Beyond Bollywood – five reasons to consider investing in India

An intriguing reflection of traditions dating back thousands of years, India is now a unique insight into the influence of innovation on growth. One if its most famous economists, Lord Meghnad Desai believes India’s “export success” – its cinematic industry Bollywood – is “one of the few of India's products, which is a global brand across Asia and Africa and increasingly Europe and America”1. However, India’s next chapter is now playing out in a vibrant new medium – economic growth on the back of a technology revolution. And it's a story filled with Indian companies and consumers providing exciting opportunities for investors seeking long-term portfolio diversification.

Consumer spending has fuelled more than half of India’s impressive economic growth2

Last November, Prime Minister Narendra Modi made a shock decision to immediately scrap all ₹500 and ₹1,000 banknotes, worth approximately AUD$10 and $20 respectively. This radical demonetisation action was designed to truncate the shadow economy, curtail corruption, remove counterfeit currency and improve the tax-take, all while bringing a greater proportion of the economy into the formal system. But this is a cash economy where most people are paid, and buy what they need, with notes and coins.

After that draconian move announced on 8 November 2016, millions of Indians queued for hours at banks to exchange or deposit their cash, and supply chains relying on cash suddenly halted. Meanwhile, those in rural areas with limited access to banking were particularly hard hit. And the flow-on to consumption saw many revert to old-fashioned bartering to secure basic goods.

This instant removal of 86 per cent of cash from circulation3 did have a short-term negative effect, but we believe the reform is a positive long-term move, and the pain should be short-lived, with growth regaining speed again. In fact, we expect Indian consumer spending to accelerate, this time with the rapid adoption and growth of digital banking services, credit cards and mobile payment systems. This will drive several long-term Indian-based investment opportunities worth considering as part of a diversified portfolio – here are five of the key drivers.

  1. India is the fastest growing major economy in the world4
    India’s impressive growth is largely being generated through greater investment in agriculture and national and state infrastructure, while recent deregulation measures and efforts to improve the ease of doing business have boosted foreign investment. For example, Ikea is the first major foreign retailer to receive government approval to establish stores in India with plans to open 25 outlets by 20255.

    India’s current low levels of urbanisation and industrialisation are other potential growth drivers alongside government initiatives to improve health and education. The launch of a Goods and Services Tax from 1 July (replacing the confused and convoluted state systems of tax) is also expected to improve efficiency and movement of goods across states.
     
  2. The country’s growing middle class will be one of the world’s youngest by 20206
    India’s burgeoning middle class is estimated to include 267 million people7 and projected to more than double by 2025-2026.  Furthermore, with an average age of just 29, and nearly two-thirds of working age8, India is very well placed to take advantage of its demographic dividend. This means a growing workforce contributing to the economy and a working age population larger than that dependent on it.

    We expect continued growth in those brands supporting middle class lifestyles. For example, ground transportation is now India’s second biggest personal consumption category – in part due to a lack of public transit options – and 16 million motorbikes were sold in 2015 compared to a total car fleet of 25 million9. Indian-owned Eicher Motors posted 25 per cent growth in total domestic sales for their iconic Royal Enfield motorcycles for the past two consecutive months alone (April and May)10.
     
  3. Most Indians now have their own bank account and mobile phone
    When Modi came to power in 2014, he did so with an enormous reform agenda including the ‘JAM revolution’ – ‘Jan Dhan’ (bank accounts), ‘Aadhaar’ (unique identity number) and ‘Mobile’. The Jan Dhan initiative has seen about 280 million bank accounts opened as of March11 – integral for those depositing cash during demonetisation.

    Indians can also directly receive government welfare thanks to the world's largest biometric identity system – Aadhaar (‘Foundation’ in Hindi’). This voluntary system was developed partly in response to the fact that many Indians had no form of identification, not even a birth certificate. Now with over 88 per cent enrolled12 with everything from their fingerprints to iris scans stored on a central database13 it will soon be compulsory to receive benefits and perform activities such as receiving university degrees and obtaining driver's licenses. The combination of Aadhaar and India Stack (refer point 4) also is expected to allow remarkably efficient delivery of services, particularly those requiring proof-of-ID and credit checks, such as applying for mobile phone contracts.
     
  4. The pace of technology-related developments in India is unprecedented
    Another of Modi’s reforms is the ‘Digital India’ campaign supporting increasing penetration of internet, smartphones and spread of digital network in rural areas. This includes creating ‘India Stack’ – an entire digital database built around a uniquely identifiable individual through an open application programming interface atop that biometric-enabled Aadhaar system14.

    India Stack will have apps for desktops, phones, wearable devices15, with endless opportunities16.  Ultimately, India Stack will allow government, businesses, start-ups, etc to utilise this digital infrastructure for cashless, paperless and ‘presenceless’ service delivery17.  Major tech companies like Google, Apple and Samsung are developing Aadhaar-compliant devices.
     
  5. Greater internet and smart device access in rural areas means more online shopping
    India is one of the world’s fastest growing internet markets with online retail expenditure expected to top US$1 trillion by 202018, although to expand beyond the large cities, e-tailers must consider serving regional language users.

    Indians are taking to shopping with gusto, spending money on everything from fresh food to reading. For example, Nielsen estimates the Indian book publishing sector is worth $6.8 billion (led by educational books) and predict an annual growth rate of 19.3 percent until 202019. Amazon also expects India to become its quickest market to reach US$10 billion in gross merchandise value and to be its largest overseas market20, while beauty, cosmetics and grooming is likely to treble by 2025 thanks to the aspirations and rising disposable income of the middle class21.  

India remains an under-developed economy with major social and bureaucratic challenges. However, this means there’s a lot of low-hanging fruit. It’s our view that when this opportunity is combined with the reform vision of Prime Minister Modi, and transformational projects such as India Stack, the potential investment opportunities are immense.

Walsh & Company Asset Management Pty Ltd (ABN 89 159 902 708, AFSL 450 257) and Walsh & Company Investments Limited (ACN 152 367 649 | AFSL 410 433) are wholly-owned subsidiaries of Dixon Advisory Group.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.
 

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Dixon Advisory is a privately owned financial advice firm supporting over 8,000 Australian trustees to optimise their wealth for retirement through self managed super funds (SMSFs).

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