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Indian Economy – Defining turn for the next decade

Luke Barrs, Head of Fundamental Equity Client Portfolio Management EMEA at Goldman Sachs Asset Management, sharing his Indian economy outlook for 2021.

Indian economy is quickly recovering from the Covid impact. Though the number of Covid cases continues to rise, the recovery rate remains healthy – and fatality rate is pretty low vs. world average. The priorities are set: Economic revival continues to be the government’s top priority.

Key reforms for India’s competitiveness

The government, with an intent to use Covid as an opportunity, is starting four factor market reforms that would improve India’s structural competitiveness in years to come. Key initiatives include: Rationalization of labour codes, deregulation of agricultural commodity markets, attracting investments in manufacturing and unambiguous approach towards privatization.

  • 3 new labour-code bills — which replaced 24 central labour laws – would be a major step towards providing impetus to domestic manufacturing. The government sees these labour reforms as a major step towards moving India into the Top #10 countries for ‘ease of doing business’.
  • Legislations have also been passed for deregulating agricultural markets. The real issue with agriculture has been its low productivity, due to small farm size and lower investments in technology. Agriculture contributes about 14% of India’s GDP but supports almost 45% of the workforce. These set of reforms have significant potential to improve productivity and achieve higher realization of crops; thereby improving rural incomes.
  • Also announced were measures aimed at self-reliance including import disincentives, production-linked incentives e.g. for manufacturing mobile phones and other consumer electronic products, tax benefits and digitization in an attempt to increase the share of manufacturing in GDP from 17% currently to 25% over the next few years. While this is expected to create 100mn new jobs, knock-on impacts could also see India better develop its consumption potential and boost earnings for domestic companies.
  • In a fiscally constrained economy like India, resources blocked under the less productive SoEs — especially in businesses where private sector could do a much better job — should be utilized effectively. These savings can then be allocated for better healthcare, education and infrastructure for its citizens.

New economy is developing under the hood

Over the last few years, competitive intensity within the Indian telecom industry has resulted in the lowest internet tariffs globally. This along with the Covid impact has propelled the rise of consumption through the internet in India, creating a fertile ground for a lot of start-ups and online businesses.

Key sector themes that we believe are currently benefiting from internet expansion are: E-commerce (including grocery), Food delivery and ride-hailing and Fintechs. The pandemic has also accelerated adoption of mobile and internet payments, online education, tele-medicine, etc. thereby creating attractive investment opportunities.

Millennials as key economic driver

Almost a third of India’s population comprises of millennials — born between 1981 and 1996 – who are fuelling India’s consumption growth more than any previous generation. With a young population and entrepreneurial capital allocation, numerous businesses are cropping up to cater to their needs. The number of start-ups and unicorns — private companies with a valuation over $1 billion – has risen in India.  Following on the heels of Chinese Tech companies over the last decade, we believe India’s billion-strong consumer market holds a similar promise.

While Indian equity market indices have rebounded by over 60% from their lows this year, underperformance relative to the broader emerging and developed markets indices — by over 30% in the last five years – has resulted in sustained pessimism, despite strengthening underlying quality of the Indian economy: market-cap of a single company – Apple at $2.1 trillion – is equivalent to the capitalization of the entire Indian equity market – a country with 1.3 billion people and long term growth visibility.

Multi-year growth cycle allows investors to benefit widely

The Covid-19 pandemic has led to an economic contraction in the near term. Despite that, we believe, the Indian economy is bouncing back quickly and has already reached around 90% of the pre-Covid activity levels. s.

We maintain our positive view on the economic reforms announced. In totality, along with the past implementations such as the Goods and Services Tax and the Insolvency and Bankruptcy Code, these farm and labour market reforms, along with measures like the production linked incentive scheme and the last year’s corporate tax rate cut, could help create millions of higher productivity jobs in the coming years – especially within the manufacturing and services sector. This would likely solve India’s lingering wage problem or lower per-capita GDP. These reforms, along with India’s core long term growth drivers, such as demographic dividend and rapid adoption of technology in various facets of the economy, have the potential to pull the economy back on a high growth trajectory for the coming decade.

We believe, India is at the cusp of a multi-year growth cycle, which could also underpin a sustained double-digit corporate earnings growth. Muted returns of Indian equities, coupled with their underperformance to global equities over the past five years, have brought valuations at attractive levels. In our view, this provides investors a good entry point into once in a lifetime structural growth story.

 

Luke Barrs

Head of Fundamental Equity Client Portfolio Management EMEA
Goldman Sachs Asset Management (GSAM)

Luke Barrs is head of Fundamental Equity Client Portfolio Management in EMEA for GSAM. He coordinates the strategy, business expansion and client communication efforts for the Fundamental Equity business across the region. He joined Goldman Sachs as an analyst in 2009 and was named managing director in 2019.