India – Why Now?

India Why Now

India - Why Now?

Julian Page, Head of Fund Research, DDQINVEST

The world’s seventh largest economy, soon to be the largest population on earth, a median age of 27, a hub for technical innovation - things are looking good. The key to India's recent success has been the overhaul of the Indian economy since the appointment of Prime Minister Narendra Modi in 2014. Since his appointment, there are now millions more companies paying tax and businessmen from the UEA have been ploughing billions in investments into the economy since Modi’s reformed business friendly policies. The UAE government has recently pledged to contribute $75 billion to aid improvements to Indian infrastructure. Modi’s push for the removal of red tape has been very well received by foreign investors, but significantly has led to a boom in domestic investment.

So where are the key growth opportunities within this burgeoning economy? Here’s a list of 5 of the biggest potential sectors of growth for the coming years:

 

  1. Consumer goods - A rapidly growing population, growth in the middle class, combined with rising GDP per Capita are all contributing to rapid increase in consumer spending in the country. Consumer goods companies are set to benefit hugely. An example of such a company is Colgate. The company has been operating in India since 1937 and is listed on the Bombay Stock Exchange. They have a market share of over 55% and are a clear market leader with almost 3 times market share over their nearest competitor. Millions of Indians still use a traditional Datun to brush their teeth, and spending on oral hygiene per capita is less than US$1 per year. With continued growth in consumer spending per capita companies such as colgate as market leaders are well positioned to gain from this trend.
  2. Technology - India has the second largest online population in the world and today, the tech industry in India is worth $110 billion, roughly 44 times its value 20 years ago. It is estimated that 20-30% of incremental GDP growth in India will come from technological advances in the next 5 years. Technology is a catalyst for growth in many sectors in the Indian economy. For example remote healthcare technologies allowing those in rural areas to pinpoint simple remedies based on a handful of questions. Other industries that will benefit hugely from technological advances include power generation, education and agriculture. To this aim, Modi has launched a variety of tech related campaigns, including Skill India, Digital India and Startup India, with the aim of increasing the integration of technology into all areas of the economy. With huge uptake in mobile use, there exists opportunities in ecommerce and mobile content providers. Despite this optimism, it has been argued that technological advances will at some point have a detrimental impact on jobs in India as human jobs become replaced by machine counterparts.
  3. Healthcare - The phrase ‘Modicare’ is already being used by the Indian people as a response to the ambitious reforms set out by president Modi. The Indian government has pledged to pay for hospital treatment of up to $100 million for the poorest Indian families and to provide improved hospital access to millions more. This initiative is set to cost around $780 billion, just shy of a third of India's $2.4 trillion economy. According to the World Factbook, total spending on healthcare in India averaged $267 per person in 2014, compared to $3,377 in the UK and $9,403 in the US, further highlighting the growth opportunity in this sector. Already India produces the biggest number of generic drugs on the planet. In the last couple of years this has been a detriment to most Indian pharmaceutical companies, whose profits have been pressured by increased competition and channel consolidation in the US, their largest market, driving down prices. As a response to these pressures, the top five Indian pharmaceutical companies spent $1.2 billion in R&D in 2017, a six-fold increase from 2010 - emphasising their need to differentiate away from generic drugs of which prices are being driven ever lower. Importantly, an increase in domestic demand and use of drugs produced by Indian pharmaceutical companies will help alleviate reliance of exports to drive profits, which should strengthen the sector. However, this may take some time. Additionally, Modi’s reforms will not necessarily benefit all Indian pharmaceutical companies, it will most likely be a select few who through product innovation and the ability to exploit cost cutting efficiencies who will benefit.
  4. Infrastructure - Modi’s ‘Made in India’ campaign set up in 2014 has already led to vast industrial growth throughout the country. The country has ambitious plans to create infrastructure corridors and ‘smart cities’ as well as to improve, or build from new, hospitals, schools, airports and roads. The Indian government are aware that for entrepreneurial activities and innovation to occur, transport and other physical infrastructure improvements are paramount. India’s Road Transport & Highways Ministry has invested almost $50 billion in the last two and half years in building roads and port infrastructures alone. The Economic Survey 2017-18 estimates that the country will need $4.5 trillion by 2040 to complete their development of infrastructure - much of this could come from foreign investment. Japan has already joined forces with the Indian government to undertake strategic infrastructure investments in the Northeast of the country. Additionally, Sweden has taken an interest in one of India’s newest initiatives of launching ‘smart cities,’ which aim to be citizen friendly and have a strong emphasis on sustainability. 100 of these cities have been selected to be upgraded as part of the program which requires cities to compete with each other in a ‘smart cities challenge’ in order to benefit from the pecuniary advantages of becoming chosen. To this end, Sweden has put forward a plan to help develop sustainable and environmentally friendly waste management systems and public transport solutions in India.
  5. Financial Services - One of Prime Minister Modi’s big plans is to enable India to grow its presence and compete in the finance world. The newly created city of GIFT in India’s Western State of Gujarat is an excellent example of this ambition. Whilst only currently holding a few glass offices, many more are under construction, and the creators of the project preach its ability to become India’s Hong Kong. The city will allow foreign investors to trade freely, with little red tape and tax advantages. Furthermore, a recent crackdown in offshore derivatives trading in India by foreign traders could lure investors to the city in order to gain exposure to Indian markets. Net flows into Indian assets last year was $31 billion, with $8 just in equities, an amount over double the previous two years combined. GIFT’s first exchange was launched in January 2017 by the Bombay stock exchange, and allows foreign investors to trade with dollars in commodity derivatives and Indian equities. Since GIFT’s stock exchange launch, there has also been the emergence of the National Stock Exchange, which is already the most popular Indian exchange in terms of trading volumes. Many foreign investors are still cautious about entering directly into Indian exchanges through current offshore centres due to the unpredictable nature of India’s tax policies, fearing that the beneficial tax laws recently introduced could be rescinded a couple of years down the line. For the Indian population, the emergence and development of mobile payment systems has benefited the whole population, but in particular rural populations where the availability of physical presence of banks is extremely sparse. Importantly, mobile banking will give millions of Indians access to credit, a further stimulus to economic growth and in areas where it is most needed.

So what are some of the main risks threatening Investment in India today?

  1. Political uncertainty - Despite the appointment of Prime Minister Modi, there has long been a history of corruption within the political framework of India and next year's general election could threaten the positive reforms that have already taken place in the country.
  2. Strikes - These are a regular occurence in India and lead to frequent closures of businesses. This disruption can slow growth in the economy and lead to wider civil disturbances.
  3. Economic Stability - India has tendency to experience economic growth in waves, with continuous peaks and troughs creating volatility and creating risks for business experiencing uneven cash flows.
  4. Oil Prices - India is sensitive to increases in the price of oil. As one of the world’s largest importers of oil, a rise in price could put pressure on inflation. Rising prices to a level of above around $70 a barrel will also put significant pressure on major industries such as the auto and airline industries.
  5. Corruption - Transparency International, a global anti-corruption organization, has ranked India in 2017 as the 81st most corrupt nation on earth as measured by its Corruption Perception Index. Modi has vowed to end the corruption scandals that has characterized the decade long tenure of the government before him. India’s corruption score of 40 on Transparency International's list has not improved since Modi took power however, highlighting the difficulty in suppressing corruption practise that have become. Most recently, the FBI accused celebrated Indian billionaire Nirav Modi of defrauding one of India’s largest state-run banks $1.8 billion.

There are clearly great opportunities available to foreign investors in grabbing a piece of India’s ever-growing pie. Whilst there are inherent risks both in emerging markets in general as well as India’s proprietary risks, these are outweighed by the benefits associated with strong economic growth across most sectors of the Indian economy.