After a slowdown in 2019 and a harsh lockdown in 2020, India may be poised to regain its place among the fastest-growing emerging markets. From e-commerce to banks to real estate, we look at some of the key sectors that could drive the recovery, and where the opportunities may lie for equity investors.
India could be poised for double-digit growth
The last decade has been challenging for India’s manufacturing, construction and infrastructure sectors as the investment cycle slowed down. That weighed on gross domestic product growth, which reached a decade-low 4.2% in 2019. Consumer demand driven by easy finance, runaway credit growth for an aspirational population, and government spending have been key supports for economic growth. So what are the prospects for India’s market and economy?
In our view, industrial firms’ aggressive cost-cutting during the past few years has laid the foundation for change. Companies have slashed capital expenditures and reduced leverage. The Indian government has implemented much needed labour reforms. Meanwhile, bank balance sheets are healthier and interest rates are low. Against this backdrop, Indian manufacturing is probably entering a multi-year growth period with recovery in margins, profits and ROCE (return on capital employed). This should drive the new investment cycle.
At the same time, the COVID-19 vaccine rollout is restoring consumer confidence. India has navigated the pandemic well despite dire forecasts. After what has been dubbed the harshest lockdown in the world, the economy has bounced back more quickly than expected.
In our many conversations with companies, we sense a buoyancy in corporate and entrepreneurial sentiment that has been missing for the past few years. Various sectors of the economy have begun to normalise. Manufacturing activity, export orders and property and vehicle sales have all improved.
The government’s approach also appears to be shifting. Rather than trying to clean up the system, as it has done with significant success over the last six years, it now seems to be targeting growth and wants to work with the private sector to spur the economy. Case in point: India recently unveiled a production-linked incentive programme to encourage foreign manufacturers of mobile phones, pharmaceuticals and medical devices to set up shop in the country and for domestic producers to expand. The just-released central government budget for the 2022 fiscal year, with its focus on infrastructure spending and growth, has further buoyed sentiment.
The nascent recovery, coupled with low interest rates, could start a virtuous cycle for the Indian economy. We believe GDP could reach double-digit growth in the 2022 fiscal year and could stabilise in the 6% to 8% range in later years.