Multibagger opportunities exist as India moves from $2 trn to $10 trn economy by 2030

By Dr. VK Vijayakumar

When we look back at the journey of the Indian economy during the last 70 years since independence, there is a lot we can be justifiably proud of even while recognizing the many failures and deficiencies.

The lost decades

The idealistic Nehruvian socialism of the initial years following independence was a product of the post-colonial era, in which the Soviet Union influenced the economic policy of many countries of the Third World.

Leaders of the Third World like Jawaharlal Nehru, Abdul Nasser of Egypt and Marshall Tito of Yugoslavia – the founding fathers of the Non-aligned Movement – were highly impressed and influenced by the egalitarian and the social justice element inherent in the socialist model.

Therefore, the economic model that independent India adopted after independence was based on economic planning, the dominance of the public sector, import-substitution and leadership role for the government.

Private enterprise and markets were looked at with suspicion. After Nehru, Indira Gandhi took India’s economic policy too far to the left with an all-pervasive government calling all shots.

Populism replaced economic pragmatism and politics trumped economics. By 1973 we had usurious rates of taxation: the peak rate of income tax touched 97.75 percent and wealth tax touched 3.75 percent forcing even the honest to evade tax.

By late 70s, the government-owned 98 percent of all coal produced in the country, 85 percent of banking, 100 percent of insurance, 100 percent of telecom and even 65 percent of the bread produced in the country.

Policies like the MRTP Act, FERA and industrial licensing created the “license-permit-quota raj”, which, apart from stifling private initiative and enterprise, also gave rise to the corrupt “politician-bureaucrat- businessman nexus”.

This inward-looking economic policy succeeded in generating a GDP growth rate of only 3.5 percent annually, during the three decades spanning 1950 to 1980.

This “Hindu growth rate” paled in comparison to the high growth rate of the Asian Tigers like Singapore, Taiwan, South Korea and Hong Kong who followed an export-oriented market economy model.

Liberalization

The Rajiv era (1984-89) saw a slight change of course for the Indian economy. Reduction of tariffs and taxes, allowing FDI in many sectors and amendments to restrictive legislation like the MRTP Act, propelled the economy to a higher growth rate of 5.6 percent during the 1980s.

However, this high growth rate could not be sustained due to the rising foreign debt, which culminated in the Balance of Payments crisis of 1991. This crisis led to a paradigm shift in India’s economic policy.

Under the leadership of the then Prime Minister Narasimha Rao and Finance Minister Manmohan Singh India embraced sweeping economic reforms. Liberalization, privatization, and globalization heralded a new economy.

Twenty-five years of reforms transformed the Indian economy. During the 25-year period 1991 to 2016, India became the second fastest growing large economy in the world with a GDP growth rate of 6.5 percent.

‘Sellers markets’ with poor quality products and perennial shortages for commodities like cars, scooters, and telephones were replaced with competitive ‘buyers market’ with superior quality products and services.

Reduction in import tariffs and promotion of foreign investment integrated the semi-closed Indian economy to the global economy. The sustained high growth in GDP during the 25 years following the liberalization of 1991 also led to an impressive growth of the Indian corporate sector.

Corporate profitability increased many folds. The net profit of the corporate sector rose from Rs 6400 crores in 1991 to above Rs 4 lakh crores by 2017.

The stock market indices reflected this profitability gains: the Sensex moved up from around 1000 in 1991 to around 32000 presently. Since the initiation of liberalization, India’s GDP multiplied 10 times in real terms and the stock market multiplied 32 times.

Capital market undergoes revolutionary changes:

The capital market has been transformed substantially by the sweeping reforms initiated since 1991.

The abolition of the controller of capital issues, free pricing of IPOs, establishment and empowerment of SEBI, emergence of NSE as India’s premium stock exchange, opening of mutual funds to the private sector, allowing foreign portfolio investment, introduction of online trading and dematerialization of securities led to the growth and emergence of a vibrant capital market.

As already mentioned, Sensex exploded from around 1,000 in 1991 to around 32,000 currently, thereby creating phenomenal wealth for investors.

India’s top companies (excluding banks) by sales turnover and market cap underwent significant churn since 1991.

See the following tables:

The churn in top companies is self-explanatory. The dominance of public sector companies in top 15 in turnover has become history. Now, private sector companies, some of them of relatively recent origin, increasingly dominate the list.

This trend is likely to gather momentum, going forward. The churn has been much more in the ranking based on market cap, with 3 new entrants from services sector in the top 5.

Resets in the economy

Currently, the Indian economy is undergoing some major resets.  The economy is on a transformative path propelled by a leadership, which has an over-arching new vision for India.

Initiatives like GST, RERA, the bankruptcy code, a crackdown on black money, effective use of Aadhaar and digitalization are transformative reforms that have the potential to shift the paradigm, not only of the economy but the nation at large.

These resets, aided by India’s demographic advantage and political stability, can turn out to be truly transformative.  India is right now one of the fastest growing large economies in the world.

With the right kind of reforms, India’s growth rate can move up to 8 percent and eventually, in a favorable global setting, to 9 or even 10 percent. India’s USD 2.2 lakh crore economy is likely to grow to a USD 10 lakh crore economy by 2030.

This growth, that will create unprecedented wealth through the stock market, is a historical opportunity for investors.  Systematic investment is the simple strategy to benefit from this coming wealth creation.