The Indian Government announced a target GDP of US$5 trillion by 2024-25 last year post a landslide election win. This would propel the economy into the top five economies in the world alongside the US, China, Germany and Japan. While this appeared an admirable goal, it left many scratching their heads on how this would be achieved, given that nominal GDP growth of close to 12% per annum was needed over the next five years.

A week ago, the Government announced the “National Infrastructure Pipeline” (NIP), which followed on from Prime Minister Modi’s announcement on India’s Independence Day last year to use Infrastructure as the growth engine and employment creator over the next five years. Given India’s weak economic growth at present (4.5% for the September quarter), it’s the spark the Government is hoping will revive the economy and is essentially pinning its hopes on for re-election in 2024.

The NIP details the Government plans to invest approximately A$2 trillion on infrastructure over the next five years to achieve its GDP target. That is more than the entire GDP of Australia!

A task force has been set up by the Economic Affairs Secretary to prepare a road map. To put this into context, over the past decade India has invested about A$1.6 trillion in infrastructure. Major areas of expenditure are Energy (24%, mainly power and renewables), Roads (19%), Railways (14%), Urban (16%, water, smart cities, metro, affordable housing, sewage), Irrigation (8%) and Rural (8%). The pipeline would be shared by the Central Government (39%), State Governments (39%) and the Private Sector (22%).

Line 3 - Construction of a fully underground metro line in the heart of Mumbai's CBD, BKC

This appears to be the blueprint for India’s growth trajectory over the next five years. As Australians we have participated somewhat through Macquarie Bank’s $2bn investment into 9 road assets. Additionally, AustralianSuper recently announced a significant investment into India’s National Investment and Infrastructure Fund. However, our investments into Emerging Market Funds, Asian Funds and India specific funds largely do not participate in the Infrastructure story, given that most of the heavyweight market capitalization companies in India are Banks, Consumption and Information Technology (~70% of the Nifty 50).

Equities

History doesn’t repeat itself in India

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, that highlighted several companies which were market leaders in 2007-2008 are now not represented in significance in Indian market indices. That’s because consumption and credit have fuelled India’s growth over the last decade.

However, if we turn our mind to the future, then the Government is in effect telling where the next leg of growth will be sourced. Therefore, as we embark on the next business cycle, companies that will benefit are likely to be involved in Engineering and Capex, Construction, Cement and Materials, Power and Renewables, as well as ancillary businesses which support infrastructure growth. The India Avenue Equity Fund has approximately 25% exposure to stocks that are directly linked to the Infrastructure thematic.

This is why we believe active management is required to prosper from investing in a region like India. It brings to the table astute judgement on the evolution of trends rather than purely participating in a bigger and bigger way on existing trends that inevitably do not last forever. 

It’s also why we believe single country exposure in Emerging Markets makes senses rather than aggregation purely for the purposes of a benchmark called the MSCI Emerging Markets. It provides greater depth and the aspect we continue to search for – growth and diversity.

In a country where the Government essentially lays the blueprint for future growth on the table, we are likely to be at a significant inflexion point.