Why India is the investment destination for growth investors?
This article is authored by Yogesh Patil, CIO - Equity at LIC Mutual Fund AMC.
India’s strong macro-economic set-up, pro-growth policy framework, and favourable global trade conditions position its economy for significant growth. Investors seeking to benefit from structural growth may find Indian equity markets attractive.
Local growth with global drivers
The Indian economy has emerged stronger at a time when the global economy is slowing down. The Economic Survey projects the Indian economy to grow at 6.5-7 per cent in FY2025. The Indian real gross domestic product (GDP) grew by 6.7 per cent in the April-June Quarter.
The growth of the Indian economy is driven by both global and domestic factors. Over the last decade, the Indian currency has been stable compared to its global counterparts. Many countries overspent, after the COVID-19 pandemic, but India maintained fiscal discipline, with the Reserve Bank of India prudently balancing between inflation control and economic growth. A stable rupee should encourage more nations to trade with India and also invest in India.
Covid19 lockdown caused supply chain shocks, and rising geo-political tensions in many parts of the world, have led many countries to seek new sourcing destinations, with India emerging as a strong candidate. The ‘China plus one’ strategy may benefit India as some companies shift their operations to India from China. De-globalisation may also help India’s manufacturing sector to grow.
Investment and consumption
The Indian government’s vow to lift the manufacturing sector has come at the right time. Initiatives such as Make in India, production-linked incentives, import substitution and export promotion strategies may attract fresh investments in the manufacturing sector. Focus on high-value exports may encourage companies in sectors such as engineering, chemicals, pharmaceuticals, and defence to incur capital expenditure. Increased production may find more takers overseas than in India. For example, India’s defence exports improved by 78 per cent in April-June 2024 at Rs 6,915 crore compared to Rs 3,885 crore in the same quarter the previous year, as per data released by the Ministry of Defence. Rising exports may boost corporate earnings growth.
Employment growth is likely to follow increased manufacturing activity. Demand for both un-skilled and semi-skilled labourers should rise, putting money in the hands of more households and creating demand for goods and services. As a result of this increased demand, the companies are likely to incur incremental capex. This virtuous cycle may continue, making the India growth story sustainable.
Structural trends
Growth stories are typically guided by some structural trends, and India is no exception. A boost to the manufacturing sector will lead to increased movement of labour and goods, which necessitates infrastructure development. Increased investments in roads, ports, railways and airports should present many long-term investment opportunities.
Urbanisation may gather pace with increased economic activity. It may hike demand for goods and services. As per the Ministry of Housing and Urban Affairs, rising urbanisation can help to decrease carbon emissions. Decarbonisation is another growth trend that not only creates new investment opportunities but also promotes a green economy by reducing emissions.
These factors, in addition to export-driven growth, can further strengthen the growth momentum of the Indian economy.
Budget and economic growth
Despite the mandate to support economic growth, the government has been tight-fisted. As per Union Budget 2024, the fiscal deficit is estimated at 4.9 per cent of GDP for FY2025, lower than the 5.1 per cent estimated in the interim budget.
Budget provisions offer more clarity to investors on the balanced economic growth the government aims for in the Indian economy. Although the government has raised the rate of tax on capital gains, it has more than compensated investors by creating an investor-friendly environment and a robust economic growth bandwagon.
Over the medium to long term, the Indian economy is likely to see the benefits of these efforts by policymakers in the form of economic expansion. Growth investors may benefit from the corporate earnings growth in this boom phase.
Disclaimer: The opinions expressed above are of the author and may not reflect the views of DSIJ.