It was a dream-like ride! India For the past 25 years, it has been the world's best-performing large market in US dollar terms. The only index with returns close to India's is the Nasdaq, a risky index that includes high-tech and innovation-driven companies.
More strikingly, India and Indian small-cap stocks have outperformed the overall market since pre-COVID-19 levels. This is despite India receiving the least amount of fiscal and monetary stimulus among the world's large economies. Indian stocks are up 1.5-2 times, while Chinese stocks are down 33%.
What explains the amazing performance?
India has always had the three D structural positives: democracy, demographics and industrial deregulation. These have increased India's GDP and per capita income level from US$500 to over US$2,600, an increase of 450% in US dollar terms over 30 years. Moreover, in recent years, they have become even more important and powerful for India compared to other countries in the world. Let's take a look at how and why.
Democracy. Over the past two decades, we have seen many countries move toward authoritarian regimes, while others retreat more radically. China is becoming more authoritarian and less transparent. Democracy is being weakened in many ways. Against this backdrop, India shares many common values with developed countries and shines as one of the truly functioning democracies. In the wake of the coronavirus experience and the recent belligerence of non-democratic countries, global investors are considering India alone as a relevant large emerging market, along with Brazil and Indonesia.
Demographics. India is the country with the strongest demographics. India will add 20% of the world's working-age population and 20% of the world's GDP growth over the next decade. The size of the workforce will decline in China, Europe, and Japan, while there will be no growth in the United States. China's working-age population has reached its peak.
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Deregulation. The reforms that abolished the Licensing Raj in 1991 have continued, and many more pro-business measures have been introduced since then. Reduction in corporate tax on new investments, introduction of GST, and simplification of tax return procedures have greatly contributed to the organized sector. The introduction of production-linked incentive schemes in many important sectors has stimulated private and foreign investment in the manufacturing sector. The Bankruptcy Act and his NCLT process, inflation targeting by the RBI, direct benefit transfers and Gatishakti for logistics are all steps towards achieving a better business environment. Domestic and foreign investors and businesses have appreciated this, and the flow of direct investment has been continuously improving.
While the three D's continue to improve, four more D's have provided competitive advantage and added tailwinds to the growth story in recent years. They are digitalisation, diversification, (low) debt and dynamism, digitalisation. India has advanced many technologies by leaps and bounds. We skipped over the rise of landline phones and went straight to mobile phones and now her 5G network, the lowest cost in the world. We may leapfrog the era of deep hydrocarbons and dive into renewable energy and green hydrogen ecosystems. The JAM (Jandhan Aadhar Mobile) ecosystem, along with UPI, is a pure Indian innovation that goes a long way towards reducing financial transaction costs and contributing to the revolution in financial inclusion. These technologies can help deliver social and government services and subsidies to eligible individuals without incurring costs or leakages. These platforms are now attracting attention from other countries as well.
Diversification: (of global manufacturing base). The disruption of global supply chains due to COVID-19 has awakened the world to China's dominance in manufacturing, with China having complete control over many critical minerals, products, chemicals and pharmaceutical ingredients. highlighted the fact that. The world has realized that having a diverse supply base is essential. Tensions between Taiwan and India and U.S. involvement in the Pacific have created added urgency to move at least some manufacturing out of China. So far, countries like Vietnam and Mexico have been profitable, but only India has the requisite size of the workforce and the added value of a large domestic market. Combined with the government's PLI and other incentives, we have already started seeing many large multinationals and local companies announcing significant plans to manufacture in India.
The opportunities for India are endless. For perspective, China's manufacturing base is worth $5 trillion and the US's is worth $2.5 trillion, while India's is about $0.5 trillion, only 10% of China and 20% of the US. China accounts for her 75-100% share in many products. So even if she has to shift 10% of her production from China, it means that India's production will increase by one.
While India continues to attract foreign direct investment (FDI) this year, net FDI inflows into China turned negative for the first time as foreign inflows slowed to a trickle and Chinese companies' outward investment accelerated. This shows that even Chinese companies are trying to withdraw their funds.
debt. India has low levels of debt. They have low financial influence at the national, corporate, and even household levels. India has one of the lowest external debts as a country. Households have traditionally been debt-averse (due to risk aversion and lack of access to easy credit), and Indian companies (especially large ones) have continued to reduce their debt over the past seven years. Therefore, all players in the economy have sufficient resources to invest and expand as needed. This is in stark contrast to other countries around the world, which are neck deep in debt. The Indian banking system has done a commendable job of cleaning up its balance sheets and banks as well as financial companies are well capitalized. This establishes a sound foundation for the financial system to fund long-term growth periods.
dynamism. The past decade has unleashed entrepreneurial dynamism on a scale unprecedented in our history. Venture capital and private equity, as well as local alternative investment funds (AIFs), are also rapidly growing. As the economy expanded, so did the number of wealthy people. Family offices, high net worth individuals and institutions have far more risk capital than ever before. The startup ecosystem is thriving and ideas and concepts are attracting funding. This has radically changed the way young people think, and failure is no longer considered taboo. We expect much more innovation to come out of India than ever before, and we expect to see world-class innovative companies emerge from India.
Over the past few years, the government has ramped up spending on infrastructure and other productive areas as private sector investment has slumped. In key areas, there is a strong push towards Make in India and Atmanirbharta (self-reliance). These have helped maintain economic momentum. The post-COVID-19 recovery remains essentially K-shaped and may be bumpy in the short term, as low-income groups still need to fully emerge. The global economy is on a weaker footing than it was before the coronavirus outbreak, and the impact of coronavirus stimulus measures is beginning to wane in Western countries.
But in the medium to long term, India as a whole is in a sweet spot. India has a growing demand, a domestic market that can provide capacity and scale, and a geopolitical position that attracts global investment, making India No Choice (TINA).
India today has a long and proven track record of economic performance, stock market performance, democracy and rule of law. There is nothing like success and the world's interest in India has never been higher. India's relative position in the world has never been better. As we continue to outperform, India's weight in benchmarks will continue to increase and investors will have to allocate more money to India by default – money begets money!
The stars are aligned for the next 20 years, dubbed the Indian Decade!
(Chief Investment Officer of TRUST AMC. Views are our own)