India's Moment?

A happy convergence of circumstances is making this India's moment, but this depends on their electoral choice this summer. EPISODE #167

Dear Reader,

A very happy Monday to you.

Last week I was in Singapore to attend a conference hosted by an investment bank. It is the best dipstick for investor sentiment. I was simply blown away by the goodwill India was generating. It was like one investor put it: “India can do no wrong”.

As a regular reader of this newsletter you would be familiar with India’s impressive socio-economic makeover. But the global appreciation for it is something else altogether.

So, this week I will try and walk you through why so many around the world believe that this is ‘India’s Moment’.

To be sure the stars may be aligned, but there is one potential hiccup: It depends on how 900 million Indians vote this summer.

The cover picture is the breathtakingly beautiful heritage street in Singapore called Joo Chiat and taken by me. More of it later in a twitter/instagram thread.

Happy reading.

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Great Expectations

Ever since the turn of the Millennium I have been hearing foreign investors heap praise on India in the belief that it was poised to realise its potential—and for them to cash their investments. Yet, on all these occasions India only flattered to disappoint. As a result, when I heard the same rhetoric last week at the conference in Singapore, the first reaction was deja vu.

The questions flew in thick and fast. They ranged from key man risk around Prime Minister Narendra Modi (what if he was not at the helm), appetite for tough reforms, to possible social chaos.

These were not questions to suss out a potential investment opportunities. Instead the queries were more about seeking reassurance about their existing investments or those in the pipeline.

Nobody wants to be last through the door.

Voices

The meetings were in-camera so can’t share any details. But check out what Christopher Wood of Jeffries, the global investment bank had to say in a recent equity strategy report: India’s March onto the Global Stage.

“India now has a macro story as good as any.

During the two five-year terms of Prime Minister Narendra Modi’s NDA government, India has seen fundamental structural reform which has created the framework for the country to realise its full potential in terms of taking advantage of its intellectual and physical capital as well as its positive demographics.”

And then added:

“Just three out of many achievements will be cited here.

First, massive government funded investment in infrastructure which has been game changing in terms of improving the overall logistical efficiencies of the economy.

Second, the passage of the Insolvency and Bankruptcy Act of 2016 which means that Indian “promoters” now know they risk losing their assets if they default on loans.

Third, long overdue reform of the residential property market as a result of the Real Estate (Regulation and Development) Act of 2016 which means the property market, three years into an upturn after a seven-year downturn, is now delivering its full potential in terms of the resulting multiplier effects for the economy at large.”

Wood then goes on to argue that this augured well for a 7% growth trajectory. And we know from the latest numbers for Gross Domestic Product (GDP) that this fiscal year (2023-24) the country may well average a staggering growth of 8% .

And remember that four years ago the GDP had contracted by 23.9% in Q1 of 2020-21 in the aftermath of the covid-19 pandemic. The resilience of the Indian economy is very impressive.

Wood then goes on to highlight how domestic animal spirits are outrunning foreign investors.

“Meanwhile, the bottom-up story remains as dynamic as ever with a flourishing start up scene and a booming local asset management industry which has meant the stock market is now primarily driven by domestic flows not, as was the case 21 years ago, by foreign flows.

Indeed the remarkable point now is how little foreign investors are invested in Indian equities. This report details how dedicated global emerging market investors are only moderately overweight India despite all the current issues affecting China.

While global equity funds are barely invested in India at all despite the fact that it is now consensus, as highlighted by headlines coming out of the Davos gathering this year, that India is the world’s next big growth story.

This lack of exposure to India by global investors is, frankly, absurd.”

My feedback from Singapore is that foreign institutional investors are no longer hedging their bets on India. They are awaiting the electoral outcome before going all-in.

Private Capex Cycle

It is such an interesting coincidence: The government, Reserve Bank of India (RBI) analysts and investment banks believe that the private capex cycle has either begun or will kick-in.

Almost everyone has waited anxiously for this moment. That is ever since the 2008 global financial crisis—when the excesses of animal spirits in the first decade after the Millennium caught up with the financial and corporate sector. It plunged corporates into debt and scarred the balance sheets of banks—one could not borrow and the other could not lend.

Take for example the analyst report (check out the picture above) released last week by Crisil (Credit Rating Information Services of India Limited)—an Indian firm offering ratings, analysis, risk and policy advice and is a subsidiary of S&P Global, the US-based rating agency.

The report confirms that capex investment cycle is on. But, it will occur in new age industries.

“Emerging sectors such as electric vehicles (EVs), semiconductors and electronics will dominate investments, driven by market dynamics and global supply-chain diversification.

With an expected Rs 5-7 lakh crore capex, these sectors will likely contribute 20% to the overall industrial investment in the next four fiscals.”

The same report shares that private capex, after contracting from Rs 4.55 lakh crore in fiscal 2019 to Rs 3.72 lakh crore in fiscal 2021, has recovered to Rs 5.86 lakh crore last fiscal. The report argues that this trend has endured in the first six months of 2023-24. Fingers crossed.

Without private capex, the present growth trajectory will come under a cloud. The government cannot sustain its present level of capital expenditure without straining its own fisc. Besides, the proportion of government in total capex spending is a mere fraction—less than 5%.

Phygital Dividends

Significantly, the Crisil report also identifies the advantage India is realising with the convergence of physical and digital infrastructure—something that India has rolled out on a war footing in the last decade.

They cite the example of tolls and how it has saved on waiting time and fuel costs.

“As of October 2023, 98% of toll plazas nationwide could accept toll electronically. This has resulted in reduced waiting times — from 734 seconds in 2014 to 47 seconds in 2023 —and increased cost savings through lowered energy requirements.”

I would throw in the rollout of Goods and Services Tax (GST)—which for the first time economically unified the country, enabling seamless movement of goods through states. Together the impact on logistic costs is very impressive.

But, remember that India is still way below in global rankings on logistics efficiency—in short, it is still a work in progress.

I had written recently about the dividends India was harvesting thanks to this convergence. Sharing below in case you wish to re-read it.

It is clear then that a happy convergence of circumstances has created a once in a lifetime opportunity for India. To undo the lost decades since Independence.

Given that a general election is round the corner, it will depend on how 900 million Indians vote this summer.

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Recommended Viewing/Reading

Sharing the latest post of Capital Calculus on StratNews Global.

In his address to the concluding session of the 17th Lok Sabha last month Prime Minister Narendra Modi unabashedly embraced economic reforms: “Reform, Perform and Transform.”

Indeed, this is a first. Previously governments, fearful of the political backlash, would never have dare to openly support economic reforms.

Obvious question then: Has India normalised economic reforms? To answer this and more I spoke to the ever insightful Sanjeev Sanyal, economist, and member of the Prime Minister’s Economic Advisory Council (PMEAC).

Sharing the link below. Do watch and share your thoughts.

Till we meet again next week, stay safe.

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Thank You!

Finally, a big shoutout to Ranjini and Premasundaran for your informed responses, kind appreciation and amplification of last week’s column. And thank you Shalini for your pledge. Once again, grateful for the conversation initiated by all you readers. Gratitude also to all those who responded on Twitter and Linkedin. 

Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I would be grateful therefore if you could spread the word. Nothing to beat the word of mouth.

Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.