Is the India story intact?

Earlier this month, I was rattled by this question in Singapore and Malaysia! The economic cycle is constantly changing making reliable forecasting difficult and thus an agreement on recurrence- bulls and bears, greed and fear akin to night and day. India clocked a real GDP growth rate of 8.2% in FY 23-24. The growth has been attributed to the manufacturing sector which grew at 9.9%. The Purchasing Manufacturing Index (PMI) for March ’24 reached a 16-year high of 59.1, the Combined Index of Eight core industries increased to 6.2% YoY and at the aggregate level, the capacity utilisation (CU) in the manufacturing sector increased to 74.7% in Q3:2023-24. China’s PMI in May’24 fell back into contraction (below 50) amid weak orders and slowing production.

Reforms of the past decade

Notably, after a prolonged lull, activity is now driven by the private sector capex cycle unfolding in India (just like in 2002-03) with the gross debt-to-equity ratio of corporates hovering around 0.6. Ending March 2024, the ratio has again touched 0.5, possibly signalling the return of the country's overall feeling of economic optimism. New project announcements in manufacturing, especially in sectors like automobile, steel, consumer goods, renewables, textiles and electronics are indicative of a revival of animal spirits. This resurgence is further supported by private equity investors who have contributed ~70% of equity inflows in India in the past 5 years. Several forces catalysed this trust of foreign capital for investments in India including the massive investment in infrastructure, implementation of the Goods and Services Tax (GST) regime, scale adoption of digital rails (UPI), inflation targeting and invoking the Insolvency & Bankruptcy Code (IBC) that led to a colossal cleaning up of corporate and banking sector balance sheets. As India is marching to achieve a $5 Tn economy, its economic landscape encompasses not only investment opportunities but also strategic exits (highest in 2023 at $29 Bn) offering diverse avenues for portfolio optimization.

Emerging new themes

An analysis of the market breadth indicator (A/D line ratio) for 2023 shows an average value of 0.99, indicating that Indian markets are approaching a balanced condition typically reflected by a ratio close to 1. In 2021, consumer tech, IT/ITES and SaaS sectors witnessed 100%+ growth in private deal activity. This digitization push was followed by a surge in metals, driven by a narrative of capex revival and then the "China+1" theme emerged in chemicals and manufacturing. It was a boom time for chemicals, machinery, and automobiles, which surged from 12% of India's exports in FY10 to 28% in FY22. The financial sector experienced a strong phase due to rising interest rates and the Real Estate (Regulation and Development) Act, resulting in unsold real estate inventory hitting a 12-year low. Additionally, Indian banks, with a new decadal low gross NPA of 3.2%, catalyzed the consolidation of macroeconomic conditions. The intent for nearshoring, which has been accelerating post-2020, will remain strong for India as corporates seek enhanced visibility, agility, and better control over supply chains. Meanwhile, leading sovereign wealth and pension funds like AustralianSuper, CPP, CDPQ, PIF, Mubadala, and Temasek have pledged to achieve net-zero emissions by 2050. Supportive policies are likely to attract risk capital to early-stage climate tech startups in India.

The case for high growth

The case for the high valuations of Indian equities is not new however nominal growth in GDP is driving corporate growth which in turn is driving market returns. Global investors have been steadily increasing their exposure to India which has in turn benefited the Indian ecosystem in four unique ways: infusion of risk capital, recalibration of valuations, better management practices and in financing large-scale infrastructure projects. New project announcements in the Manufacturing sector are at record levels; FY22-23 combined matches the total announcements of the previous five years (FY16-21). Industrialization generates employment, giving rise to a new middle class. Furthermore, in the past two years, domestic investors have increasingly influenced the direction of India's equity market, with the monthly mutual funds (SIP) contributions hitting an all-time high in May’24 at USD 2.5 Bn. This abundant domestic liquidity is driving up valuations, eventually attracting foreign investors out of fear of missing out. This will enable more corporates to raise capital from the market in the coming months making way for FIIs to inject in fresh capital. India’s growth trajectory remains strong driven by consumption, demographics, and premiumisation. Domestic investment is reshaping the market, and it holds promising opportunities for both local and foreign investors.

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