The investors and other market participants in their 50s and 60s would recall that there have been at least three occasions in the past three decades when India was considered the next best thing after sliced bread.
Starting with the opening up of the economy in early 1990s, the narrative acquired a much louder echo after Roopa Purushothaman, a non-descript research analyst coined the term BRICS for a report to be published in the name of legendary Jim O’Neill (Chairman Goldman Sachs AMC) in 2001. During the global financial crisis (2008-2010) that weakened many developed economies, India and China emerged as two strongest pillars of support for the global economy, growing in high single digits despite the global crisis. Post Covid, since India has again emerged as one of the fastest growing economies, leaving even China behind, the narrative is again in vogue.
There is absolutely no doubt that the Indian economy has never been intrinsically so strong in the past four decades. The growth is not high but looks sustainable for many years. The efforts to fill infrastructure gaps that started 25yrs ago have begun to show tangible results. In the next five years, India shall have decent physical infrastructure to attract the best of the global manufacturers to produce in India.
However, in my view, the investment theses that rely on this need to be realistic and moderate. Extrapolating the Chinese experience of the 1990s and American experience post WWII, to Indian conditions may lead to disappointment.
For example, the businessmen who travelled to China in early 1990s would recall seeing industrial estates in Zhuhai, China running several kilometers in length; high speed rails etc. We are still far away from that status. Today, China has about 45,000 km of high-speed rail running at a speed of 280-310 km/hour; where we are expecting the first 200km of such trains not before 2026.
There could be little argument over the fact that India has poor productivity in terms of investment/GDP ratio. Every incremental investment of INR yields much lower GDP growth. The largest sector in terms of employment, viz., agriculture is saddled with extremely low productivity.
India’s present market cap is already above its FY23 nominal GDP. To make Indian markets an attractive investment destination on this parameter, GDP needs to grow much faster than the stock market. Assuming a 90% Market cap to GDP is attractive, a US$5trn economy by 2027 (present US$3.5trn) could result in a US$4.5trn market cap in 3yrs. This is 14% CAGR for the next 3yrs with plenty of “ifs” and “buts” thrown in between.
Some market participants love to talk about INR emerging as one of the key currencies in global trade. Given that India’s share in the merchandise global trade is less than 2% and global services it is less than 5%, this proposition does not merit any comment, not even ridicule, at this point in time. I would just like to remind these enthusiastic market participants that we are struggling to get Indian bonds included in global indices for over two decades and there is no visibility of that happening anytime soon.
It certainly feels good when the global CEOs visit India and speak highly about the potential of the Indian economy and people. However, I would not take these comments at their par value in my investment decision making. Many of these comments are made in zest or to promote vested interests, e.g., to get government subsidies under the PLI scheme etc. For example, I feel that Apple is manufacturing locally to save on hefty duties on imports of SKD and fully assembled phones, which makes Apple phones uncompetitive to those who manufacture or fully assemble in India. Both Apple and Samsung do only the assembly work in India, without adding much to the local skill set or technology. The value addition in India is less than 10% in case of iPhones. So, when we read the staggering amount of iPhone exports from India, we need to adjust it for the 90% import content and low revenue to employment ratio of factories assembling iphones.
As I said, I am extremely positive on "India story" for the next decade. In fact, I have never been so positive about the "India story" in my life. But I am not running my excel sheets wild by extrapolating the current numbers by Chinese and American experience in their high growth years. I shall be extremely delighted to get a small premium on the nominal GDP growth over the next decade or so.
No comments:
Post a Comment