India: at the junction of recovery and growth
In an otherwise challenging and often bearish investment landscape, India is the only large accessible economy that is projected to grow at 7 per cent or more for a foreseeable future. Unlike China, which for many years economists have emphasised should shift from an export-centric model to a more self-contained economy, India has been an economy sustained by its own consumption.
Below, we highlight what a roaring Indian economy might mean for investors.
• Underleveraged: Due to its relatively low debt levels, India can increase debt issuance with ease, thereby accelerating growth without running into the risk of excess debt levels. In 2015 domestic credit to the private sector (percentage of GDP) stood at 52.6 per cent for India, compared to 153.3 per cent for China. This reflects China’s years of rising debt and state-driven investments, which have created excess capacity in several sectors.
• Demographics propelled: By 2050, India’s workforce (that is, people between 15 and 59 years old) is expected to have grown from the current 674 million to a staggering 940 million. To put this into perspective, the US workforce will be a little over 200 million in 2050 at its current rate and China is likely to be facing a shrinking workforce. This will potentially drive up labour costs in China – which would be a dent to its competitiveness.
• Consumption driven: Juxtaposing India’s favourable demographics with its consumption expenditure, it’s no surprise that India’s 60 per cent consumption expenditure to GDP ratio is much higher than the 39 per cent of China. This indicates an economic model that is hugely influenced by local consumption, with greater potential insulation from global headwinds.
Participating in the growth of India
Unlike China, India’s growth is, to a great extent, fuelled by its fast-growing middle-class and internal consumption. When we combine these consumption numbers with burgeoning demographics, we get an economy that we believe offers unparalleled growth potential.
Another key element to India’s growing economy is that the Modi government has been gradually opening various sectors of the economy to foreign investors. Areas like Construction Projects, Cable Networks, Agriculture and Plantation (coffee, rubber and palm oil, etc.), Air Transportation (non-scheduled and ground handling) are now allowed to have 100 per cent Foreign Direct Investment (FDI).
Other sectors like Defence and Broadcast have been allowed, for now, an increase to 49 per cent in FDI. We believe this creates opportunities for investors to invest in sectors that were earlier not accessible.
The Modi government is also in the process of implementing what could be the single biggest tax reform under the ‘Goods and Services Tax’ or GST bill. Under this taxation scheme, all states and central taxes would be combined to create a consistent tax structure across the entire country, converting the whole nation into one marketplace. Several other key reforms on boosting consumption, infrastructure spending, debt recovery for banks, etc, are also in the process of being implemented.
India is at a crossroad
Strategically India has strong growth potential, but what about tactical opportunities? From a monetary policy standpoint the Reserve Bank of India (RBI), after having successfully fought inflation from highs of 11.51 per cent YoY as of November 2013 to its current lows of 3.41 per cent as of December 2016, has engaged in consecutive rate cuts to spur growth. It is noteworthy that the Sensex, India’s leading index, has delivered double-digit annual returns after a lag, following the last two rate cut cycles by the RBI.
The country is at an interesting crossroad where leadership is pro-actively taking tough reforms for long-term growth. Two pillars of the Indian economy, that is consumption and demographics, have encouraging projected growth numbers.
What we see right now in India is the following:
1. Policymakers are not shy of taking bold steps and opening the economy
2. A central bank that successfully fought inflation is now supportive of growth through lenient monetary policy
3. We have a global macro environment that is not disruptive of growth in India, and
4. Financial planning that is accelerating consumption, infrastructure and digitisation.
We believe that investors interested in emerging markets who hold an overweight position in Indian equities (which are right at the junction of recovery and growth) will benefit from long-term growth
Gaurav Sinha is an asset allocation strategist at exchange traded product provider Wisdom Tree