The country is in a structural growth cycle, with a focus on reform, infrastructure investment and manufacturing. Alongside favourable demographics, it's making India an easier country in which to do business
In November 2016, on the same day Donald Trump won the US presidential elections, the Indian government announced a massive demonetisation effort, removing the country’s largest bills from circulation, representing 80% of total currency.1 On any normal day this would have been on the front pages of all the major financial publications, however, election of the 45th President of the United States understandably took precedence.
Demonitisation, which initially created tremendous economic upheaval, was part of the government’s ambitious efforts to combat corruption, curb tax evasion and bring more people into the formal economy. It was part of a comprehensive strategy by the government of Prime Minister Narendra Modi to structurally transform the Indian economy. Since he was elected in 2014, Modi has pushed forward economic reforms aimed at fostering a more business-friendly environment, including instituting a national goods and services tax (GST). This streamlined the complicated web of state taxes and helped bring the manufacturing and industrial sectors into the formal economy. He also revised the Insolvency and Bankruptcy code which facilitated improving capital allocation and the cost of credit.
Many market participants did not connect the dots at the time, but the digitalisation of the Indian economy, known as IndiaStack, was a core part of the government’s strategic thinking. This digital public infrastructure is best understood as a public utility and it could have enormous implications for the people of India and its economy. It could also present new and compelling investment opportunities.
Understanding India’s digital evolution and revolution
The potential significance of IndiaStack is best understood through an example: Prema is a 23-year-old born in a rural Indian village who recently migrated to Mumbai in pursuit of better opportunities. But without a permanent address Prema would fall at the first hurdle when trying to open a bank account. Here’s how IndiaStack works for her:
- Identify: The first layer of IndiaStack is AADHAR, a biometric identity database, which links Prema’s national ID to her biometric data so she can open a bank account and financial service providers can conduct “know your customer” checks.
- Payments: Next, the Unified Payments Interface (UPI) enables cashless payments by linking Prema’s ID number, phone number and bank account to a payment address. This allows her to receive her salary electronically. It also enables her to send money back to her parents or shop at the local market, all on her smartphone and without a costly middleman.
- Data: The final layer, DigiLocker and e-consent, allows Prema to store copies of documents like academic records, birth certificate and driver’s licence. She can share these with potential employers or financial service companies to apply for loans.
Figure 1: India’s income pyramid is forecast to invert within the next decade
Source: PropEquity, Jefferies, 2023
Infrastructure and manufacturing are still key
India’s structural growth story is not just limited to digitalisation, population and wealth creation. The government is investing in massive infrastructure projects and supporting the development of its manufacturing sector in a bid to increase foreign direct investment and kick-start substantial network effects in supply chains, as the economy seizes the opportunity of China+1 diversification efforts by multinational corporates.
Historically, India’s lack of fiscal stimulus and limited infrastructure spending has been a significant impediment to unlocking its growth potential. In 2021, the government announced a $1.4 trillion infrastructure spending plan7 to improve its competitiveness with more than 9,000 projects from railways, highways, ports and dams to airports (Figure 2). Within manufacturing, the goal is to increase capacity, scale and productivity to serve its domestic market and eventually gain the competitiveness to export internationally. The Modi government has been steadfast about removing bureaucratic and regulatory barriers to support growth, such as streamlining the process for land acquisitions. In addition, it is courting international companies, from Japan’s Daikin to Apple in the US. Local players such as Dixon Technologies and Amber Enterprises are also getting in on the act, investing heavily to gain a share of the growing pie.
Figure 2: Infrastructure investment on road and railways is increasing significantly
Source: Ministry of Finance, Jefferies, 2023
Where are the investment opportunities?
Figure 3: MSCI India relative to MSCI Emerging Markets over the past 20 years
Source: MSCI, Citi Research, September 2023
Figure 4: Housing volumes are set to grow +15% over the next few years
Source: PropEquity, Jefferies, 2023
We are cognisant that labour, capital and productivity are far from hitting their peak. We believe the themes discussed in this piece will present great opportunities over the next decade and beyond: the private banks will benefit from a vibrant economy with loan growth in both retail and corporate segments picking up, as well as taking market share from the weaker state-owned-banks; building materials and industrial companies will benefit from the focus on infrastructure, real estate and manufacturing investment; and consumer companies or healthcare providers will benefit from the wealth and demographic trends.
We believe India is in a structural growth cycle and that the government’s policies and reforms are making it easier to do business. Underpinned by a young and large population, the focus on digitalising the economy as well as investing into infrastructure and manufacturing could unlock its economic potential. Alongside the new credit and property cycle, we are excited to uncover investment opportunities geared to these themes over the coming decade.
