Move over, China
When global investors think Asia, they're increasingly thinking India.
When recently in Delhi, I had some time to spare before my flight back to the U.S. Given my love for cooking and long-held belief that the best way to understand other cultures is through food, I decided to take a trip to Chandi Chowk, one of the oldest and largest bazaars in India and Asia. You can find everything there, from saffron to wedding dresses. Unfortunately, as a foreigner carrying nothing more than a phone, credit card and small amount of cash, it was hard to buy much of anything. Not every food cart or spice shop accepted cash or credit card, and I didn’t have access to myriad QR code payment options to pay via smartphone. To add insult to injury, it took me two hours by car just to get to a point where I could walk into the market. New York at rush hour would seem like a Sunday drive in the country compared to these 8-lane-wide roads, where there are no rules and vehicles of all sorts vie for position.
That, in a nutshell, captures India. It’s big. Crowded. Old and new. A place full of contradictions and a bit of swim at your own risk. Maybe a bit like China 20 years ago, though I wouldn’t say it is trying to fully replace China as some suggest. India is not a command economy with centralized authority. It can’t just issue an order and make it so. It’s a democracy modeled on the British system and extremely diverse. More than 1,600 languages, 22 of which are nationally recognized, are spoken, English and Hindi most frequently. There also are many different regions and religious sects, with Hindu and Islam making up the majority. In an economy split between 55% services, 25% industry and 15% agriculture, the juxtaposition of affluence and poverty is quite noticeable, especially in urban areas.
So, why do we like India?
- First and foremost, demographics. At 1.4+ billion, it’s the largest, one of the youngest (67% of its population is under age 40) and one of the most promising countries in the world. India has growing upper, upper middle and middle classes, colloquially known as India 1A, India 1 and India 2. These groups have roughly 25 million, 85 million and 105 million people, respectively. The upper tiers of the consumer class are largely Westernized and a favorite target of start-ups and tech firms for which the “new” India is known. Collectively, India 1A and India 1 account for a third to half of all spending/transactions on the new age e-platforms—this alone represents an enormous consumer opportunity over the intermediate to long term, as does the sheer size of the rest of India as it catches up in the coming generations and even if vast swaths of the population don’t flock to urban areas en masse for factory work as occurred in China. I don’t see India trying to fully replace China as a manufacturing base—the latter is too far ahead. But in relative terms local manufacturing is non-existent; as infrastructure improves, so should migration, urbanization and use of modern services.
- Resilient growth and manageable inflation It’s estimated India’s nominal GDP will grow at least at a 10% annualized rate for the next decade, with 6-7% real growth for the next two years. The underpinnings are government investment in infrastructure—since Narendra Modi became prime minister in 2014, Jefferies estimates the length of national highways has increased 60% and public capex has jumped from 1.5% of GDP in fiscal 2018 to 2.7% in fiscal 2023 that ended March 31; it’s budgeted to hit 3.3% of GDP in this fiscal year. Private capex is booming, too, up 70% y/y through June to a record 28 trillion rupees (roughly $34 billion), lifting the annualized gross fixed capital formation to GDP ratio to a 15-quarter high of 29.2% in fiscal Q1. While smartphone penetration has improved since 2015/2016, internet penetration is still near 50% vs. the global average near 65%, which provides opportunity for growth in the consumer economy. Higher food prices have pushed up retail inflation this year, but the core rate appears to be stabilizing, dropping below 5% in August.
- A stable and (relatively) friendly government Modi is up for reelection and polls show him as the most popular leader in the world. His policies have been focused on driving growth through both foreign and domestic investment, while also improving infrastructure so the country can better realize its potential. This month’s G20 summit in New Delhi allowed India to showcase its progress, and Modi’s political deftness. He welcomed the G20 announcement of a multinational rail and shipping project linking India with the Middle East and Europe, a development the Biden administration hopes strengthens ties with India and serves as counter to the Russia-China axis. But Modi also persuaded the U.S. and Europe to soften wording of a joint communique on Russia’s invasion of Ukraine so that the summit could provide consensus on addressing the concerns of poorer countries. The balancing act reflected the realities of today’s India. Its new economy relies on partnerships with the West. But as an energy importer and neighbor to China, it also needs to maintain relations with the East. Indeed, India imports oil from Russia and is a partner in the International North South Transport corridor linking Russia, Iran and Azerbaijan with India via rail, shipping and roads.
Certainly, there are risks; there always are in emerging markets. Beyond the potential for geopolitical disputes, both externally and within its borders, India’s currency is weak, its fiscal and current account deficits are large, and it’s a major oil importer. However, the country is still in the early stages of a tech-ecosystem buildout that accelerated during Covid and is being supported by the government through such initiatives as Aadhaar (a 12-digit identification number), Unified Payments Interface (UPI) and Open Network for Digital Commerce (ONDC), laying the groundwork for the masses to leapfrog past their lack of internet access in this highly connected world. This momentum, and the structural catalysts above, give us reasons to think just as previous decades this century belonged to the U.S. and China, perhaps this one will be India’s.