The Indian economy is expanding rapidly at a time when the rest of the world is cooling down. Many positive factors such as strong demographics, competitive labour costs, relatively low levels of debt compared to other countries, and an increasingly favourable environment for doing business are important long-term drivers for India’s growth.

 

Prime Minister Narendra Modi, who is at the helm again after a six-week long general election, has completed the first 100 days of his third term. That has ensured policy continuity, with Modi adopting a pragmatic approach to working with his coalition allies. The federal budget, which was tabled after the new government took over, shows the government is attempting further fiscal consolidation.

Real GDP growth forecasts for next three years look impressive

Source: IMF, July 2024

Indian inflation fell to a five-year low of 3.5% in June. Within this, core inflation (excluding food, fuel and tobacco) has now fallen below the midpoint of the Reserve Bank of India’s (RBI) 2%-6% range. Persistently high food inflation had been the main deterrent to the RBI cutting interest rates to date, however a normal monsoon season has significantly reduced this pressure. Amidst a backdrop of global central banks gradually cutting interest rates, expectations of rate cuts by the RBI are starting to build.

 

The external picture is also robust; India has sizeable foreign exchange reserves. The external debt is now just one-fifth of India’s GDP, and the current account deficit is fully funded by foreign direct investment inflows that are long term in nature. The sharp fall in oil prices due to slowdown in major economies should help keep prices pressures in check and limit the current account deficit even if exports suffer due to slower global demand. India imports about 80% of its oil.

Tax reforms

The fiscal deficit is now estimated to narrow to 4.9% of GDP in the current year from 5.6% in the previous year. This has been driven by strong tax receipts, which are estimated to grow to about 12% of GDP in the current year from 10% a decade earlier. This has been helped by the implementation of Goods and Services tax, which has reduced multiple layers of taxation and subsequent tax-avoidance. Tax reform has driven increasing formalisation of India’s economy, bringing hundreds of millions of people into the cashless economy and significantly boosting government tax take.

 

India is set to become the third largest economy by 2031, according to a Morgan Stanley report, which identified the creation of a world-class digital infrastructure, policy initiatives focussed on manufacturing and energy transition, strong consumer demand as well as offshoring capabilities as key areas driving the economy.

Domestically driven

In the financial year ending March 2024, India’s GDP grew 8.2%, surpassing expectations by a wide margin. The RBI projects the economy to expand 7.2% in the current fiscal year, which will help cement its place as the fastest growing major economy.  Consensus forecasts for the next two years are in the 6%-7% range. For the most part, the reported numbers have tended to exceed initial figures in recent years.

 

As the world’s most populous country, India’s large workforce is rapidly urbanising, and experiencing significant productivity gains, swelling the ranks of India’s middle-classes. We expect these rapid demographic shifts and improvement in household wealth will continue to drive India’s domestic economy for the remainder of the 21st century.

 

What does the economic backdrop mean for stocks and how are investors responding to the bullish growth outlook? Local investors are pouring in record sums in the Indian equity market, primarily through mutual funds via long term investment products. India’s equity market, the fourth largest by market capitalisation, is increasingly being driven by these domestic investors. This structural shift in equity demand could potentially reduce volatility in the market.

 

The breadth of the Indian stock market, with more than 4800 listed companies, provides a rich hunting ground for investments. Out of this, almost 600 companies have market capitalisations exceeding one billion dollars. With stocks scaling new heights in recent months, valuations in some pockets of the market may look stretched. We follow a consistent and patient “growth at a reasonable price” approach by striving to identify companies that could potentially generate higher returns at lower valuation than their peers. We believe this combination should continue to hold us in good stead in the coming months.

The value of active minds: independent thinking

 

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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