Amid fears of a global recession, India is seen as oasis for investors
AGAINST the backdrop of the so-called China+1 strategy where more businesses and investors are looking to diversify beyond China, one country that is seeing increased attention is India.
Just last month, Apple began production of its new iPhone 14 models in India, ahead of schedule. Earlier this year, India overtook the UK to become the world’s fifth-largest economy. One might even go as far as to say that India is well placed to shake off its “Fragile Five” status, having been lumped together with the emerging market economies of Brazil, Indonesia, South Africa and Turkey nearly a decade ago.
While India has plenty of competition in the region – notably from the likes of Indonesia, Vietnam, Thailand and the Philippines – what it has in its favour are its huge size, a burgeoning middle class, a growing share of the world’s GDP, rising exports, stable foreign exchange reserves and robust digital infrastructure.
Of course, India is far from immune to the risks and impact of a global recession. There are many political and policy risks, as it has to deal with challenges such as high import tariffs, unemployment and poor infrastructure.
In a report titled The New India: Why this is India’s Decade released on Oct 31, Morgan Stanley wrote that India is set to become the world’s third-largest economy and stock market by the end of this decade. The equity strategists and economists at the Wall Street major noted that GDP is likely to cross US$7.5 trillion by 2031, more than double the current level.
“As a consequence, India is gaining power in the world economy. In our opinion, these idiosyncratic changes imply a once-in-a-generation shift and an opportunity for investors and companies,” the report said.
The global economy is entering a slow lane and inflation globally has hit multi-decade highs. Global growth is expected to be about 2.7 per cent in 2023, down from 6 per cent in 2021, according to the International Monetary Fund. India’s economy is estimated to grow by 6.1 per cent in 2023, compared with China’s 4.4 per cent projected expansion and the 4.9 per cent growth for emerging and developing Asia as a whole.
The developed economies of the US, the UK, Germany and France are expected to grow at 1 per cent, 0.3 per cent, -0.3 per cent and 0.7 per cent, respectively next year.
As things stand, there are many drivers of India’s growth. India is already the “back office to the world”, with many international firms comfortable with establishing an offshore set-up in the country.
The government has a vision of turning India into the “factory of the world”. For this, it is looking to attract foreign direct investment in manufacturing by lowering corporate tax rates, rolling out production-linked incentive schemes and introducing labour reforms, among other initiatives.
“Multinationals are more optimistic than ever about investing in India, as the all-time high on our MNC Sentiment Index shows, and the government is encouraging investment by both building infrastructure and supplying land for factories,” the Morgan Stanley report noted, adding that it expects India’s global export market share to more than double to 4.5 per cent by 2031.
The country’s digital revolution, meanwhile, is unique in the sense that it is aligned with its huge 1.4 billion population. IndiaStack, a unified software offering a set of APIs to different stakeholders (governments, businesses, startups and developers) is helping India in its digital financial inclusion.
Its initial layers beginning from presence-less and paperless identification to cashless payments have already enjoyed plenty of success. The upcoming layers – OCEN (open credit enablement network) and ONDC (open network to digital commerce) – are expected to boost credit and e-commerce growth.
“The process of digitalisation in India is likely to supplement the ongoing reform momentum of the government to provide a fillip to India’s growth trajectory,” said the Morgan Stanley report.
The optimism in India is perhaps reflected by the strong performance of Indian stock markets. Thanks to huge foreign reserves, the RBI has managed to defend the Indian rupee well this year, with the currency depreciating 11 per cent in the first 10 months of this year. The Malaysian ringgit, Philippine peso, Thai baht, Chinese yuan and South Korean won have all depreciated even more over the same period.
Among the world’s stock markets, India is the fifth-best performing country (minus 7 per cent) globally this year after Brazil (up 19 per cent), Indonesia (minus 2 per cent), Mexico (minus 3 per cent) and Singapore (minus 6 per cent). China’s stock market has lost 31 per cent this year, and this makes India trade at a historical premium against its emerging market peers and developed markets.
India’s share in global market capitalisation topped 4 per cent in September, an all-time high, data from Motilal shows. Interestingly, it was a little over 2 per cent just a year ago.
Gautam Duggad, the head of research (institutional equities) at Motilal Oswal Financial Services, highlights some key risks.
“Global investors should be cognizant of corporate earnings growth trajectory, ongoing inflationary pressure on commodities, consistency in institutional flows, currency risks, and central banks’ stance on interest rates amid evolving global macro policies,” he said.
Among persistent challenges, price sensitivity is the most common. While the Indian consumer market is huge, their price-conscious approach makes it trickier for global companies to price their products. The country has to take action on high import tariffs as well. According to the World Trade Organization, India has one of the highest average tariffs of 15 per cent in the Asia-Pacific region. The country is increasingly looking at signing free trade agreements with different countries. It has to tackle issues around poor infrastructure if it has to emerge as a factory of the world.
While the risks will always be there, it’s worth noting that at a time when many countries are expected to post negative growth, India appears to be in relatively better shape to weather the storms ahead.
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