According to IMF data, the Indian economy would likely have the fastest real growth in Asia in 2022 and be the only one to experience nominal double-digit growth. This makes India the fastest-growing Asian economy in the Asian region in 2022–2023. In this blog, we shall describe India’s growth super-cycle, and where the Indian economy stands today

According to analysts at Morgan Stanley, India's GDP growth will average 7% during this time, which is the strongest among the largest economies, and India will contribute 28% and 22% to both Asian and global growth, respectively. Against this backdrop, PMS Bazaar conducted a webinar with Mr. Pankaj Murarka, founder of Renaissance Investment Managers, as a Keynote speaker.

Mr. Pankaj discussed the global economic outlook and explained in detail the resilience of the Indian economy with a data-packed presentation. Some of the key insights of this webinar are -

• The resilience of the Indian economy
• Production Linked Incentive Scheme
  
• Revival of the real estate sector
• Revival of bank and trade credit, corporate profit, and the NIFTY index earnings
• NIFTY earnings to double by 2024
• Big Wave – the financial services sector
• Big wave-consumption
• Big wave – Internet economy
• Big wave - manufacturing sector

1. Resilience of the Indian economy

Considering the global economy today, we are witnessing a phase where there is too much negative data circulating and emerging from various parts of the globe. The world is witnessing the energy crisis that Europe is currently experiencing, which is causing a high degree of probability or almost a certainty that by the end of this year, all of Europe will be affected. A recession will inevitably hit the Eurozone. Today countries like Germany pay around 80 rupees per unit for electricity, compared to 10 rupees in April and May. This is because gas prices in those nations have skyrocketed as Russia has restricted its supply of gas. With this one can envision what would happen to industrial output and what will happen to households that are obliged to reduce their electricity usage. Therefore, it is very likely that Europe will experience a recession before the year is over.

Given the sharp increase in rates being implemented by the US Fed, it is likely that the US economy will face a recession at some point in 2022-2023. Moreover, while China's growth is accelerating rapidly, experts who have been following China for the last 20 to 25 years and who have a thorough understanding of China believe that the Chinese economy is currently in a recession. Comparatively, this is where India stands out and India has been a highly resilient economy. Currently, India has been experiencing a super growth cycle because we have a very large domestic economy and a very large demand in the domestic economy. Large internal demand negates the need to depend on the outside world, and hence the domestic economy supports our growth. The government of India also has taken some very very concerted policy efforts to drive the growth of India's economy. One such is the Production Linked Incentive (PLI) scheme.

2. Production Linked Incentive Scheme

Production Linked Incentive Scheme (PLI) offers a production-linked incentive to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components, including Assembly, Testing, Marking, and Packaging (ATMP) units. The Scheme would tremendously boost the electronics manufacturing landscape and establish India at the global level in the electronics sector. 

The scheme shall extend an incentive of 4% to 6% on incremental sales (over the base year) of goods manufactured in India and covered under target segments, to eligible companies, for five (5) years after the base year as defined. Moreover, India has already committed approx. 30 billion dollars as subsidies to different sectors of manufacturing in India over the next six years.

According to Mr. Pankaj, “Manufacturing and its second derivative in terms of the initial units that will come up to support paralleling manufacturing, all of them can cumulatively add something like about one percent to India's GDP in five years. In 2027 we will see a real big impact, which is a very positive and very significant step in terms of driving India's long-term growth, and at the same time we are seeing strong signs of recovery in other popular sectors such as real estate, bank and trade credit, consumption, etc.”

3. Revival of the real estate sector

Real estate is one sector that was not doing well for the last five to six years due to the Covid-19 pandemic, but today there has been a very sharp recovery in real estate. As sector, real estate is a very big sector in the economy and has a direct bearing in terms of the revival of other Industries which are associated with real estate. If you look at the real estate sector, prices have been flat or have fallen over the last six to seven years, and affordability has improved, and over the last 12 months to 18 months.

Today, of the top 10 Metro cities in India, eight out of the top 10 Metro cities have had the highest real estate sales month on month basis over the last 18 months, compared to the last 15 years. This indicates the strong consumer demand or the demand that has actually emerged in the real estate sector. Hence, this whole revival in the real estate sector will continue over the next three to five years because there's a very strong pent-up demand both in the residential as well as commercial and retail segments. Collectively, all taken together, we will see the sector being one of the key sectors in the economy.

4. Revival of bank and trade credit, corporate profit, and the NIFTY index earnings

Another notable thing is that presently the Indian economy is witnessing a revival in bank credit and hence the overall credit growth in the economy is strong. Also, after a long time, there has been a revival in industrial credit, therefore, industrial trade was very weak during the Covid-19 pandemic, and in the last 3-4 years the industrial growth rate was extremely weak. This is because industries were not doing new Investments or new Capex.

Presently, there have been early signs of industrial recovery and this relates to the revival of the private sector investment cycle which was completely absent for the last 10 years. As such, in the backdrop of an environment where the world economy or major economic blocks in the world are challenged, the Indian economy remains in a safe spot and is an outlier economy.

The collective cumulative effect of the revival of the sector relates to the sharp revival in corporate profitability in India. Corporate profits which as a percentage of GDP dipped to as low as two percent or under two percent in FY 2020, have now bounced back to five percent, and this is also reflected in the strong earnings growth that we've witnessed in Index companies and corporate India. 

We have had a very sluggish economy over the five years, and the Nifty index earnings were just about three to four percent. The sluggish earning growth was because of demonetization, GST, the real estate Bill, etc.  However, post-Covid-19, there has been a smart recovery in the economy. Over three years post-Covid from FY21-FY23 Nifty earnings have been growing at a CAGR of 23.5 percent. This is a very strong earnings road that we are witnessing due to the strong revival in the demand that we have seen across all the broad sectors of the economy and importantly a strong recovery of corporate profits.

5. NIFTY earnings to double by 2024

We know that for the index to give returns or companies to deliver profits, cash flows have to grow. If you put the last 15 years in context, Nifty earnings have been very sluggish. Between 2010 and 2020, the growth was very moderate, and more importantly because of multiple headwinds. In that decade, the earnings growth for Nifty companies decelerated sharply. But, between FY 2010 to FY 2020, the earnings growth for NIFTY doubled, that is from INR 250 in 2010 to INR 470 in 2020. But the fact is, to double, NIFTY earnings almost took 10 years, and over 10 years, NIFTY had an earnings growth rate of only 6.6 percent.

Today, the doubling of NIFTY earnings which took 10 years is likely to happen in the next four years between FY 2020 and FY 2024. This is a reflection of the strong underlying demand or growth that is been seen in the economy across sectors and that India is an outlier economy, and will continue to deliver very healthy growth over the next five years while the world will continue to remain challenging. A strong revival in India's manufacturing because of PLI schemes has led to a very strong domestic demand in India across sectors. The hiring markets are very robust and the hiring trends across industries are very strong. In terms of job creation, the economy has been very strong last four years. IT companies in India have hired very significantly which include TCS, Infosys, HCL Tech Wipro. In 2019, these companies were hiring 50,000 freshers, and compared to today they are hiring about 3,00,000 freshers. 

When job creation happens, disposable income increases, and when disposable income increases, consumer demand increases and has a kind of cascading impact on the growth of the economy. Hence, domestic demand and growth remain extremely resilient and in the context of that, Indian markets will do well over the medium term and the short term. There has been a very sharp rally over the last two months from the lows we made in May. NIFTY started the year in January at about 18000 and now after the dip in March, April, and May because of the Russia-Ukraine war, the residual markets rallied back in September, which shows that NIFTY will be back at 18000. 

Because of the sharp rally over the last three months, near-term markets may remain range-bound or sideways, but if looking at equities from a three- to five-year time horizon,  we remain extremely constructive on the outflow point in equity markets. Hence, the Indian equity market is the best place to invest and will likely be the best-performing equity market in the world because no other economy promises the same level of growth. India's economy is expanding at the quickest rate in the world, and more significantly, will continue to be the fastest-growing economy in the world for the foreseeable future over the next 20 years. 

The Indian stock market's resilience is also demonstrated by the fact that, between October of last year and June of this year, foreign investors sold the most stock they have ever sold in India in a single year. Previously, the highest amount of stock ever sold in India in a single year was 26 billion dollars, which occurred in 2008. This time around, however, they sold 35 million dollars of Indian stocks, an increase from what they sold during the same period in 2008.

That demonstrates the depth of the Indian market in terms of how we've developed, how broad-based we've become, and more importantly, how strong markets have become in that sense. Therefore, every dip is an opportunity to buy into Indian activities over the next three to five years. Mr. Panjak stated, “I have a very positive outlook for the economy's output. Given our growth trajectory, by 2025 or 2026 we should be the fourth-largest economy in the world, ranking behind the United States, China, and Japan, and we will be the fourth-highest economy in the world. I'm sure all of you have read the news item that India is currently the fifth highest economy in the world, and in three years we should also be the fourth overtaking Germany as well.”

6. Big wave – the financial services sector

Financial services are a megatrend that will play out in India over the next 20 years. India's financial services industry, including all traditional banks and non-bank financial companies (NBFCs) that provide lending, as well as asset management firms, financial advisors, wealth management firms, and stock exchanges, all have very significant growth potential over the next 20 years. 

As household savings rise and are invested back into the economy through bank deposits, fixed-income mutual funds, or equity mutual funds, all these businesses will experience very strong growth over the next 15 to 20 years. And in India, where per capita income is expected to increase significantly, everyone in the financial ecosystem as a whole will benefit from this strong growth.

We all now play a critical part in the ecosystem, whether it is as consumers who borrow money for credit cards, personal loans, mortgages, or businesses who think highly of working capital loans or domestic loans. Therefore, over the next 10-15 years, India's economy will experience an acceleration of its trade growth, and all the players in the credit ecosystem will also experience very strong growth. Likewise, when it comes to contingency planning or planning for Life build Insurance across life in general, Pension funds, Provident funds, and other such funds, these players will all experience very strong growth.

Given the rising incredible per capita income, high savings rates, and investments in India, the entire spectrum of financial services will perform incredibly well over the next 15 to 20 years.

7. Big wave – consumption

A very substantial inclusion of discretionary consumption is the second major wave or major trend that we are currently observing. Over the last 15 years, India's consumption basket has changed rapidly, and now that India is at that inflection point of about two and a half thousand dollars of per capita income, over the next five years to 10 years we will witness a J curve effect in consumption.

Hence, discretionary consumers will do very well over the next 10 to 20 years because of rising per capita income, and strong job creation in the economy will enable the largest supplier of talent to the world. because of our demographics every year, India will have 10 million people joining the workforce every year and this will continue for the next 20 years. Therefore, effectively over the next 20 years, we will be supplying 200 million people to the world in terms of the working-age population. 

When you add such a large pool of people to productive jobs on a sustained basis over such a long period of time, one will have strong growth and productivity improvement. This is because these people are not going to go and work in a low productive job such as farms but work in manufacturing or services sector where productivity levels are extremely high and on top of that we have rising per capita income, The per capita income will rise much faster than the overall nominal GDP growth because of the improvement in productivity ratios, and then all these consumers are going to spend money. Hence, discretionary consumers are going to do extremely well 

 8. Big wave –Internet economy

The next big trend is India's Internet economy. If you combine everything taken together the Internet economy’s value is around 100 billion dollars, which is three percent of India’s GDP. Over the next seven to eight years, the Indian economy will grow by seven percent, and India's Internet economy will grow three times. 

The Internet economy can comfortably grow at twenty percent and the potential it holds is huge as there's a huge amount of wealth creation that will happen in India's Internet ecosystem. In terms of the kind of wealth creation that has happened in Internet companies in the US in the last 20 years, India will witness something similar in terms of growth and wealth creation in the Internet ecosystem. This will happen in India over the next 20 years.

9. Big wave - manufacturing

All sectors of industry are experiencing a significant comeback. Consumer electronics is one industry in India that is experiencing a significant revival. Numerous businesses are establishing facilities in India to manufacture goods that will be sold not just domestically but also internationally. India was zero percent in terms of manufacturing or iPhone which is the largest sold consumer product in the world. India will likely produce approximately 3% of the world's iPhones this year, and in three years we should be making 15% or perhaps more, which illustrates the kind of rapid expansion the consumer electronics industry is experiencing.

Similar to chemicals, India is witnessing a significant rise in the chemical sector. All international corporations aim to diversify and reduce their supply chain from China since the entire chemical ecosystem or supply chain is concentrated in China. Given the kind of incentives the Indian government is providing, they want to have a second base, and India has a very appealing value proposition. There have also been strong trends in the migration of production in chemical plants from China to India.

In the field of contract research and manufacturing services (CRAMS), India is likely to take the lead, just as it did in the last 20 years with IT services. Over the next 15 to 20 years, India will also overtake the world's leaders in CRAMS and, in autos, India has enormous potential for passenger vehicle growth. More importantly, using India as a manufacturing base would enable exports from India to many other Middle Eastern and African nations, as well as possibly some European or Eastern European nations. Perhaps India will likely overtake the United States and China as the third-largest market for passenger vehicles in the world in 10 to 15 years. Cars and auto accessories since India is likely the third-last market for passenger vehicles. Indian manufacturing is at a critical juncture and will experience significant growth over the next 15 to 20 years.

Mr. Prateek Agrawal discussed all the above in detail and also answered questions from the audience and introduced the audience to the Renaissance team, their philosophy, their risk management, and their strategy. Finally, he answered the questions from the audience, addressing the above topics. For more such insights on this webinar, please click on the appended link.

Get access to rich data and analytics of PMS & AIF by subscribing to us. Join the 40000+ investors & experts now: Subscribe NOW