Link’s Favorite Long-Term Themes: India

The Fastest Growing Economy in the World

Many economies around the globe are facing pivotal moments. In the U.S., the Federal Reserve is embarking on an ambitious rate-cutting cycle, with markets expecting 200 basis points worth of interest rate cuts by next summer. Many European economies are experiencing a similar dilemma; record-high stimulus following the pandemic led to once-in-a-generation levels of inflation. Interest rates were quickly raised to tackle inflation, which has now fallen to long-term trends and central banks are ready to ease financial conditions. On the other hand, China continues to feel pressure from its restrictive policies during the pandemic. A weak consumer, struggling real estate market and high regulatory oversight have its economy unlikely to reach its goal of 5% gross domestic product (GDP) growth in 2024.

India appears to be an exception. The country has surpassed growth expectations over the last three years, growing GDP by 9.7% in 2021, 7% in 2022, and 8.2% in 2023, averaging an 8.3% annualized growth rate over this time period. Earlier this month, the World Bank and International Monetary Fund (IMF) both increased their growth forecasts for the Indian economy to 7% in 2024 from 6.6% previously. At a time when growth concerns are prevalent across many global economies, there is a strong consensus that India will continue to see further growth in the years to come.

Chart 1: India is Experiencing the Fastest GDP Growth in the World¹

Improving the Economic Environment with Supportive Demographics

India has seen extraordinary growth over the last few years, but inflation has been running at a higher rate than preferred. For much of 2022 and 2023, the country’s consumer price index (CPI) was above the 6% threshold set by the Reserve Bank of India’s (RBI) framework, named the Flexible Inflation Target (FIT). The FIT has a set inflation target of 4% for its CPI, with a tolerance of 2-6%. India’s CPI in July hit a five-year low of 3.54% y/y and has been trending lower over the past year. The 12-month average CPI inflation rate peaked in mid-2023 and declined ever since. The 12-month average is currently at the RBI’s preferred rate and will help provide the country’s consumer base with greater confidence.

Chart 2: India’s Inflation has Declined Towards the Country’s Stated Goal of 4%²

The World Bank’s Country Director in India recently stated that “India’s robust growth prospects along with declining inflation will help to reduce extreme poverty.”³ India’s economy continues to grow at a historic rate partly due to its favorable demographics. The country boasts a population of 1.45 billion, making it the largest in the world. The population has doubled since 1950, and 40% of the population is under the age of 25. A younger workforce will help contribute to increased levels of productivity and innovation. S&P Global projects that the Indian consumer market will double within the next 7 years – hitting $5.2 trillion by 2031 from $2.3 trillion in 2022.⁴ High growth, slowing inflation, and a young workforce will provide many tailwinds across the Indian economy for years to come.

Growing Foreign Investment in India

Amidst a struggling Chinese economy, India has seen an influx of foreign direct investment (FDI). International companies are moving manufacturing plants to the country given India’s accommodating pro-growth policies. Investment as a proportion of its GDP reached a 10-year high of 34% in 2023, and global FDI inflows reached a record $84.8 billion in 2022. Further in 2022, FDI inflows into India’s manufacturing sector grew 76%, and the computer software and hardware sectors were the largest recipients of overall FDI.

Many of the most well-known U.S. corporations are currently operating in India, including Apple (AAPL), Amazon (AMZN), ExxonMobil (XOM), and General Electric (GE), to name a few. AAPL is currently manufacturing one out of every seven of its iPhones in India⁵, and we expect more companies to transition their operations to the country in the coming years.

Innovative Industries are Seeing the Most Growth in India

India’s booming economy is seeing growth across many different industries. The country is home to information technology (IT) companies focused on software services and outsourcing, with many recently transitioning their focus to artificial intelligence. India has 64 private companies valued at over $1 billion and is home to the third most unicorns (private companies with a valuation >$1 billion) in the world, only behind the U.S. and China. New energy is another focus for the country, specifically solar, lithium batteries, green hydrogen, and biogas. Reliance Industries is India’s largest private-sector company operating in many of these energy industries, while also controlling the largest 5G network and retail business in the country. Reliance has nearly doubled its EBITDA over the last five years and will continue to drive growth in the economy.

Electric vehicles (EV) and hybrid electric vehicles (EHV) are an industry in which India is looking to become a global leader in. Earlier this year the country approved an EV policy given to companies that plan to manufacture in India with a minimum investment of $500 million,⁶ with Elon Musk recently stating that he is excited about the future of India and has hinted at the idea of partnering with the country. India’s EV sales doubled in 2023, and Prime Minister Modi has a goal for 30% EV usage by 2030.⁷

Other industries with high growth expectations include telecommunications, infrastructure, and pharmaceuticals. In 2024, India is projected to realize ~29% earnings growth and ~20% revenue growth, with expanding margins. To note, the Indian stock market has outperformed both its emerging market counterparts and the S&P 500 for the past 20 years.

Chart 3: India’s Stock Market Has Outperformed the S&P 500 Over the Last 20 Years⁸

How We Are Exposed to This Theme

Earlier this year, Narendra Modi won India’s general election to secure his third term as the country’s Prime Minister. Modi’s victory cemented our idea that India will remain one of the fastest-growing countries in the world. Many of Modi’s policies are framed around growth and investment, and over the next two years, $534 billion worth of new infrastructure is set to be in use across the country.⁹ Improving the region’s infrastructure is also a focus of Modi’s, and during his time in office, the country boosted the total length of its highways by 60%.

We maintain broad exposure to the country through the iShares MSCI India ETF (INDA). INDA tracks a market-capitalization-weighted index of the top 85% of firms in the Indian securities market. It maintains exposure to approximately 136 high-quality companies in India, and 73% of the index’s total revenues come from India. India’s favorable economy and demographics have brought an influx of foreign investment, and many U.S. companies that currently operate in China are pondering the idea of transitioning to India. We are believers in India’s expanding economy and favor it as an international investment.

With contributions from Stephanie Link’s investment team.

Sources

^[1] Source: Blackrock. As of May 1, 2024.

^[2] Source: Bloomberg. As of September 22, 2024.

^[3] Source: World Bank. As of September 3, 2024.

^[4] Source: S&P Global. As of August 3, 2023. [1] Source: Bloomberg. As of April 9, 2024.

^[5] Source: Bloomberg. As of April 9, 2024.

^[6] Source: Economic Times. As of June 17, 2024.

^[7] Source: CNBC. As of April 25, 2024. [1] Source: Schwab. As of March 8, 2024.

^[8] Source: Schwab. As of March 8, 2024.

^[9] Source: Bloomberg. As of May 26, 2024.

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