- Macro Strategist
Denmark, Intermediary
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A few of my colleagues and I were in India for a week late last year. While there, we met with Indian policymakers at the Ministry of Finance, the Reserve Bank of India (RBI), and other government offices. We also visited leaders of large Indian banks and several other corporations. Here are some of my high-level takeaways from that trip.
High-level takeaways
I came back very positive on the medium- to longer-term structural outlook for India, for the following reasons:
- The country’s growth catalysts are multiplying and broadening out, with domestic investment picking up, in part due to a strong infrastructure push by the central government and greater competition among the states.
- Bank balance sheets have not looked this healthy to me for more than a decade. Many corporates have de-levered through the COVID pandemic, and household balance sheets have also remained relatively unlevered.
- India’s fiscal balances are stretched, but with little corporate/bank issuance, the market should be able to absorb government paper. In addition, household savings are helping to finance the fiscal deficit via insurance and pension funds. (Medium term, though, the government may still need to raise taxes.)
- A new real estate cycle has begun following the 2014 bust, with more measured property price increases, while the hospitality and travel industries are still riding the wave of the post-pandemic boom phase.
- The manufacturing sector is also gaining significant traction, including in the smartphone supply chain and via a recent drive to “get on the map” in the semiconductor space.
- With domestic consumption and investment both strong, and monetary policy unlikely to tighten very aggressively, I expect India’s economy to grow by slightly less than 6% in 2023, even amid a potential global slowdown.
- Medium term, I believe the economy can sustain an annual growth pace of around 6%, as I see a virtuous cycle of greater capital formation supporting jobs, which should then boost consumption demand.
- Productivity improvements are being fueled by rapid digitalization and the big infrastructure push noted above. Reforms in areas such as real estate, banking, bankruptcy, and direct-subsidy transfers are beginning to bear fruit.
Risks I’m monitoring
Political and policy stability under Prime Minister Narendra Modi, who remains very popular with most voters (and, as of this writing, a shoo-in for reelection in May 2024), will be key to continued structural momentum in India.
Beyond that, my main near-term concerns are that: 1) the country’s core inflation rate is likely to remain elevated (comfortably above the RBI’s 4% target) for most of 2023; and 2) the current-account trade deficit may widen further from its already high levels as global demand likely softens. While the RBI’s monetary policy committee members sounded pretty dovish late last year, I suspect that the persistence of inflation may lead the central bank to eventually tighten policy a bit more than the market was pricing in at last check.
India equity outlook
I remain generally positive on Indian equities given the country’s favorable medium-term growth and earnings environment. While overall market valuation has been quite stretched from a near-term perspective, I still think there are plenty of opportunities for discerning investors at the individual stock level.
For example, I see potentially attractive medium-term opportunities in banks and insurers and in the hospitality industry (see above). I also like a number of companies that may be beneficiaries of the global response to climate change (e.g., renewables, electric vehicles), as well as those that appear poised to benefit from the migration of global supply chains out of China.
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