India: Prospects and Challenges
(This
is for information purposes only. This should not be construed as a
recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial
adviser before taking any investment decision. Safe to assume the author has a vested
interest in stocks / investments discussed if any.)
Prospects:
> India is a big market with large number of young people
> India's human capital is seen as long term positive for country's growth
> in 2023, India surpassed China as the world's most populous nation
> India is the world's fifth largest nation by GDP
> India is expected to be the world's third largest by GDP by 2028 (an assumption with caveats)
> India's real GDP growth is the highest among the Group of 20 (G-20) nations
> because of China's growth slowdown in recent years (due to high debt of real estate companies, Xi Jinping's anti-corporate policies, crackdown on big Chinese tech companies in 2021 and 2022 and other draconian measures) and major nations' discomfort with China after COVID-19 outbreak, India is seen as an alternative to China in manufacturing and outsourcing (China+ theory)
> India's foreign exchange reserves are more than USD 580 billion, giving a decent cushion in the event of any trouble from foreign investors exiting the country
> India has adequate foreign exchange reserves to cover its imports and any foreign outflows; and its short term external debt is in control
> in September 2023, JP Morgan decided to include Indian bonds in its global emerging markets bond index effective from June 2024 -- this is a positive for Indian bonds and may bring down India's cost of capital in future
> more number of Indians have adopted digital technologies in a rapid way in the past seven years, especially after COVID-19 Pandemic (UPI payments, higher smartphone usage, work form home, etc.)
> many Indians have taken to stock market in the past four years, this is reflected in the strong growth of online demat accounts opened in the past three to four years
> India's soft power has grown with its recently successful launch of Lunar satellite mission
> India's corporate balance sheets are clean, meaning that the debt to equity ratios have come down and return on equity (RoE) ratios have improved -- providing scope for them to expand whenever the demand for products and services rises
> India's public sector banks (PSBs) and some private sector banks have cleaner balance sheets, with their bad assets falling in the past three years
> India has, for the past 20 years, been dominant in exports of information technology services and pharmaceutical products; more sectors of the economy are expected to improve in future
> India needs to spend more on public health and education; the spending Indian governments is low
> Indian stock market has attracted institutional money through domestic pension funds, like, EPFO, banks and insurance companies
> this domestic institutional money has worked as a bulwark against money from foreign investors (called FPIs), who withdrew money on a net basis from Indian stocks in financial years 2021-22 and 2022-23
> though the share of FPIs in Indian stock market has fallen to 17 percent from 20 percent six years ago, domestic institutional and retail investors have acted as a counterweight to FPI outflows in recent years
> big money across the globe is looking toward investing in India via foreign portfolio flows, FDI or foreign direct investment and other routes
> there are some success stories,
like, Zerodha (co-founded by bootstrapping entrepreneur Nithin Kamath), a low-cost brokerage house in the start-up world
-- its net profit margin are nearly 40 percent -- it's still privately
owned
> another Indian success story is Sirdhar Vembu's Zoho Corporation (a SaaS or software as a service firm) -- it's another bootstrapping company growing rapidly
> digital payments company PhonePe is also growing very well (now, it's India's only Decacorn)
> another Indian success story is Sirdhar Vembu's Zoho Corporation (a SaaS or software as a service firm) -- it's another bootstrapping company growing rapidly
> digital payments company PhonePe is also growing very well (now, it's India's only Decacorn)
> these success stories are giving hope for a better ecosystem for budding entrepreneurs in future
> India is ranked second in MSCI Emerging Markets Index -- its share in MSCI EM Index has gone up while China's share has fallen in the past three years -- but China remains at the top of MSCI EM Index
> Indian stock market is currently reflecting many positives mentioned above
> Indian stocks remained resilient throughout 2022, despite big falls in the US and European stock markets
> India, in September 2019, cut its top corporate tax rate to 25 percent for new firms
Challenges:
> however, there are a number of challenges facing the country
> consumer price inflation (CPI) has been very high, cumulatively, since October 2019
> food inflation has been high in the past four years impacting the lower sections of society more negatively and severely
> India's per capita GDP is still very low -- by per capita GDP, India is ranked 140th in the world (though India is world's fifth largest economy by total GDP)
> majority of Indians are still dependent on agriculture and rural economy
> millions of Indians are still in poverty; unless India attains high real economic growth rates of more than seven or eight percent in the next decade, it is not possible to lift millions out of poverty
> India is short energy; in the sense, India's dependence on imported oil has increased to 88 percent from 78 percent nine years ago
> with high inflation and interest rates, India has higher cost of capital compared to other nations
> cost of capital is especially high for small and medium enterprises, which are the backbone of big industries and are a bedrock generating employment opportunities
> many Indians are still reluctant to pay for services, like, streaming apps, investment advisory, banking services, digital platforms, etc. -- Indians are more DIY kind though DIY is sub-optimal in several instances
> as per venture capital firm Blume, around 50 percent of online spending in India comes from just 45 million Indians
> India's rural population is facing challenges in terms of income growth, despite hollow promises of doubling farmers' income by the federal government
> in terms of transparency, timely justice and freedom of expression, India ranks low by global standards
> there are many start-up failures in the past few years, like, Byju's, despite the success of several new-age and young companies
> many Indian start-ups were funded by easy money (zero interest rates between 2008 and 2021) in the US and Europe -- with interest rates surging in the West, easy money is no longer available for new Indians start-ups; though some may still tap money if they have a differentiated and sustainable business models
> India's fiscal deficit is still high at around six percent of GDP, putting pressure on Government of India's finances
> India's debt to GDP ratio is high at around 89 percent; it was 75 percent in 2019
> India is having a spate of elections in its states (provinces) in the next six months
> Indian Parliamentary elections are due in May 2024
> the outcome and progress of these elections may create some turbulence in stock markets -- though this is not seen as a big negative for Indian financial markets for now
> political stability, rule of law, ease of doing business and enforcement of contracts are big factors for foreign investors
> enforcement of contracts is wobbly if you go by the experience of Amazon Inc's acquisition of embattled Future Group assets and its subsequent court battles with Reliance Industries
> India's tax laws are still a quagmire for corporates and individuals
> there are concerns about crony capitalism in India; in January 2023, a foreign research firm Hindenburg accused India's Adani group of malpractices -- the Indian capital market regulator is yet to come out with its findings
> one peculiar feature of Indian economy is big firms are getting bigger; while small and medium enterprises are struggling, especially in the past four years
> while luxury spending has been booming, small-ticket items are struggling for growth
> Indians are preferring to buy more high-end cars; while two-wheeler and small car sales are falling
> to use a cliche: India is a kaleidoscope of contrasts
> as per reports, Africa is likely to surpass India and China in terms of young population in the next decade because of high women fertility rates in Africa
> India's so-called demographic dividend may not sustain for more than 10 years -- of course, it depends on several other factors
> there is a need for the Indian federal government to give a boost to consumption; in many developed economies, the share of consumption in GDP is between 65 and 70 percent
> it is expected India may see a bump in consumption ahead of the May 2024 Parliamentary elections
> border skirmishes between India and China along the Line of Actual Control (LAC) in the past five years are a concern for investors
> as per foreign brokerage firms, like, JP Morgan and UBS Global, there is renewed interest for India as an investment destination despite the problems being faced by India
> in an increasingly inter-connected and multi-polar world, no country can work and thrive in isolation; so is the case with India
> India's prospects are dependent on its own efforts, but amidst a thriving world, India may do much better
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Abbreviations used:
GDP - gross domestic product
DIY - do it yourself
EPFO - Employees' Provident Fund Organisation
FPIs - foreign portfolio investors
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Back-up weblinks for some of the above bullet points:
Indian Economy: Strengths and Weakness
Constitution of India - Wikimedia Commons
India up the Ladder in MSCI EM Index
Spectacular rise of Demat accounts
India Crude Oil Import Dependency Jumps under PM Modi
EPFO Investments in Stock Market via ETFs
Meltdown in Adani group stocks
Slowest Growth in India per capita income
Slowing FDI to India
India Foreign Exchange Reserves data
Adequacy of India's Forex Reserves
Exit Policy by foreign investors
Scourge of Negative Real Interest Rates
When will Fed Stop hiking interest rates?
Corporate tax rate cut Sep2019
China military strength
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India Public Debt and Floating Rate Bonds
India Equity ETFs Worth Considering
JP Morgan Guide to Markets Sep2023
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India's Crude Oil Import Dependency Jumps under Modi
Analysis of Nifty 100 Low Volatility 100 Index
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Buyback Offers and Weblinks
Understanding Floating Rate Savings Bonds 2020 (Taxable)
Negative Impact of Debt Mutual Fund Tax Changes
Why Do Indian Equity Mutual Funds Always Disappoint Investors?
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
CFA Charter credentials - CFA Member Profile
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He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
X (Twitter) @vrk100
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