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India - The greatest investment idea of the coming decade
Understanding the mega trends that enables India to become the most lucrative investment destination of the coming decade
Disclaimer: No part of this article should be construed as investment advice, this post is meant for educational purposes only. Please consult a financial advisor before making any investments.
Over the past 3 decades, India has gone through 3 huge wealth creation opportunities each with a significance of its own. It all started in the early 90's when the country started opening up its economy to the world. India's economic liberalization and abolishment of 'license raj' acted as a foundation for country's economy to grow.
Since 1991 when India first opened its economy, its GDP has grown from then 330 Billion USD to the current 3.26 Trillion USD.
This growth in the last 30 years has minted many billionaires and even more millionaires. It led to companies like Reliance and Tata growing even bigger, birthed new ones like Infosys, Wipro and TCS and even more recently multi billion dollar start ups like PayTM, Zomato, Postman, RazorPay, Byjus, Unacademy.
The last three decades provided an economic foundation for India to stand on and dream of even bigger laurels.
Here is how I view the past three decades.
1991 to 2000: This was the period of economic liberalization, international companies wanted to establish their presence in India and for the first time in India's independent history, foreign capital inflows along with privatization created a rising middle class in an otherwise clearly segregated society of 'haves' and 'have-nots'.
2000 to 2010: This decade in my view was India's moment to earn its credibility in the world. Until the 2000s we were mostly a poor nation and majorly discounted by rest of the world as an under developed to a slowly developing economy. The onset of the great millennium and the Y2K phenomenon led to the birth of India's IT services industry and gave the country a chance earn its credibility among the leaders of the world. (If you want to learn more about Y2K bug and how it helped Indian IT service industry, you can read about it here.)
2010 to 2020: The end of the previous decade was marked by The Great Financial Crisis of '08 and even though the crisis was global in nature, India managed to escape largely unscathed. Foreign multinational companies had set up shops and outsourcing units in India and were creating even more jobs than the previous decade as a result of competitive 'cheap and skilled labour'. The rising middle class of the 90s had ballooned to the biggest share of the population. The country transitioned from an agriculture based economy to a largely service and manufacturing one and in the process lifted hundreds of millions out of poverty. Home grown start ups like Ola, Swiggy, PayTm were competing head on with multinational firms like Uber and in many cases beating them.
Not bad for a country that was mostly written off by the world as a 'land of snake charmers' until a few decades back.
The end of this decade, the year 2020, brought another challenge and with it another chance for India to rise. The pandemic halted economies and killed millions, it also exposed faults in the global supply chains. For majority of the last two decades, China's ambitions to become the 'factory of the world' and unchecked globalization meant that every country, if not directly was at least indirectly dependent on China for either finished goods, intermediaries or basic raw materials. The capitalist hunger to grow profits and decrease costs meant that companies never paid much attention to where they were sourcing from as long as it was the cheapest available.
In March of 2020 as countries around the world started to close their borders and the world came to a halt, the global supply chains had by then already started to break under pressure. China with a pandemic to handle, imposed restrictions and lockdowns in several of its industrial towns. Demand for goods all over the world dropped, stock markets around the world were in a freefall and the symphony of capitalism, unchecked consumerism and globalization suddenly stopped.
It is at this moment in March of 2020 that our story starts.
India and the decade ahead
Just a few weeks before the onset of pandemic, India's finance minister unveiled the nation's budget. In it were several policies and targets for India to achieve in the next few years, which ultimately would all combine and help the country become a USD 5 Trillion economy by 2024. One of the policies that stuck with me was the use of PLI or Production Linked Incentive Schemes to help certain industries develop and become self-reliant. This was unique as even though India has experimented with such schemes in the past, it wasn't always a key tool in Government's arsenal. India until now had mostly relied on providing subsidies and levying duties.
While this worked in the past (huge duties on import of cars and two wheelers insulated the domestic auto industry and allowed it to claim a 7.1% share in India's GDP), such tactics are hard to justify in an open globalized economy. Further PLI schemes are an tool of a cash rich government. The implementation of GST and several other major reforms meant that the government was finally generating stable cash for itself which it can then use to fund such incentives.
These incentives and disruptions in global supply chains mean that there are several tailwinds (finance jargon for a good trend and conditions) for a selective few Industries in India.
Let's explore a few of these trends in detail.
Long term mega trends that are favorable for India
Trend #1: Anti China Sentiment and China plus one strategy for supply chains
Covid 19 pandemic highlighted the various issues with current global supply chain and the heavy reliance on China for majority of the world's goods. Increasing trade tensions between US and China along with China's military skirmishes in the South China Sea, recent border dispute with India and the rising cost of manufacturing in China, all have led to companies diversifying their existing supply chains out of China to countries like Vietnam, India, Indonesia, Thailand and Bangladesh.
India and Vietnam are bound to benefit disproportionately from this effect. Vietnam already has good industrial infrastructure and was already competing with China for business before the pandemic. India has the largest and youngest workforce in the world and can quote rates cheaper and more competitive than many other manufacturing economies.
In the short term, we are likely to see small supply concentrations being diversified by investments in India and Vietnam. (This is already playing out in India, two of the biggest suppliers to Apple have set up shops in India to produce electronic goods). India also aims to become the largest mobile manufacturer in the world and government has already announced production linked incentive schemes to help develop this industry. Massive firms like Samsung have set up factories in India with production capacities larger than anywhere else in the world.
In the long term (10 years), India will most likely come out on top and take significant market share of the new supply chains provided it keeps making investments in its own infrastructure.
Opportunity: Electronic manufacturing, infrastructure, industries like pharma and specialty chemicals
All the above industries will likely benefit from this trend and some of them like pharma are well on their way to dominate the global supply chain already.
India is one of the leading suppliers of active pharmaceutical ingredients to the world.
I will do a write up about these specific industries and key investment opportunities within them in a subsequent post.
Trend #2: India will become a leader in global renewable energy sector
India has lofty goals when it comes to renewable energy. Not only the country wants to build a working energy grid of 175GW by 2022 but it wants to almost 2.5x that target by 2030 to 450GW.
To achieve this ambitious goal, India has already announced several large scale projects including the largest solar park in the world to be located in Kutch desert. The size of the park is bigger than the whole land mass of Singapore.
Even though the scale of the project is massive, its not something new to India. The country has already built the current largest solar park in the world located in Tamil Nadu along with the only airport in the world to be powered entirely by solar energy in Cochin.
Renewable energy as a sector is getting attention directly from the Prime Minister's Office and there is good reason for that. For most of its development and energy needs India is heavily dependent on import of crude oil and burning of cheap coal.
Crude oil imports are the biggest line item every year in India's import bill and often leads to substantial outflow of currency.
If India can find a way to self fund its energy needs and reduce this dependence on crude oil, it can save a lot of money that can be used for better things like investing in its own country.
I think our Prime Minister realizes this and is the reason why he has made getting rid of oil imports via development of renewable sector as one of the key agendas for his government.
There is just a small problem with this plan.
China also went through something similar, it was dependent on importing too much oil and started on renewable journey well before everyone else in the world. As a result, the renewable energy industry is dominated by Chinese firms.
Almost all of the public transport in China is now electric and runs on renewable energy. China is also the largest market for electric vehicles in the world with more EVs on its roads than any other country.
Most of India's initial renewable energy projects were made by importing solar modules and components from China, which were then assembled in India. If India has to achieve its ambitious goals, it has to create, establish and thrive the renewable energy industry within the country and the Government just aims to do that.
Indian government has already announced several PLI schemes to help establish the industry, it is also going all out and imposing tariffs and duties of upto 40% on any of the solar module imports. This is the same playbook India used to establish its auto industry. The only difference this time is the new strategy is even more aggressive. The government has also started to give out domestically sourced only tenders for the massive solar projects its undertaking.
All of this has already started to bring some effect with more private players entering the market and the groundwork for the industry being laid. There are very few publicly listed players in the renewables space but I expect more companies to go public via IPO route in the next 2 to 3 years.
There is a lot more happening in this space, I will cover it in detail later in a dedicated post.
Opportunity: Renewable energy companies that will build India's renewable infrastructure
Trend #3: Foreign capital is rushing to invest in India
Foreign portfolio investors (also known as smart money) are making investments into the country at a faster rate than ever before. Even in 2020 when most of emerging economies saw net outflows of foreign capital, India bucked the trend and received more than $13.5 Billion dollars in capital investments. This figure does not take into account the investments made by Private Equity and Venture Funds into private companies like Jio etc. The $13.5 Billion figure is just for Indian public equities!
Investments by foreign investors is a good sign as these are usually large funds that invest for the long term. Just like any other market, stock markets are governed by the forces of demand and supply. As more money piles in and starts buying stocks, it constricts the existing supply and causes prices to shoot up.
Availability of easy foreign capital also means we don't have to compete for the same resources and more companies can raise money easily for their capital expenditure (investment made by the company in itself) plans. This expenditure in turn creates jobs and boosts income - all contributing to the development of the economy.
In the next few years, I expect this trend to continue and even more foreign capital to find its way into our country.
Its not just public markets, even private markets are witnessing foreign capital inflows like there's no tomorrow. Private Equity (PE) firms have bought businesses at a faster rate than any other year going all the way back to India's independence.
These are just three of the many mega trends that are playing out in India's favour. With the youngest workforce in the world, good government policy, a cash rich government and plenty of money to fund infrastructure expenditure plans, I expect India's economy to grow faster than it has in the previous two decades.
In the subsequent posts, I will attempt to deep dive into some of the industries mentioned here like pharma, renewables, infrastructure and specialty chemicals.
Until next time.