In its recent biennial World Economic Outlook publication, the IMF has projected India’s GDP growth to be the highest among all major economies for FY22, writes Ramesh Mantri, adviser to the Ashoka India Equity Investment Trust.
While one can argue that FY22 is an extraordinary year, benefitting from favourable comps, it is interesting to note that even for FY23, India’s GDP has been forecasted to grow by 8.5%, the fastest among major economies.
The IMF also lauded both the thrust on structural reforms as well as near-term policy actions, such as accommodative monetary policies and scaled-up support to vulnerable groups.
Indeed, as per forecasts by most global agencies, India could emerge as the fastest growing economy in this decade.
Key growth drivers
India is likely to have the most favourable demographic trends among the large economies over the next decade, as per UN estimates.
However, favourable demographics alone is not sufficient to support high growth rates. It must be well complemented by broad-based reformative action to boost economic productivity.
In this context, it is essential to mention that even as India has pursued a steady reforms momentum over the years, recent policy measures have been particularly noteworthy and encouraging, nudging the country towards harnessing the demographic dividend even further.
One of the most significant steps was the announcement of the $27bn (£19.7bn, €23.3bn) Production Linked Incentive (PLI) scheme for 13 key sectors including autos and electronics.
Apart from generating employment and encouraging scale (with minimum production/capex thresholds in place), the main objective is to reduce India’s import dependence on some high value products such as consumer electronics and in turn subsume Indian manufacturing into global supply chains.
The PLI for the auto sector and the sectoral scheme for advanced chemistry cell and battery storage is expected to help India emerge as a meaningful player in the global EV supply chain. The full impact of these measures will take time to materialise given that the duration of the PLI scheme is spread over five years, but it is important to note that initial signs are encouraging.
Credible alternative
Multiple disruptions over the last couple of years, including trade wars and covid have underscored the importance of a ‘China +1’ strategy.
With its large technically qualified labour force and scale of infrastructure, India is emerging as a credible supply chain alternative to China.
It is already evident in sectors like specialty chemicals where Indian manufacturers are accelerating their capex given the strong visibility in order pipeline from global customers looking to diversify away from China.
With comprehensive regulatory and compliance norms in place, this sector has strong parallels to India’s pharma sector which today accounts for 40% of US generic volumes.
Corporate progress
Among the other key reforms being tracked by investors is the progress of the privatisation process.
While the share of state-owned enterprises (SOEs) is lower within India’s benchmark indices as compared to its EM peers, there is still a sizeable presence of SOEs in sectors such as energy, utilities, defence, mining and, until recently, in airlines as well.
Over the last couple of years, there has been a marked change in policy with thrust on outright privatisation along with transfer of management control. In what is seen as an important milestone, the privatisation of Air India, India’s flagship airline, was successfully concluded earlier this month – a highly complex transaction and hailed by many as a sign of things to come.
Apart from Air India, the government has also decided to privatise BPCL (Oil & Gas SOE), Concor (Logistics infrastructure SOE) and Shipping Corporation of India (Shipping SOE). In the February 2021 budget, it was also proposed to privatise two SOE banks and one general insurance company.
Overall progress around privatisation has been encouraging over the last few months, and despite the overhang of covid, due diligence is underway by potential bidders in many SOEs.
A notable feature over the last year has been the buoyancy in capital market sentiments in India, with initial public offerings (IPOs) worth $12bn to date in 2021. While the public listings pipeline is broad-based, a particular segment that has generated significant interest is the emergence of ‘new-age’ technology-enabled companies.
In addition, India has a vibrant start-up ecosystem with 70 ‘unicorns’, the third-highest globally after the US and China. More than 30 unicorns have been created in 2021 alone.
Alpha opportunities
In summary, even as long-term growth catalysts are favourably aligned, we are likely to witness a broad-based economic normalisation from a near-term perspective with receding covid infections and further relaxations in travel and tourism.
As India equity specialists with a very well-resourced investment team, we focus on investing in strong businesses in scalable industries, run by credible management teams with good corporate governance, while maintaining a highly disciplined cash-flow-centric valuation approach.
Indian markets being very dynamic, inefficient, and well-diversified continues to offer many such alpha opportunities.
This article was written for International Adviser by Ramesh Mantri, adviser to the Ashoka India Equity Investment Trust.
