Is India on the road to realising its economic potential?

July 11, 2017

India’s economy is growing faster than many of its Asian counterparts but many believe it has failed to live up to its potential. Andrew Graham, portfolio manager of the Martin Currie Asian Unconstrained trust, says favourable demographics and a reforming government suggest India is on its way to fulfilling its promise.

The heart of the Asian growth story is the predicted rise in the middle class which will create a new generation of consumers. Estimations vary, but forecasts are that two-thirds of the world’s middle class will come from Asia Pacific – that’s more than 2.5 times India’s current population.

In this rapid expansion, it is estimated that a significant proportion of new entrants will be from India and China.

Indian demographics driving economic growth

The rise in Indian middle-class spenders has been anticipated for some time (dating back to the early 1990s and the first days of economic liberalisation). However, it has been held back by a slower move towards urbanisation than places like China, and the challenges of a culturally and geographically diverse population.

Now though, a major shift in the labour market (from agriculture to manufacturing and services) is occurring, which means the hoped-for acceleration could finally be on the way.

Indian vehicle ownership is accelerating

A growing middle class in India, with increase levels of discretionary income, will naturally benefit many companies in consumer-focused sectors. This would have a particular impact on vehicle ownership.

The number of registered motor vehicles in India has already risen considerably since 1992, from 23.5 million, to 210 million in 2015. But, with a clear link between vehicle ownership and income, there is still a great deal of room for the passenger vehicle sector to grow. Only 167 per 1,000 people in India own a vehicle – compared with 386 in nearby Korea – and 783 in the United States.

India’s passenger vehicles market is still dominated by mopeds and motorcycles, which make up more than 70 per cent of the market. It is in this area where some of India’s quality companies come to the fore.

Hero MotoCorp, for example, has a 39 per cent domestic market share in the two-wheeler market (and 52 per cent in motorcycles) selling 6.6 million two-wheelers in the 2015/16 financial year. It has a sizeable distribution network with a presence in more than 100,000 villages.

Meanwhile, in the small-car market, Maruti Suzuki, is an example of a quality company which stands to benefit should passenger-vehicle sales go up as expected. It is the dominant player in this market with a market share of 47 per cent.

It also benefits from an extensive distribution network of 1,820 sales outlets across 1,471 cities. In addition, parent Suzuki Motor Corporation will manufacturer and supply cars to the company from its new plant in Gujurat, with an eventual capacity of 1.5 million.

The rise in vehicle ownership presents other investment opportunities outside the manufacturers, such as companies involved in related infrastructure (like toll-road operators). The number of projects awarded to the National Highway Authority of India has risen since the start of the Modi administration.

We expect an increase in toll revenues, due to new roads and traffic growth on existing roads, both stimulated by a pick-up in economic activity and the cutting of red tape at the state level.

a tough market for foreign companies

An ever-growing number of quality Asian companies are now competing on the world stage. In India though, only a narrow selection of firms have emerged as global players in their respective sectors. At home, however, these companies are very successful in an environment which so often proves impenetrable to foreign competitors.

Fuelled by a more affluent, expanding population and a swelling consumer market, combined with the process of restructuring, India is one of the most compelling investment stories over the next decade and beyond.

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