It has been a dream run! India has been the best-performing large market in the world for the past 25 years, even in US Dollar terms. The only index with returns close to India is the Nasdaq, a higher-risk index with tech and innovation-led companies.
Even more starkly, since pre-Covid levels, India and Indian small stocks have done better than all markets. This is despite India having done the least fiscal and monetary stimulus among all the large economies in the world. Indian stocks are up 1.5 to 2x while China is down 33%.
What explains the phenomenal performance?
India always had structural positives of the three Ds: Democracy, Demographics, and De-Regulation of industry. These helped Indian GDP and per-capita income levels grow from USD 500 to over USD 2600, a rise of 450% in USD terms in 30 years. Moreover, in the past few years, these have become even more important and stronger for India versus the rest of the world. Let us see how and why.
Democracy. In the past 20 years, we have seen several countries regress to become more radical while many have transitioned to dictatorships. China has become more authoritarian and less transparent. Democracy has been weakened in many ways. Against this backdrop, India shines as one of the truly functioning democracies with many shared values with the developed economies. After the Covid experiences and the belligerence of non-democratic countries recently, global investors are considering only India as a relevant large emerging market along with Brazil and Indonesia.
Demographics. India has the strongest demographic profile. India will add 20% of the working-age population of the world in the next 10 years, and India will add 20% of the world’s incremental GDP. China, Europe, and Japan will see a reduction in workforce sizes while there will be no growth in the US! China’s working-age population has peaked.
De-Regulation. The reforms that ended the license permit Raj in 1991 have continued, and many more pro-business steps have been introduced since then. Reduced corporate tax for fresh investments, the introduction of GST, simplification of the process to file returns, etc. have considerably helped the organized sector. The introduction of production-linked incentive schemes for many critical sectors is kick-starting private and foreign investment into the manufacturing sector. The bankruptcy code and the NCLT process, inflation targeting by the RBI, direct benefit transfers, and Gati Shakti for logistics are all steps for a better business environment. Local and foreign investors and corporations appreciate this, and we are seeing a continuous improvement in direct investment flows.
While the three Ds continue to improve, the past few years have given us four more Ds in competitive advantage, providing further tailwinds to the growth story: Digitization, Diversification, (low) Debt, and Dynamism.Digitization. India has leapfrogged many technologies. We skipped the landline penetration story and went straight to mobiles and now 5G networks at the lowest cost in the world. We may skip the deep-hydrocarbon age and leapfrog to renewables and green-hydrogen ecosystems. The JAM (Jandhan Aadhar Mobile) ecosystem, along with UPI are pure Indian innovations that are going a long way to bring down finance transaction costs and help revolutionize financial inclusion. These technologies help delivery of social and government services and subsidies to the targeted individual without cost or leakages. These platforms are now being eyed by other countries.
Diversification: (of the global manufacturing base). The global supply-chain disruptions during Covid awakened the world to the dominance of China in manufacturing and highlighted the fact that it has total control over many critical minerals, products, chemicals, and pharmaceutical ingredients. The world recognized the imperative to have a diverse supply base. The tensions in Taiwan and India and the USA’s involvement in the Pacific created a further urgency to move at least some portion of manufacturing away from China. While countries like Vietnam, and Mexico have been gainers so far, only India has the required size of labor pool and the added benefit of a large domestic market. Combined with the Government’s PLI and other incentives we have already begun to see many large multinationals and local companies announce significant plans to manufacture in India.
The opportunity for India is limitless. To give a perspective, China’s manufacturing base is USD 5 Trillion, the US base is 2.5 trillion, while India is about USD 0.5 Trillion – just 10% of China and 20% of the US. China has a 75-100% share in many goods. So even if 10% of production needs to shift out from China, it means an addition of one India in output!
This year while India continues to attract Foreign Direct Investment (FDI), net FDI flows for China have turned negative for the first time as flows from abroad slowed down to a trickle and Chinese firms’ outbound investments accelerated. This indicates that even Chinese companies are looking to take money out.
Debt. India is carrying low levels of debt. It has low financial leverage at the country level, company level as well as the household level. India as a country has amongst the least levels of external debt. Households have traditionally been averse to debt (because of risk-averseness as well as due to unavailability of easy credit) and corporate India (especially large corporates) has continued to reduce debt over the past 7 years. So, all the players in the economy have adequate resources to invest and expand as needed. This is in stark contrast with the rest of the world which is neck-deep in debt. The Indian banking system has done a commendable job of cleaning up its balance sheets and banks as well as finance companies are adequately capitalized. This sets up a sound foundation for the financial system to fund a secular period of growth.
Dynamism. In the past 10 years, entrepreneurial dynamism has been unleashed at a scale not seen before in our history. The growth of venture capital and private equity as well as local alternate investment funds (AIFs) has been exponential. As the economy has expanded, the numbers of the wealthy have grown. Family offices, high-networth individuals, and institutions have far more risk capital than ever before. The start-up ecosystem is thriving and ideas and concepts are getting funding. This has decisively changed the mindset of the youth and failure is no longer considered taboo. We will see far more innovation from India than before and we hope to see the emergence of global-scale innovative companies from India.
In the past few years, as private sector investment was faltering, the Government stepped up by spending on infrastructure and other productive areas. There is a strong thrust towards make-in-India and Atmanirbharta (self-reliance) in critical areas. These have helped keep up the economic momentum. In the short term, there may be bumps as the post-Covid recovery has still been K-shaped in nature and the lower-income segments have still to fully emerge. The global economy is on a weaker footing than it was pre-Covid and the impact of Covid stimulus is wearing off in the Western world.
However, if we take the medium to long-term view, all in all, India is in a sweet spot. India has the demand to grow, the capacity to produce, the domestic market to offer scale, and the geopolitical position to attract global investments – almost like there-is-no-option (TINA) to India.
India today has a proven long-term track record of economic performance, stock market performance, democracy, and the rule of law. Nothing succeeds like success, and we see global interest in India at an all-time high. India’s relative position in the world has never been better. As we keep performing, India’s weight in the benchmarks will keep increasing and investors will by default have to allocate more money to India – money begets money!
The stars are aligned for the next two decades to be called India’s decades!
( is the Chief Investment Officer at TRUST AMC. Views are own)
