India – The Investment Case

Mumbai SealinkWe believe that the Indian economy is likely to continue growing at a much faster pace than the rest of the world for the next decade.  India has the potential to cross $5 trillion in GDP by 2025. Only the US, China and Japan have been able to cross this milestone so far. The astounding rise of India is likely to be fuelled by its extremely favorable demographics, improving structural growth dynamics, and globalization. This creates vast opportunities for investors because India’s earnings growth is highly correlated to macro variables such as industrial production and GDP. Investors with proven stock picking abilities are likely to outperform the markets in general because the correlation of returns across stocks remains much lower in India, when compared to the rest of the world.


India’s favorable demographic dividend is driven by the fact that it is a young country with a growing talent pool. According to United Nations’ estimates, India is going to contribute an additional 124 million people to the global labor pool by the end of 2025, a number far greater than the combined contributions of other large economies such as USA (5 million), Europe (28 million), China (12 million) and Japan (6 million) over the same period. Improving education levels in the country can ensure that India’s labor force is better-equipped for high-end jobs. The country’s tertiary educated workforce is set to double from 50 million in 2010 to 122-125mn in 2020.


Rising Income levels in India have led to rising aspirations for its people. The recent election outcome has addressed a major issue that has plagued Indian politics in the past 10 years and held India’s development back.  This Election is a lesson that what young India wants is development, better infrastructure, better opportunities. It is this unified desire that has pushed aside decades of caste based, religion-based and community based politics.  A stable political regime which favors infrastructure development and drives policy reforms can unlock India’s demographic potential. With a new government in place, we expect crucial reforms in Taxation and better allocation of natural resources to inspire business confidence. Reforms are likely to encourage private sector investment in India, a process that should not only improve efficiency but also create employment opportunities for India’s growing workforce. Further, continued private investments are likely to increase the representation of corporate sector in India’s economy. Private sector revenues currently accounts of around 56% of India’s GDP, up from just 18% in mid-1990s.


India is urbanizing at an unprecedented pace in its history.  — estimates that . The Bharatiya Janata Party has announced a vision to create 100 smart cities in India.  For this to happen, the new government will need to announce a a very clear approach and a modern policy framework which will attract both foreign and domestic capital.


With the private sector accounting for a larger chunk of India’s economy, we expect earnings growth to outpace India’s GDP growth rate over the next decade. Equity markets are likely to be a direct beneficiary of the growth in corporate profits and are expected to compound between 12% and 15% in local currency terms over the same period. The combined market capitalization of Indian equity markets can reach $4 trillion by 2025, a sizeable opportunity set.While the growth in Indian economy boosts the overall market capitalization of the country, individual stocks are likely to behave differently. The average correlation of stocks to India’s benchmark index remains significantly below rest of the world, implying ample opportunities for stock picking and alpha generation.