IN FOCUS6-8 min read

Why India merits a standalone allocation in global portfolios

Robust economic growth, improving digital and investment infrastructure, policy reforms and a young population are just some of the factors that make India an attractive investment proposition.

10-20-2023
Investing in India's growth

Authors

Ashish Gupta
CIO, Axis AMC

India’s fast-growing economy, which is currently the fifth-largest in the world, is well on track to be among the top three in the next few years.

Several factors underpin this economic strength. These include strong forex reserves, robust industrial activity, increased lending, the deleveraging of Indian corporate balance sheets and the start of a new investment cycle. From being a consumption-oriented economy, India has been moving towards a consumption and investment-led economy.

Benefiting from the “China Plus One” strategy

In the aftermath of Covid-19-led disruptions, many countries and companies took the “China Plus One” approach to rethink their supply chains and reduce dependence on China, by adding an alternative manufacturing or sourcing location.

India presents an attractive alternative to China with its vast consumer market, skilled labour force, and improving infrastructure. In recent years, the government has helped to position India as a significant player in these global value chains and this has contributed to its status as a global manufacturing hub. Roads, railways, and waterways have seen significant expansion while ports and airports have been substantially upgraded in the last decade. This not only helped India move from uni-modal to multi-modal transportation but also aided in closing the logistics infrastructure gap.

The government has implemented several reforms to attract FDI, making it more conducive for foreign companies to establish a presence in the country. Between 2014-2023, India has received $632 billion of FDI inflows.

India’s digital transformation is moving into high gear

In 2009, 17% of adults in India had bank accounts, 15% used digital payments, 4% had a unique ID document, and about 37% had mobile phones. Today, these numbers have seen a meteoric rise — telephone density is now up to 93%, more than one billion people have a digital ID document, more than 80% have bank accounts, and as of 2022, more than 600 crore of digital payment transactions are completed per month (one crore is 10 million).

All this has been made possible by the implementation of India Stack. This includes Aadhaar – a secure and inclusive platform that has laid the foundation for a robust digital ecosystem - and the Unified Payments Interface (UPI), which has played a pivotal role in unlocking India’s internet economy. However, even though UPI is considered a ground-breaking innovation, reliability, and security (digital identity of the individuals, and financial details) are still considered to be at risk, leaving many people apprehensive about using the payment system.

Formalisation of the economy

The creation of digital identities such as Aadhaar, registration of unorganised workers on the eShram portal (a database of unorganised workers), street vendors on SVANidhi (a micro-credit portal), taxpaying firms on Goods and Services Tax Network (GSTN), and MSMEs on the Udayam portal, has played a significant role in the inclusion of these groups under the formal economic net. The real benefits of formalisation will result in higher productivity, formal jobs and improved economic competitiveness. This would mean a shift from low paying, labour-intensive jobs to more productive formal sector jobs.

Deleveraged balance sheets, banking system clean up favourable to growth

High non-performing assets (NPAs) level in the banking sector and several high-profile defaults resulted in the government injecting capital into public sector banks between 2016-17 and 2020-21. Banks’ gross NPAs (GNPA) ratio has now improved substantially following asset quality reviews by the Reserve Bank of India, and stringent recovery processes. The government has also implemented various initiatives to help the private sector. With improved balance sheets, banks have been able to meet the working capital requirements across sectors.

New economy growth

Digital loans, mobile share services, e-commerce payment platforms and digital currency exchanges mean that the fintech ecosystem is now a formidable force. Online marketplaces have been exploding across all sectors of the economy. Transportation, retail, food delivery, banking – all these have supported the expansion of small and large businesses and new global markets. The size of the e-commerce market is expected to grow to $350 billion by 2030. Consequently, India is now one of the fintech hubs of the world, with an estimated market opportunity of $1.3 trillion by 2025.

Strong market performance and high valuations

Indian equities have performed well over time, reflecting a decade of transformation.

Table: India has outperformed the broad indices significantly across many calendar years

India's growth

As of August 2023, the MSCI India is trading on a 12-month forward price earnings ratio of 20.5x. India’s premium to the rest of the Asia Pacific ex Japan region currently sits at 59% versus an average premium of 49% over the past five years (31% over the past 20 years).

Chart: MSCI India 12-month forward PE ratio

India's growth

A re-rating of sectors, especially banking, and corporate deleveraging on the back of strong earnings growth are fuelling the upward movement of the index. As discussed earlier, the biggest overhang on corporate balance sheet was debt and for a change, instead of taking on debt, corporate India is repaying loans.

For the first time since the pandemic, more than 40% of stocks are trading close to 52-week highs. With the market trading at the upper end of historic valuations, many of the positive long-term factors for the market are being reflected in share prices. Ongoing strong delivery of earnings by corporates would help to support share prices.

India is not without its risks

While there is much to be positive about in India, there are also a few risks. These include weak infrastructure (despite the constructive changes discussed above), high cost of capital, corruption, and bureaucracy.

Even though India offers significant advantages for companies considering the China Plus One strategy, it is not the only country competing in this space. There are other Asian countries that offer lower labour costs, proactiveness in signing free trade agreements and lower corporate income tax.

Separately, stemming from digitisation are breaches of privacy and security safeguards. A lack of digital literacy, which is an offshoot of illiteracy in India, aggravates this further.

These challenges are far outweighed by positives in our view. Slowly and steadily, India has been moving in the right direction and, we believe, the market warrants a place in a global investor’s diversified portfolio.


Read and download our full, in-depth paper on India here: Investing in India's growth

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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

Authors

Ashish Gupta
CIO, Axis AMC

Topics

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