India wakes up every morning to read about the ill effects of the three “I”s—inflation, interest rates and inadequate infrastructure—on the Indian economy. Everyday more and more negative stories come out, painting a very subdued picture of the economy’s health. It’s time to have a relook at the fundamentals of the Indian growth story and re-evaluate the road that we have taken.
A 10-year-old depression in the US in the 1930s and 1940s laid the foundation for a 30-year economic super cycle in which favourable demographics, economic reforms and massive infrastructure building led to a virtuous circle of job creation, income growth, higher savings and investments and general economic prosperity. Post-war reconstruction efforts in Japan saw a war-ravaged country turn into a manufacturing giant while moving to a high per capita income level. As India enters the third decade of this 30-year super cycle, demand growth in most sectors is likely to be exponential.
Consumption: The driver of growth in the last two decades has been the consumption story. While the rural and urban divide in India is very old, what is similar is the significant rise in consumption of consumer stables, durables and educational and telecom services in the last five years. While rising farm income has contributed to rural prosperity, the services sector growth has created a huge pool of educated urban middle class which has an increasing propensity to consume. Once per capita income reaches a particular level, the demand for items such as cars, air-conditioners and tourism begins to explode. World Bank pegs that level to be around $3,000 per annum on purchasing power parity basis. With India being very close to this income level, the ever-expanding Indian middle class will demonstrate hyper growth in discretionary consumption in the next decade.
Infrastructure: The demand for infrastructure in sectors such as road, power and water has already forced democratically elected governments to proactively pursue such projects. Hence, unlike China where infrastructure growth is supply-led, the Indian growth phenomenon will be completely demand-led with the government and private parties coming together to provide infrastructure services. The willingness to pay for such services has increased in the last decade and this could lead to a virtuous circle of infrastructure creation. Savings rates in the economy continue to be high, which in turn will also provide the necessary capital for higher fixed asset creation. While the current concerns on inflation, interest rates and land acquisition may temporarily slow the infrastructure creation, rising consumer aspiration would become the growth driver. The demand for such services would be hard to ignore by governments and the democratic process will become the push factor for better social, educational and healthcare infrastructure.
Your savings and investment
While discretionary income rises, the propensity to save and invest in the future will also increase. For the millions of members of the aspiring middle class, financial planning is critical to achieve long-term financial goals. It is paramount to have prudent asset allocation and balance the investments between debt, equity, real estate, precious metals and alternative assets. The use of only savings bank accounts, fixed deposits and debt investment will lead to low returns and make the capital required to achieve financial goals far higher. It would be prudent to shrug off the recent negative sentiment prevailing in the equity markets and build equity portfolios that will go a long way in delivering long-term capital appreciation while meeting financial targets. Needless to say, systematic and prudent investment process will hold the key to success. The trailing 10-year compounded annual growth rate of the Indian equity market is 15% vis-a-vis the 8% return on fixed income investments. The long-term returns from Indian equities are likely to move to a higher plane in the next 10 years as the GDP growth accelerates further. The two necessary conditions for high macroeconomic growth to translate into strong equity returns, being reasonable current valuation and high profitability of the corporate sector reflected by return on equity, are firmly in place.
The time has come for the people of India to start believing in the growth story that continues to play out in thousands of villages and towns—every day, every hour, every second. It is time for us to stop being cynical and believe in our ability to create a future of prosperity and abundance.
Graphic by Shyamal Banerjee/Mint
Varun Goel is head, equity PMS, Karvy Private Wealth.
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