India infrastructure logistics: The rise, the investment opportunity

Finance has come a long way from the time cocoa beans were traded as money by the Aztecs, an ancient tribe in Mexico. However, what remains unchanged is the drive to achieve healthy financial returns. Similarly, some of the current issues plaguing global finance now – inflation, growth moderation among others – are not new concepts either, having seen their way through in multiple cycles across time immemorial. So, the real question is – how do Investors navigate the current cycle of interest rates, growth moderations to earn superior risk-adjusted returns? Or simply put, where are astute Investors seeing opportunity in the current world?

India a global investment bright spot – Numbers speak To answer that, let us consider the following numbers first-

• International Monetary Fund (IMF) in its World Economic Outlook report, January 2023 projects World GDP growth for 2023 at 2.9 % and Advanced Economies GDP growth for 2023 at 1.2% – the same report projects India GDP growth for 2023 at 6.1%.
• US inflation in 2022 peaked to a 40-year high of 9.1%, Euro Area inflation in 2022 peaked to a 20-year high of 10.6% – India recorded its peak inflation in 2022 at 7.79%.
• From being the 10th largest economy in 2014, India has grown stupendously to become the 5th largest economy in the world in 2022 – in spite of headwinds like COVID-19, geo-political dynamics etc. IMF projects India to be the 3rd largest world economy by 2027.
• Aside from being one of the oldest civilizations of the world, India today has one of the youngest populations with 50%+ of its population under the age of 30, while simultaneously having one of the highest populations of the world in size – this demographic dividend is unleashing the massive consumption demand and resulting economic growth for years to come.

Evidently, it is no wonder that India today is at the centre-stage of global investment flows. A key reflector of this trend, is the Foreign Direct Investments (FDI) inflow data, an useful gauge for long term capital – as per Invest India, national investment promotion and facilitation agency, total FDI in the 22 years between April 2000 until March 2022 has been USD 847 bn while the total FDI in the 8 years between April 2014 until March 2022 has been a staggering USD 523 bn – around 40% of total FDI flows in the above 22 years, achieved just in 8 years. Infact, inspite of global headwinds, India received its highest ever FDI in Financial Year 2022 at USD 84.8 bn – resplendent of the fact that India is truly a global investment destination.

Infrastructure logistics, a catalyst for economic growth – Factors making it happen

Therefore, to ponder on the question of opportunities, it’s imperative to understand ‘what does India need to grow?’ Because reaping financial rewards has a lot to do with identifying areas of growth, and thereby aligning with those areas that has fundamental tailwinds. One such area is infrastructure logistics, more specifically modern warehouses.

For a nation growing at one of the fastest pace in the world, and simultaneously transitioning from a large USD 3 tn to an even larger USD 5 tn economy, while also becoming one of the top 3 economies in the world – the need for infrastructure logistics is critical to drive this kind of growth, and therefore is a no brainer. Add to that, several macro factors are combining as solid catalyst to fuel the expansion of this sector – Policy initiatives like National Logistics Policy, PM Gati Shakti, focus on manufacturing through Make in India and Production Linked Incentive (PLI) Scheme, re-adjustment of global manufacturing into India, a colossal population driving consumption demand therefore creating a humungous market size, technological advancements in robotics and automation accelerating productivity are some of the main factors.

Superior investment performance is about aligning with areas of high growth

So what’s driving the demand for these modern warehouse assets on the ground? As discussed previously, superior investing is about identifying and aligning with areas that have fundamental tailwinds – modern warehouse assets have multiple factors driving their demand. Growth of online retail and omni-channel retailers, wider consumer demand from Tier 2 and Tier 3 cities, gentrification of Tier 1 cities, re-alignment of supply chains closer to population centres, third- party logistic (3PL) providers optimizing efficiency from packaging to fulfillment for varied sized and nature of corporate clients like Direct to Customer (D2C) companies are some of the key drivers of demand. As a result, the underlying leasing demand for India modern warehouse segment has already surpassed pre-pandemic levels.

For investors, the asset class provides stable cashflows – highly critical at a time of global uncertainties and volatility – as well as provides potential for capital growth. It is therefore small wonder, that this segment has stood resilient amidst global uncertainties and has attracted capital flows of over USD 7 bn in the last decade. What’s even more interesting, is that this capital has not just been domestic but foreign investment flows too, from countries like US, Singapore, Germany, UAE, Canada among others – further underscoring this segment as a harbor for global investment. And yet, Indian infrastructure logistic segment remains one of the under-penetrated markets relative to its population size and GDP, when compared with other key markets like US, China (with similar population) and UK (with similar GDP) – making a compelling case for India modern warehouse segment, the best is yet to come.