India’s growth story over the past decade has been driven by rising consumption rather than investment. This was partly caused by the global financial crisis, when excesses were built into the system and overhangs occurred from 2008 to 2012 in industries related to investment spending. It also meant excessive corporate debt financed by the banking system.
In response, we have seen an increase in bad debts and weaker balance sheets. This means that consumption, and to some extent government spending, “carried the brunt” of growth during the 2010s.
Personal consumption was largely fueled by banking services and credit financing from private banks and non-bank financial corporations. This has led to a fantastic period for companies in these sectors. Stocks like HDFC Bank, Kotak Bank, Bajaj Finance, Hindustan Unilever, Asian Paints, Maruti Suzuki and Nestle have grown in importance and market capitalization over the decade. However, related industries, such as infrastructure or manufacturing, have all suffered from sluggish demand and lack of private investment. As a result, India’s GDP growth fell from over 8% to 3% in 2020 (pre-pandemic).
In the 2020s, the focus has gradually shifted towards manufacturing and exports. Given the supply chain issues the world is facing due to China’s dominance, India and other countries like Indonesia, the Philippines and Vietnam are trying to seize the moment and integrate into global supply chains either through a structural labor cost advantage or through a manufacturing, R&D or technology advantage in value-added exports.
The Indian government has looked to this post-COVID-19 era by announcing its “Atmanirbhar” philosophy of self-sufficiency, which focuses on local manufacturing, reducing imports and seeking to increase exports to 1 trillion. US dollars per year by 2030 (from the current US 350 to 400 billion per year today). When it came to power in 2014, the BJP government led by Narendra Modi set up an initiative called “Make-in-India” which aimed to leverage India’s strengths to manufacture more locally. This initiative had mixed success in its early years. However, the reduction of corporate taxes and levies on new manufacturing projects in 2019 and the introduction of a Production Linked Incentives (PLI) program in 2021 to increase foreign interest in local manufacturing in India as part of a joint venture with a local partner, are two areas that have the potential to increase India’s integration into the global supply chain. Additionally, reducing the cost of doing business by reducing red tape and improving transparency and audit trail has resulted in higher levels of foreign direct investment than ever before.
Figure 1: Foreign direct investment in India in billions of US dollars
Companies like Apple NASDAQ: AAPL, Toyota, Samsung, Pfizer NASDAQ: PFE, Walmart NASDAQ: WMT and Amazon NASDAQ: AMZN are all investing in India to build locally, which is likely to create additional job opportunities and help boost India’s GDP per capita which is 15 years behind China. Given India’s huge market opportunities, these multinationals seek to lower their production costs and benefit from lower taxes and fewer barriers to entry into India’s long-term lucrative opportunities. .
If India can solve its manufacturing problems (which currently contribute less than 15% of GDP) and further integrate into global supply chains and use its skilled and unskilled labor to manufacture for the rest of the world, then its GDP per capita is set to rise like China’s in a more sustainable way over the next two decades.
The chart below indicates that a recovery in corporate earnings is underway after lagging GDP over the past decade. India has been one of those economies/markets where GDP and markets have followed side by side over the long term. This bodes well for investors looking to take advantage of India’s growing economic importance globally.
Most actively managed funds will seek to invest in companies that are not just index heavyweights, which tend to significantly represent the winners of the past decade. While these companies may continue to be good investments because of the moats they’ve built, they won’t necessarily capture the same share of additional growth in the future.
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