India: Liberalization and globalization model driving growth

Summary

The Indian economy is poised for a renewed growth spurt, similar to that enjoyed following the reforms introduced in the early 1990s. Prime Minister Narendra Modi is embracing a liberalization and globalization growth model. While investors are aware of India’s ambitious targets for growth, exports and consumption, they may be less aware of the commitment to innovation and liberalization required to achieve these targets, which include:

1. India technology stack: the Unified Payments Interface (UPI) is creating a cascade of innovation.
2. Infrastructure: new fast trains with dedicated freight corridors between major cities, and a focus on renewable energy.
3. Production Linked Incentives (PLI) and a focus on manufacturing for export.
4. Pursuing free trade agreements and the India-Middle East-Europe trade corridor.

The translation of these reforms to economic growth is particularly important for investors given the high correlation between gross domestic product (GDP) and earnings growth in India.

Success breeds success

India has ambitious plans for growth. Previous bottlenecks and capacity constraints are being unblocked, raising investor confidence that growth targets will be met. Increasing foreign direct investment focused on manufacturing indicates the target for quadrupling exports to US$2 trillion by 2030 looks achievable.¹ Expectations of 7% GDP growth in the coming decade will double the size of the economy to almost US$7 trillion and more than double per capita income to almost US$5,000.² It will also require the creation of seven million jobs annually.³

The India technology stack, underpinned by the Aadhaar number (a unique identification number assigned to individuals in India) and the UPI, is creating a cascade of innovation in e-commerce and fintech. Growth in e-commerce shopping has surged thanks to homegrown innovators. The sector has pioneered various forms of “buy now, pay later” and “cash on delivery” shopping, which has turbocharged growth. India’s infrastructure has been a perennial weak link in achieving its growth aspirations. Indirect tax reform, which removed multiple layers of state taxes that impeded the flow of goods across state borders, is one of the catalysts to address the infrastructure bottlenecks. With a single national goods and services tax (GST), companies are able to source inputs on a pan-India basis and move imports and exports with ease. This has added renewed impetus for better road, rail and port infrastructure, which is being delivered. New Dedicated Freight Corridors (DFCs) will slash time and costs for transportation of goods by train. Indigenously designed and manufactured Vande Bharat trains now offer modern and fast short-distance passenger services between major cities.

The PLI scheme is driving a significant increase in manufacturing, led by mobile phones and electronic equipment. We expected this to accelerate in the year ahead. The pursuit of free trade agreements is part of India’s globalization agenda. The proposed India-Middle East-Europe trade corridor will open up new markets for Indian manufactured goods through a combination of a plentiful supply of labor and lower wage cost compared to peers.

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