet access will reach around 1.1 billion users and 90% of Indians over the age of 15 will be online by 2030. Mobile phone penetration in India is catching up compared to to China and the US: GSMA Intelligence data shows that there were 1.14 billion cellular connections in India at the start of 2022, or about 70% of the population, but not all of them included data plans. This quantum leap in connectivity is propelling online retail: India's e-commerce market is estimated to grow from $150 billion to $170 billion by 2027. This implies 25%-30% annual growth and a doubling of market penetration to 10% over the next five years, while India's online shopper base will grow from 400 million to 450 million by 2027.
“FINANCING” IN PROGRESS
The emergence of a young and digital economy is having a profound impact on the Indian financial sector and we believe this is another key development with positive macroeconomic implications, which also represents a long-term investment opportunity. India has traditionally kept some wealth in physical forms such as gold bars, but we believe the increased availability of Fintech retail investment products will increase the proportion of equity investments.
Fintech start-ups will likely be key to serving this market and provide new sources of credit. India's credit-to-GDP ratio, at 57%, is about half the average level for G20 countries, with household debt at 35% of GDP. The IMF has suggested that rising incomes and savings in India are likely to depress long-term interest rates and magnify the impact of easier access to credit.
THE MANUFACTURING INDUSTRY BENEFITS FROM THE FRIEND-SHORING AND THE PRODUCTION-LINKED INCENTIVE (PLI) PROGRAM
Growing geopolitical tensions in recent years and rising wage levels in China have encouraged some global companies to diversify their supply chains and build plants at home or in other countries deemed suitable. Countries such as Mexico, South Korea, Japan, Vietnam and India have benefited. The most striking example was that of the tech giant Apple, which in 2020 began manufacturing smartphones through contract partners in India, encouraged by government incentives. Currently the company sources 7% of its smartphones in India and, according to analysts and Indian government sources, an increase is expected. India's share of global merchandise exports is still low, estimated at 1.8% by the WTO in 2021 compared to China's 15.1%, so there is significant growth potential. The government has stepped in to help with the Production-Linked Incentive (PLI), a policy initiative aimed at boosting domestic manufacturing in key high-value sectors, including renewable energy, pharmaceuticals, electronics, manufacturing automobiles, textiles and telecommunications. The initiative helps both established local producers and multinationals looking to establish themselves in India.
STARTUP BOOM
The tech sector, which has its hub in the southern cities of Bangalore and Hyderabad, has spawned a thriving start-up culture, with many Indian tech entrepreneurs now choosing to be based in India, rather than relocate to the US. According to the Government of India, as of May 2023, India was home to 108 unicorns with a total valuation of $341 billion. The start-up boom spans virtually all industries, including FinTech, EdTech, Ecommerce, Social Networking, Food-Tech, Logistics & Supply Chain, Media & Entertainment, D2C Brands, SaaS, and HealthTech.
CONCLUSIONS
India's economic fundamentals have changed for the better in recent years, but we believe the impact of reforms, infrastructure investment and an active industrial policy like the PLI has barely been felt. India's diverse economic growth drivers are positioned positively for the next decade and are coalencing to boost the country's long-term growth trajectory, to the benefit of the Indian equity market.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/ecco-come-e-perche-leconomia-india-stupira/ on Sun, 03 Sep 2023 05:14:26 +0000.