The Indian economy has witnessed a paradigm shift in GDP growth since liberalisation in the 1990’s. Today it is one of the fastest growing economies in the world and this trend is set to continue over coming decades as the dependency ratio of its youthful and vibrant population dips to a low point.
India’s demographics are the fundamental tailwind to its GDP growth. The population is now the largest in the world, with a median age of 28.7 years. India’s dependency ratio (people below 15 or above 65, divided by people of working age) continues to fall (currently 48%) headed toward levels similar to China (which bottomed at 36% in 2010). This is likely to lead to sustainably high economic growth (as experienced by China) over the next few decades as India becomes the value-added factory for the rest of the world.
India has averaged 6.0% GDP per annum since liberalisation of the economy and significant reform was undertaken in 1991. Over the last decade, despite being impacted by initially disruptive economic reform and COVID-19, India’s GDP growth still managed a healthy average of 5.5%. In the year ending FY23, India recently announced GDP growth of 7.2%, ahead of China’s 5.2%. India’s growth drivers going forward, as the leading major growth economy, are likely to be manufacturing, infrastructure, financial services and technology.
India’s economy, demographics and potential makes it an appealing investment region for Australian investors seeking to benefit from its long-term fundamentals. However, there are also other high growth regions which leads us to ask, Why India? Part of the appeal of the region is the diversity it offers to investment portfolios. Given India’s unique demographics and status as a commodity importer, it has a low correlation to the Australian economy and stock market. Over rolling 3-year periods the Indian and Australian stock markets have an average correlation of only 0.49. Similarly, India’s stock markets also have a low correlation to World stock markets of 0.47. Regions like Brazil, Russia, South Africa and the Middle East, which form a large slice of Emerging Markets portfolio allocations, have a higher correlation to Australia given they are also commodity exporters.
Ride the Profit Wave
India’s long-term fundamentals lend itself to sustainable profit growth for its well managed corporations who are able to leverage upon a large and growing addressable market. India’s Top 50 companies corporate earnings have grown at 10% annualised over the last 26 years. As an investment region it benefits from sectoral diversity and lower dependency on cyclical industries which have more volatile profit cycles. In general, Indian firms are able to generate higher ROE’s than their global peers due to these factors. After a decade of weak profit growth (FY11-FY20) due to low private investment, an undercapitalised banking system and high cost of capital, it is likely that India’s corporates will now achieve higher compounding profit growth in the next decade driven by economic recovery, improving productivity of reforms and a focus on infrastructure.
India’s Corporate Governance has been improving steadily over the last 20 years. This is increasing the interest of foreign investors in investing in its capital markets. The graph shown outlines the Government effectiveness as sorted by percentile rank across countries. This indicator captures the perceptions of the quality of public services, the quality of the civil service as well as the credibility the government holds. These statistics were all outlined and measured by the World Bank. It outlines how, over the past 5 years, India’s journey has led to a significant focus on the way the Government handles themselves.
Being ahead of the curve
Global GDP is approximately US$96.53tn as of 2021, (according to the World Bank). India’s GDP is about 3.3% of that, which makes it the world’s 6th largest economy at present. While currently sits at 5th place, given its growth trajectory, India should be close to the 3rd largest by the ambitious end of 2027. From a market capitalisation perspective, India currently sits at an average of 3.1% of global market capitalisation as of April 2023.
Over the next decade India’s market capitalisation should rise significantly driven by the rising GDP opportunity, IPO’s (particularly in the technology space) and government privatisation. India’s weight in Global MSCI All Country World Indices is approximately 1.52%, which translates into most clients having less than 0.5% of their portfolio exposed to what is likely to be the world’s fastest growing major economy of the decade.
Consumer Revolution - Pricewaterhouse Coopers“India offers a potentially lucrative opportunity, with its huge, young population that’s increasingly urban and has a growing ability and desire to spend”
Superior Investment Destination - Ernst & Young“India has been named the most attractive country for investment in a survey of more than 500 global investors”
Attractive Growth Profile - International Monetary Fund“Indian economy is the bright spot in global landscape, becoming one of the fastest-growing big emerging market economies in the world”
Global Integrated and Thriving - World Bank“Over the past decade, the country’s integration into the global economy has been accompanied by economic growth. India has now emerged as a global player”