Opinion | Markets’ tryst with destiny in New India
5 min read . Updated: 15 Aug 2020, 11:26 AM IST- We must look beyond the gloom and doom – India is like a spring that is ready to be freed
While India is an ancient civilisation, it is a young nation and on a per capita basis still largely poor. But in constant 2010 US dollars terms, India’s per capita GDP did increase from $330 in 1960 to $581 in 1990 to $2169 in 2019. Assuming $2000 for 2020, it has gone up six times in 60 years with most of the increase in recent decades. Yet this is only the beginning.
Ignore the gloom and doom about India that you have no doubt been hearing, which has been further exacerbated because of the pandemic. Long term factors such as demographics and technological innovation, mid-term factors such as improvements in governance, and relatively short term factors such as a weaker dollar are going to be massive tailwinds for the India story.
India is likely to have the largest group of people aged between 25 and 65 years around 2030. In that group, India has around 670 million compared to China at 820mn. Over the next 25 years, India’s working age population is likely to increase to around 920mn and China’s will decrease to 720mn. That is a relative shift of a third of a billion people!
The age group of 0-24 years is 45% of our total population and the dependency ratio (the young and the old divided by the working age population) would improve from around 100%to 85% by 2040 for India while China’s dependency ratio could worsen from 70% to 95%during the same period.
It is not just quantity, but also quality. The literacy rate for women over the age of 25 is 58%, while the literacy rates of females in the age group of 15-24 years is 90%. This is close to the 93% literacy rate among males of the same age group. A correlation is seen between the working age population ratio and gross domestic savings as a fraction of GDP. In the last few years this has not happened because of a general slowdown. But with a revival, savings are likely to rise and so will female labour force participation which seems to have bottomed out.
India will also benefit from technological innovation happening domestically and globally. Renewable energy is getting cheaper and so is storing it - the average cost of battery has declined from $1160 in 2010 to $156 as of 2019. Combine that with a rise in electric/hybrid vehicles, public transportation post-pandemic, and a double digit dollar cap on crude prices thanks to American shale – and India’s current account position which has already been improving could improve further.
Mass availability of 4G and then 5G, combined with augmented reality as well as the now demonstrated utility of collaborative working across long distanceswill further accelerate services outsourcing to India, and boost the domestic start-up ecosystem. From 2015 to 2019, largely thanks to Jio, the average wireless data consumption has jumped ~24x from 5GB a year per user to 119GB a year per user.
Finally, the incumbent government has taken various initiatives that would aid economic growth, such as massive infrastructure investments (and ways to monetise it such as INVITs) along with various structural reforms such as IBC, GST, RERA and (barring from China etc.) a much more liberal FDI policy across sectors. Limited import substitution along with domestically liberal markets is also likely to help growth going by economic history.
Relatively speaking, the government has shown fiscal prudence and implemented a strict inflation targeting regime with all its drawbacks. Improvements in digital state capacitysuch as the JAM trinity (Jan Dhan Yojana, Aadhar, and Mobile) are already enabling efficient administration with the ability to transfer subsidies directly, and much more.
But since these are more long term or medium term trends, it is fair to ask: why now? Even if India does well over the next decade what about the next 1-2 years? I think it is here that the US dollar peaking a few months ago and likely beginning its cyclical weak phase for the next 5-7 years matters. History does not repeat, but it does rhyme and 2020-21 is looking a lot like 2002-03.
Non-US developed markets and emerging markets such as India are definitely not expensive on their currency or equity metrics (EMs are also relatively cheap on their debt). For example, while the rupee is around 75 per dollar, in cost of living or PPP terms it is close to 20. As India bounces back, secular productivity growth along with cyclical depreciation in the dollar in general is likely to see the rupee remain, in nominal terms, stable or even see appreciation.
India’s total market cap at around $2T for a GDP of say $2.7T yields a 75% ratio, near historical averages, but that hides a lot of dispersion between a few blue chips and other companies. With easing monetary conditions, fiscal as well as financial stress is likely to reduce as inflation falls in the second half of the current fiscal year. The government has enough dry powder for additional stimulus once the lockdowns are behind us.
If we look at listed company earnings as a percentage of our GDP, they are at their lowest in the last 15 years. In FY06 listed companies’ profits were 5.4% of India’s GDP. The trend has been on a decline and was at 3.2% as of FY19, and is probably even lower right now. Compare this to the US, where the reverse can be seen.But Indian listed players are likely to benefit as the unorganised sector remains under pressure due to formalisation.
So where could the markets be on 15 Aug 2022 in “new India" as we complete 75 years of independence? Assume FY20 and FY21 nominal GDP to be approximately 200 lakh crores each. FY22 could see low double digit real growth (say, 14% nominal) due to base effects and FY23 could also see strong growth but less so (say 10% nominal growth). That gives us 250 lakh crore GDP in FY23.
With a conservative 80% MCap-GDP ratio, total MCap will increase by a third in two years, from roughly 150 lakh crore now. You can add dividends, and even faster growth for midcaps as well as select sectors/cyclicals. Ignore short term volatility: this could be a historic opportunity to go long India!
(Harsh Gupta and Chirag Jain are chief investment officer and chief executive officer of Ashika India Alpha fund respectively. The views expressed in this column are their own and do not reflect Mint's.)
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