Is it time to look at India again?

Global challenges may just be a temporary setback for India, which is forging ahead with growth plans. Investors considering emerging markets for diversification are often attracted to the Asian region, due to the well documented growing middle-class and economic prospects that build a growth case for this region. While China has been a long-held investment darling, India’s star is on the rise and many nations, including Australia, are seeking to forge closer trade partnerships.

Recovering from the global pandemic

The COVID-19 pandemic has been significant globally, not just from a health perspective but also economically. India was initially hard-hit, implementing one of the harshest and most extensive lockdowns globally (1). Cases appear to have peaked in India in September and there are now signs of economic recovery as seen in indicators such as industrial output and energy consumption (2). The Indian government has returned its efforts to the future growth of the nation, with key emphasis on its existing plans for infrastructure.

Driving the Indian economy

A large and diverse nation, both in population and in the region, India’s future is dominated by three key growth drivers.

1. Infrastructure investment

For many emerging nations, infrastructure can be an important tool for economic growth as it offers short term benefits such as employment, and longer-term benefits in the form of useful infrastructure to improve access and lifestyle for a population, such as via roadways or electricity. It also builds out an appeal to international investors who see viable infrastructure to support production or trade activity. India is no exception to this path – in fact, China’s accelerated growth in the past has largely been attributed to its infrastructure focus and it has since needed to transition to a services-led economy.

Neelkanth Mishra, Managing Director, Indian strategist and Co-Head of Equity Strategy for Asia Pacific at Credit Suisse, says “the inclination of the government is to do investment spending. There is the national infrastructure pipeline, it's a set of projects. For example, a lot of projects in roads, quite a few projects in railways, power distribution, renewable energy generation, water and sanitation and gas pipelines. This will mean a remarkable increase in the number of households with piped gas connections. These are things that most countries have had for a long time, but in India, we didn't. It is still a cylinder-based distribution. These gas pipelines are growing. There's a large set of projects which can be accelerated.”

As part of this program, the Indian government has committed to US$1.4tr infrastructure investment by 2025 (3). There is also a strong focus on climate and renewables, with the Ministry of Petroleum & Natural Gas announcing in September 2020 that it aims to operate 50% of fuel stations using solar power within five years (4). India has also partnered with Japan via the India-Japan Coordination Forum for Development of Northeast for projects in India’s Northeast states (5).

A range of listed companies in India stands to benefit from the increased infrastructure investment. One example is Larsen & Toubro with services extending from engineering, construction and manufacturing to technology and financial services. It has been awarded a range of government infrastructure contracts, most recently for rail works between Delhi-Meerut and a surface-based water supply project to Patiala town (6).

In the wake of the COVID-19 pandemic, the Indian government has forged ahead with infrastructure projects to support the recovery of the country.

2. Reform and fiscal policies

India has historically been complicated for business operations, but government reforms have assisted in opening the country to internal and foreign business investment.

Some examples of these reforms include:

- The introduction of GST in 2017 which centralised 17 indirect taxes. This made the Indian goods market more competitive and reduced costs of doing business (7).

- Corporate reforms covering reduced registration fees, stricter requirements before commencement of business operations, improved insolvency processes, an integrated general incorporation form and enabling post-clearance audits and enhanced electronic trade submissions to enhance cross-border trade (8).

The Indian government has also recently passed updated labour codes to simplify laws and compliance processes as well as incorporating a social security fund for gig and platform workers (9). These reforms are anticipated to support continued ease of doing business in India.

Monetary policy in the form of interest rates set by the Reserve Bank of India (RBI) has further supported business investment. The RBI lowered interest rates during the COVID-19 pandemic to support business lending activity. This is likely to remain accommodative for some period to support ongoing recovery (10).

The Indian government has also been active in fiscal spending to support the ongoing growth of the country by reducing poverty. While many programs have existed for some time, the continuation has also been a vital part of recovery from the COVID-19 pandemic.

Some examples include:

- The Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) which guarantees 100 days of unskilled manual labour per year on public works projects at approximately 200 rupees a day (11).

- Pradhan Mantri Jan Dhan Yojana (Prime Minister’s People’s Wealth Scheme) which aims to offer affordable access to financial services such as basic savings and deposit accounts or insurance (12).

While foreign companies stand to benefit from moving into the Indian market as business conditions ease, local companies are also capitalising on greater cross-border activity. One example is Infosys, India’s second-largest provider of consulting and IT services across the globe with a staff headcount of more than 240,000 in nearly 50 countries (13). Infosys’ proprietary software Finacle is considered an industry-leading program and used globally (14).

3. Consumption

India is expected to benefit from a growing middle-class across Asia and the accompanying economic rise in consumption. It is expected to see the percentage of households in poverty drop from 15% to 5% by 2030 (15).

The movement of people to higher financial status represents a huge opportunity. It is an audience with the ability to afford more than just the basics and demand better quality goods and services. At a base level, manufacturers of higher quality consumer staples can benefit from this demand. For example, a middle-class audience is more likely to purchase well-known brands or consider organic foods over mass-grown options.

The opportunity extends across industries. A middle-class audience has excess cash to consider travel, education, healthcare, medical needs, luxury goods and technology. Universities and schools worldwide are recognising the current interest in accessing their campuses, with international education worth $38 billion to the Australian economy (16). Luxury consumer discretionary brands from houses like LVMH are already reaping the benefits (17), while healthcare and vitamin companies like Blackmores are discovering consumers who are focused on their health needs and have the finances to pay for it (18).

While foreign companies have an opportunity to access this trend, domestic-based companies have cultural and physical base advantages in reaching this audience. Hindustan Unilever is one such example. The largest consumer staples company in India, it has direct coverage of 3.5 million outlets and around 88 million consumers within India (19).

Another example is India’s largest listed company by market capitalisation, Reliance Industries. Reliance Industries spans three segments: oil and gas, telecommunications and retail (consumer electrics, fashion and groceries). It has been working aggressively to expand its consumer activity. 

On the telecommunications side, it offered users free internet calling for one year and invested heavily in data services and capacity which has driven it to more than 30% market share in the mobile space (20). On the retail side, it has recently purchased Future Group (21) – the first to launch hyper stores in India – and its Whatsapp grocery order system called JioMart increased in popularity during the lockdown (22).

On the more discretionary end, the market for personal vehicles in India is also on the rise. Maruti Suzuki is the largest passenger car company in India and has a 50% domestic market share (23). The COVID-19 pandemic has supported increased interest in personal vehicle ownership, with 57% of Indian consumers considering purchasing a car in 2020 compared to the global average of 35% (24).

Using an investment in India in a portfolio

Investors can consider investing in India from a few perspectives.

1. Regional diversification

Diversification is used by many investors to manage risks specific to countries and regions. Spreading investments across a range of regions, such as India, can assist with this as well as offering exposure to different economic drivers compared to Australia or the US. From this perspective, it could be considered part of the core investments within a portfolio.

2. A thematic investment

Investors may consider an investment in India as a form of exposure to the broader trend for the growth of the middle-class across Asia. This may see the investment form part of the satellite portion of a portfolio to tilt towards thematic investments.

3. Growth opportunity

Investors looking for long-term growth opportunities could consider India within growth allocations in either the core or satellite of a portfolio given its prospects and activity.

How to invest in India

It can be difficult for investors to directly access the Indian market for listed shares. From this perspective, investors could consider other options such as:

• Direct investment in companies with business operations in India listed in Australia or internationally.
• Actively or passively managed funds which focus on Asia themes relevant to Asia or India or specifically focus on India.

ETFS Reliance India Nifty 50 ETF (ASX code: NDIA) is the only fund in Australia that offers exposure to the Indian economy via its benchmark index, the NSE Nifty50 Index. NDIA includes exposure to the 50 largest and most liquid companies listed on the National Stock Exchange of India (NSE) and represents more than 60% of the market capitalisation of India. 

For more information on investing in India or ETFS Reliance India Nifty 50 ETF (ASX code: NDIA), click the 'CONTACT' button below.

Footnotes

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3. Source: India 2030: exploring the Future; National Infrastructure Pipeline  
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10. https://www.businesstoday.in/current/economy-politics/rbi-rate-cut-economic-recovery-covid-lockdown-crisis/story/422035.html 
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19. https://www.hul.co.in/investor-relations/ 
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24. https://auto.economictimes.indiatimes.com/news/passenger-vehicle/cars/almost-57-indian-consumers-willing-to-purchase-cars-in-2020-survey/75672140