Mutual fund Investment Firm Franklin Templeton (FT), in a recent note, highlighted that investors are increasingly recognizing the Indian growth story. However, there are concerns that it has been fully reflected in market valuations, it noted.
The MF firm believes that if a 7 percent GDP growth is achieved over the next decade, it should attract more investors to the equity market as well as enhance its outlook.
"If policymakers in India are successful in raising GDP growth to an average of 7 percent in the coming decade, this can be expected to follow through to corporate earnings. While there will inevitably be economic mini-cycles over this period, rising earnings growth would ordinarily be expected to attract capital to the market and support valuations. Assuming no expansion in valuation multiples and the equity market tracks earnings growth, we believe an investment case can be made for significant long-term capital gains in the Indian equity market," rationaled the report.
According to the report, the Indian economy is poised for a renewed growth spurt, similar to that enjoyed following the reforms introduced in the early 1990s. Prime Minister Narendra Modi is embracing a liberalization and globalization growth model. While investors are aware of India’s ambitious targets for growth, exports and consumption, they may be less aware of the commitment to innovation and liberalization required to achieve these targets, it stated.
These, as per the report, include:
1. India technology stack: the Unified Payments Interface (UPI) is creating a cascade of innovation.
2. Infrastructure: new fast trains with dedicated freight corridors between major cities, and a focus on renewable energy.
3. Production Linked Incentives (PLI) and a focus on manufacturing for export.
4. Pursuing free trade agreements and the India-Middle East-Europe trade corridor.
The translation of these reforms to economic growth is essential for investors given the high correlation between gross domestic product (GDP) and earnings growth in India, it noted.
"The proposed Indian-Middle East-Europe rail corridor is among the most significant new developments. The project builds on the plans to significantly increase manufacturing capacity currently underway. The PLI and manufacturers’ China+1 strategy, in turn, drives this. India’s renewed emphasis on pursuing free trade agreements with its trading partners also complements it. Innovation in the technology and finance sector is creating employment opportunities and democratizing access to credit in the economy. The multiplier effect of this is only starting to be recognized. Taken together these policies have the potential for India to achieve its target of 7 percent GDP growth over the next decade which, if achieved, should attract more investors to the equity market as well as enhance its outlook, in our view," it rationaled.
Increasing foreign direct investment focused on manufacturing indicates the target for quadrupling exports to $2 trillion by 2030 looks achievable. The expectations of 7 percent GDP growth in the coming decade will double the size of the economy to almost US$7 trillion and more than double per capita income to almost $5,000. It will also require the creation of seven million jobs annually, informed FT.
India technology stack: The India technology stack, underpinned by the Aadhaar number (a unique identification number assigned to individuals in India) and the UPI, is creating a cascade of innovation in e-commerce and fintech, said FT. Growth in e-commerce shopping has surged thanks to homegrown innovators. The sector has pioneered various forms of 'buy now, pay later' and 'cash on delivery' shopping, which has turbocharged growth, it said.
In July 2023, 9.9 billion transactions were recorded, up 50 percent from the prior year and threefold from two years ago, informed FT. This compares with a 27 percent increase in global mobile transaction volumes in 2021. Going ahead, the National Payments Corporation of India (NPCI) estimates individual digital payment users will grow to 750 million by 2027 and merchant users could double to 100 million. Currently, 473 banks are part of the UPI, double the number from two years ago, it added.
Infrastructure: India’s infrastructure, which for many years has been a drag on growth, is undergoing a transformation. Airports have been upgraded, power networks expanded, and toll roads opened. One of the key catalysts for the upgrade of roads was the national GST, which enabled companies to source and transport inputs on a pan-India basis. While this was possible prior to the introduction of the GST, the multiple taxes and overlapping requirements in moving goods between states made it impractical for many companies, particularly SMEs, said FT.
This has added renewed impetus for better road, rail, and port infrastructure, which is being delivered. New Dedicated Freight Corridors (DFCs) will slash time and costs for transporting goods by train. Indigenously designed and manufactured Vande Bharat trains now offer modern and fast short-distance passenger services between major cities.
One of the fastest-growing sectors in India is renewable energy. However, renewables only generated 12.5 percent of electricity consumption between April–December 2022. There are concerns over the expansion of PSP (power storage pump) due to environmental issues and planning delays. There is also resistance to expanding hydro projects from river-based—which are the only source of hydropower in India—to off-river sources. While uncertainties remain, if India is to meet its carbon reduction targets, PSP in combination with solar will be part of the solution from an electricity generation perspective, stated FT.
PLI Scheme: The PLI scheme was launched in 2020 and covers 14 industries, with electronics and a parallel semiconductor investment plan accounting for half of the $40 billion in subsidies over five years. The scheme has been a tremendous success in boosting import substitution and manufacturing output, said FT. As per the report, the PLI scheme is driving a significant increase in manufacturing, led by mobile phones and electronic equipment. FT expected this to accelerate in the year ahead.
There is significant scope for this to rise given the surge in PLI-related investment, which rose from $1.1 billion in FY22 to $5.5 billion in FY23. ICRA credit rating forecasts PLI-related investment could peak at $20 billion in FY26, accounting for 40 percent of total investment.
Free Trade: The pursuit of free trade agreements is part of India’s globalization agenda. In 2022, India signed a trade agreement with the United Arab Emirates (UAE) within 90 days of starting negotiations, as well as with Australia in the same year. It is currently in the final stage of negotiations with the United Kingdom and is seeking an agreement with the EU, Canada, the Gulf Cooperation Council (GCC) countries and Israel, according to the report. The latter is of particular importance as the proposed India-Middle East-EU trade corridor passes through the GCC countries and Israel, it added. Without a free trade deal, the corridor will struggle to gain traction.
The proposed India-Middle East-Europe trade corridor will open up new markets for Indian manufactured goods through a combination of a plentiful supply of labor and lower wage cost compared to peers, said FT.
India’s goal in re-engaging with its trade partners is to seek new tariff-free access for its pharmaceutical, electronic and technology services exports as well as easier access for Indian professionals, it further noted.
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