Aug. 14, 2023
India is having a moment. It recently overtook China to become the world’s most populous country, with an estimated 1.43 billion people. The country’s woefully inadequate infrastructure is getting an upgrade. Multilane highways dot the countryside, Mumbai’s airport is about to double in size, and improvements are on the way for the nation’s water and power needs.
On the economic front, India’s once-frail fiscal health and precarious current accounts deficit is much improved, helped by its ability to buy Russian oil on the cheap amid the war in Ukraine. Reforms are chipping away at government bureaucracy and investors and companies are jumping in, especially as they look for alternatives to China. India’s economy is now the world’s fifth largest, up from tenth a decade ago.
“If I had one place in the world with the highest conviction in growth, India would be it,” says Laura Geritz, manager of the Rondure New World fund.
The question now is whether India can turn what Prime Minister Narendra Modi describes as “India’s decade” into sustainable progress. For all the recent advances on a national level, companies still get bogged down in red tape on a local level. And while the middle class is growing rapidly and digitization has connected vast swaths of the population to banking, millions are left behind in poverty, with progress on the education front stalling in recent decades.
India is a natural beneficiary of the recent struggles of China, its northern neighbor and rival. Rising U.S.-China tensions and China’s economic slowdown put that nation on track to grow at sluggish 4.5% next year, with some analysts expecting growth of just 3% beyond 2025. As investors and corporate chiefs look for alternatives, India—with 6.3% growth expected next year—is one of the few viable options.
This change in fortune has already lifted India’s shares. The MSCI India Index is up 12% in the past year, compared with a 2% gain in the MSCI Emerging Markets Index. But many money managers see India’s run as just beginning.
“As long as the multinationals keep coming, Wall Street will keep coming,” says Michael Kelly, global head of multi-asset at PineBridge Investments, who thinks India is in the early stages of a secular bull market.
A parade of global companies announced India-related investments and pacts in June, coinciding with Modi’s visit with U.S. President Joe Biden. The two leaders vowed to deepen their countries’ ties. They signed technology deals to help the U.S. diversify away from China and defense deals aimed at helping wean India from its reliance on Russia for military equipment.
General Electric (ticker: GE) signed an agreement with an Indian aerospace company to make engines for the Indian Air Force’s jet fighters. Micron Technology (MU) announced plans for a new test and assembly facility in India, and Boeing (BA) is investing $100 million to train pilots in India.
Walmart (WMT), looking to expand its long history of sourcing items such as apparel and home goods from India, is targeting $10 billion in annual exports from the country by 2027 that will include toys, bicycles, and even seafood. Amazon.com’s (AMZN) Amazon Web Services plans a $13 billion investment by 2030, and Apple (AAPL) has tripled its iPhone production there.
A Web of Red Tape
Though India and China had similar per capita incomes in the 1980s, China zoomed ahead as it became the world’s factory by building infrastructure at record pace and clearing the way for businesses. India, says veteran global investor Mark Mobius, head of Mobius Capital Partners, is better understood as the “united states of India,” with each state having different rules and priorities that contribute to the country’s web of red tape that has made doing business in the country so difficult.
It will take years to fully detangle the Indian bureaucracy, including freeing up more access to the country’s scarce land required for building factories. India also still has nationalist policies, including tariffs on poultry and sugar that hinder free trade. Recent restrictions on freedom of speech and press have raised concerns, with India backsliding in some democratic gauges under Modi. Sweden’s V-Dem Institute describes India as an “electoral autocracy,” in the same camp as Russia and Turkey.
Asked about such concerns on his visit to the U.S., Modi responded: “Democracy is in our veins.”
“People think politics and economics can be divorced,” Arvind Subramanian, former chief economic adviser to India’s government and currently a senior fellow at Brown University, said at a recent Asia Society panel discussion in New York. “If you centralize power and exercise state power capriciously against some and not others, eventually investors will also get worried.”
Even with those concerns, India looks poised to capitalize on its demographic dividend as home to nearly twice as many people than in all of Europe. As China’s working-age population shrinks, India is on track to see its pool of prospective workers swell to a billion over the next decade. It also boasts a median age of 28, a decade younger than China and the U.S.
“India’s population bulge provides an unprecedented chance for economic development,” says Joyce Chang, head of global research at J.P. Morgan. For India to capitalize on it—and on the opportunity created by companies looking to diversify their supply chains beyond China—Chang says it will have to attract stronger foreign direct investment flows, as China did in the 1990s.
Meanwhile, many of India’s 28 states are vying for multinationals to invest within their borders, often offering land or other incentives in hopes of bringing in new jobs. India in 2017 replaced a complex web of state and federal taxes that had fueled local protectionism and corruption with a single goods and services tax, speeding up commerce and increasing tax revenue.
And there is finally evidence of upgrades to the country’s dilapidated infrastructure. India has doubled its rural road network and number of airports since Modi took office in 2014, and recently touted the completion of 100 kilometers of road in 100 hours in the northern India state of Uttar Pradesh. The country aims to slash logistics costs from 16% of gross domestic product to 9% by the end of 2024. It even has a spacecraft on the way to the moon.
“That is not the India I knew,” says Rajiv Jain, GQG Partners’ chairman, who grew up in India. “Will it last forever? I don’t know, but this government has improved the execution by orders of magnitude.” Jain has almost a third of the asset manager’s emerging markets strategy invested in India.
India has also facilitated the delivery of essential goods and services such as cooking oil and sanitation to a vast part of the population and speedily digitized its economy, giving citizens identity cards and bank accounts. It also has created a platform for private companies to innovate, jump-starting a technology boom that has already birthed 120 unicorns—private companies worth more than $1 billion—in the past five years. As a group, the companies are valued at $350 billion.
While China has taken a more interventionist role in the private sector, with harsh crackdowns on tech and other sectors, India is moving toward privatization of several major airports, toll roads, and ports. Such moves help boost government coffers and revitalize assets sold with new investment, Jain says.
Executives of global companies see opportunity in India, but are also clear about the challenges. Although India has rolled out new policies to woo foreign businesses, accessing programs and incentives continues to be a challenge, as is the relative scarcity of suppliers that can support large foreign companies, said Guru Bandekar, Carrier’s global vice president of supply-chain management, at a U.S. Chamber of Commerce session on India in June.
Another challenge: accessing raw materials to make goods. “Often with suppliers in India, we have to bring in products from southeast Asia to transform [them] before we export it out,” Bandekar says, adding that Carrier aims to triple its sourcing from India for its heating and air conditioning business over time.
Walmart is investing in an ecosystem of potential suppliers, says Andrea Albright, executive vice president of sourcing for the retailer. She tells Barron’s that the situation has changed markedly in the past 10 to 15 years as many suppliers have embraced technology and automation, increasing the ability to manufacture at speed and increase scale. “We are just at the beginning and see tremendous potential if India continues to refine capability around exports,” Albright says.
Still, India isn’t about to become the factory of the world. Sunil Asnani, founder and managing partner of First Principles fund, sees India becoming a manufacturing power in areas that may not be as resource needy—such as making televisions, Apple and Samsung phones, and washing machines. Such products require less land—an important factor for a country that has more than 17% of the world’s population but just 2% of its land.
A Growing Middle Class
At least for now, higher-income and urban consumers are on spending sprees, fueling demand for sport-utility vehicles, travel, and real estate as people move from ancestral homes to cities and become more mobile. Lower-income and rural consumers have been more constrained, evidenced in part by tepid sales of two-wheelers, which have yet to recover to prepandemic levels.
There’s a broader problem: education. India has long been a source of highly skilled, English-speaking talent for global companies, as a look at the leadership of U.S. tech giants such as Microsoft (MSFT) and Google parent Alphabet (GOOGL) illustrates. But Subramanian sees human capital as India’s biggest failure, as education levels for much of the population have stagnated: Half of fifth-graders read at a second-grade level, the same as 25 years ago.
Those who have tried to draw parallels between China’s burgeoning middle class and India’s came up empty in the past, in part because those at the bottom of the income pyramid didn’t have much opportunity, says Ajay Krishnan, manager of the Wasatch Emerging India fund (WAINX). But that could change if India’s manufacturing takes off. “The next 10 years is going to look like China from 1991, with much more broad-based growth.”
With India’s per capita income about a fifth of China’s and primed to grow, money managers see a longer runway for growth for companies that cater to consumers as India’s standard of living improves. “Once people hit middle income, consumption starts to spike,” says Leon Eidelman, manager of the J.P. Morgan Emerging Markets Equity fund. “India is very early in this stage of that growth.”
How to Invest
That longer runway for growth is one reason Indian stocks may not be as pricey as they look, at 19 times next year’s earnings. Jain notes that over the past decade, the MSCI India Index has trounced MSCI China Index in earnings growth—160% to about 30% in local terms, respectively. Indian stocks could take a near-term breather, but their growth prospects make them attractive over the longer term. For the next year, India is expected to see earnings growth of 16% compared with 15% in China, Jain says.
India’s market is dominated by oligopolistic companies boasting strong balance sheets and high returns on equity and assets. That’s a difference from China, where intense competition can quickly change sector leaders.
Given India’s rapid growth, Mobius favors looking at return on capital and return on assets rather than price/earnings multiples. He also prefers companies that have little to no debt and that generate earnings growth of 10% plus. That turns up opportunities among midsize companies, Mobius says, including software companies positioned for the next phase of India’s growth such as Persistent Systems (PSYS.India) and APL Apollo Tubes (APAT.India), which makes tubing used in construction.
Financials are also a way to tap India’s improving outlook. Jain likes HDFC Bank (HDB), a well-run leading private bank. “A lot has happened in the past 20 years, and still HDFC Bank is cheaper than 10 to 20 years ago because of its earnings growth,” Jain says.
For investors looking for a broad-based way to invest in India, exchange-traded funds such as the $5.8 billion iShares MSCI India ETF (INDA) and $1 billion WisdomTree India Earnings ETF (EPI) offer low-cost exposure.
Investors looking to get the best picks of India investing veterans can find actively managed funds such as the all-cap $592 million Matthews India (MINDX), which averaged 10.9% returns annually over the past decade, and $512 million Wasatch Emerging India.
Peeyush Mittal, portfolio manager of Matthews India, favors smaller companies to benefit from structural shifts in the economy. Holdings include beneficiaries of the push to diversify supply chains away from China, including Syngene International (SYNG.India) and Neuland Laboratories (NLL.India). Both companies help drugmakers get their products closer to commercialization.
The Wasatch fund’s 13.7% average annual return over the past decade has beaten 99% of its peers, according to Morningstar. Krishnan favors financials including Cholamandalam Financial Holdings (CHOLAHLD.India), which started as a commercial vehicle lender and is moving into mortgages, and Bajaj Finance (BAF.India). Krishnan also has been favoring companies positioned for India’s manufacturing boom, like CG Power & Industrial Solutions (CGPOWER.India) which sells motors and power equipment.
For those looking for a broader-based emerging markets fund, the $13.5 billion GQG Partners Emerging Markets Equity (GQGPX) has a third of its holdings in India, more than double its peers. Over the past five years, the fund, run by Jain, has averaged an annual return of 5.4%, beating 91% of its peers.
India is bound to get more attention. Yet to be seen is whether it will live up to expectations this time.