According to International Monetary Fund (IMF) forecasts, India will see the highest GDP growth rate among emerging markets over the next five years. Against the backdrop of muted growth in developed economies, India enjoys a unique combination of favorable demographic trends, steadily rising investments in infrastructure and broad-based economic reforms. Here’s why we think these three trends will set India apart as the next great emerging market.
- Rapid consumption growth driven by demographics, changing habits and technology
The demographic trends are unmistakable. India’s population is large (1.3 billion), young (median age of 27) and growing faster than any large economy—almost three times as fast as China. Additionally, as the working cohort expands, incomes should increase, with India’s share of global consumption projected to grow from 2.5 percent in 2015 to almost 3.5 percent by 2020.
Internet adoption in India has also accelerated over the last five years; now 18 percent of the population has Internet access, and this number is set to increase. In fact, the Boston Consulting Group expects “the number of Internet users to at least double, from 190 million in 2014 to 400 million in 2018,” according its 2015 report "The Changing Connected Consumer in India." As a result, revenue from online retail is projected to grow to $70 billion by 2020 from $6 billion in 2015, according to India Brand Equity Foundation's "Retail Industry in India" report. Additionally, the move from e-commerce to m-commerce is also accelerating, as more and more Indian consumers shop via apps on their mobile phones.
- Investment in infrastructure will address growing business needs
The IMF projects that India’s overall infrastructure investment will accelerate markedly from 5.4 percent of GDP in the 2011–12 fiscal year to over 8 percent during 2017–18 and beyond. The government is committed to increasing spending on total infrastructure investment in 2016–17 by 22.5 percent as outlined in the recent union budget.
Funding for infrastructure investments can be sourced from both the public and private sectors. The government would continue to be the lead investor on projects in electrification, railways, roads and bridges, whereas the private sector would drive investment in communications, ports and airports.
Critical to improving the productivity of the manufacturing sector, there is an urgency to raise the share of railways in total infrastructure investment from around 0.4 percent of GDP to 1 percent and above by 2017–2022. For example, it usually takes 13 or 14 days to transport goods made close to Delhi to the ports on India’s west coast. A railway from Delhi to Mumbai would reduce the travel time to just 16 hours! This is already part of the world’s largest infrastructure project—the Delhi to Mumbai industrial corridor—and the government has already passed legislation to increase Foreign Direct Investment (FDI) in railway infrastructure by 100 percent.
Besides plans to complete work on industrial corridors, there are ambitions to build 100 smart cities, link key cities with bullet trains, initiate the “Sagarmala project” to set up 10 coastal economic regions (CERs) and implement a “digital India project,” a project to improve online infrastructure by increasing Internet connectivity.
- India’s growth supported by government-led economic reforms
The Indian government, led by Prime Minister Narendra Modi, has already initiated a wave of reforms and will need to continue to tackle several obstacles to growth. Specifically, the government will need to continue to reduce the fiscal deficit, manage the current account deficit, revive the manufacturing sector, address infrastructure shortages (as discussed above), relax restrictive labor regulations and reform public sector banks.
Modi has already made great strides on the reform front. Recent legislation has narrowed the twin deficits (current account and fiscal account) and helped attract much needed FDI, particularly into the manufacturing sector, with FDI increasing over 25 percent during the fiscal 2015–16 year. Other reforms, such as the “Make in India” initiative (aimed at encouraging foreign companies to establish a manufacturing presence in India), have been enacted.
India’s equity market has taken note of these policies and outperformed the broader EM index since the Modi government was elected. But Modi’s work is far from complete and he needs to continue to implement policies aimed at minimizing inflationary shocks, breaking down fiscal barriers between states, allowing for faster unlocking of stressed corporate assets and privatizing many of India’s lumbering state-owned firms—to name a few of the key policy priorities.
Conclusion
India stands out among its peers due to a unique combination of demographic trends, investment and economic reform. With the fastest growth profile among EM countries and against a backdrop of low global growth, India is a unique opportunity for investors.
Edward Kerschner, CFA, is Vice Chairman and Chief Investment Strategist, Emerging Global Advisors.
