In a world rife with macroeconomic uncertainty, emerging markets have come under pressure. Yet one country is bucking the trend. India’s prospects look particularly strong, with the country’s economy hovering close to its pre-pandemic path despite a challenging global environment.
The World Bank predicts India could be the world’s third largest economy by the end of the decade, with its GDP expected to surpass $5trn by 2026. India is also now the world’s most populous country, presenting opportunities for investors. So, why has India become the poster child of emerging market growth?
Structural and banking sector reforms
India’s resilient economic growth has been helped by structural reforms introduced by policymakers. Measures include efforts to improve the regulatory environment and transition to a digitalised governance model. Aadhar, India’s biometric ID system and the world’s largest, has been a great success. It has captured the identities of more than 94% of India’s population and slashed the cost of identity theft.
Aadhar has also paved the way for millions of Indians to directly access government subsidies. Effectively reducing reliance on the middleman, it has made financial services more commonly available.
India’s economic prospects have also been supported by favourable tax changes. Corporation tax has gradually been reduced from around 35% in 2019 to 25%, helping to attract manufacturing investment and lift public capex as a share of GDP to a near 17-year high. Indirect taxes have been subsumed into one tax for the entire nation to reduce system leakage. The country also removed a contentious 2012 law that retrospectively levied capital gains tax on companies for the indirect transfer of their Indian assets.
Further, India’s banking sector has staged a dramatic turnaround of late. Gross non-performing assets (NPA) for Indian banks have reduced from a high of 13% in 2016 to below 6% in 2022. Net NPA currently stand at under 2%, implying a provision coverage ratio of more than 70%. Meanwhile, retail credit has grown at almost 20% year-on-year, year-to-date, while corporate debt-to-GDP has fallen to approximately 47% in 2022 from a previous high of 62%.
Demographics
India’s demographics are robust, with 40% of the country’s population aged below 25. India’s brightest spot lies in domestic consumption, which accounts for more than two thirds of GDP and can act as a buffer against global economic headwinds. India’s GDP-per-capita is projected to double from $2,500 to $5,000 by the end of the decade.
The number of households earning an annual income of more than $35,000 is expected to increase more than fivefold, setting the stage for a discretionary spending boom.
India will also emerge as one of the largest suppliers of labour, accounting for almost 23% of the increase in the global working-age population by 2030, according to the UN. Its wage rate per employee is among the lowest in the world, creating a competitive advantage for Indian firms.
Geopolitics and trade
India is reaping the benefits of proactive participation on the global political stage, enjoying positive relations with most other countries. India’s recently signed trade agreements with Australia should now make it more likely to clinch a deal with the UK and Europe, further reducing barriers to trade.
Growing tensions between China and the West in recent years have also increased the desire of Western economies to diversify away from China and hedge against any potential future conflict.
Geopolitical tensions between Europe and China mean India is well positioned to benefit, as companies seek alternative markets to diversify their supply chains and help prevent disruption.
Additionally, India has introduced World Trade Organization-compliant production-linked incentive schemes to benefit from the decentralisation of supply chains. The government plans to bring down the high cost of the country’s logistics sector via infrastructure development and process-related reforms.
Pivot to green energy
Finally, India’s role in the global energy transition is creating opportunities for investors. At COP 26, India committed to increase its non-fossil energy capacity to 500 GW and fulfil 50% of its energy requirements from renewable sources by 2030.
In the past six years, India’s installed renewable capacity has more than doubled. This is expected to reduce India’s reliance on oil and positively contribute to its terms of trade. India’s energy transition will likely pave the way for new markets for electric vehicles and hydrogen-powered vehicles, as well as reduce inflation volatility.
During the Covid-19 pandemic, investors turned to India as a safe haven. It became an overvalued, overowned and overloved market among emerging economy equities. Even after a period of derating however, markets are yet to fully price in India’s rare and cyclical growth story. Investors should pay close attention, but remain selective, with the mid-cap sector offering the most promising opportunities.
Tim Love is investment director of emerging market equities at GAM Investments. The views expressed above should not be taken as investment advice.