The report— An India Economic Strategy to 2035, by Australia's former chief diplomat Peter Varghese, carries both physical and economic weight.
"There is no market over the next 20 years which offers more growth opportunities for Australian business than India," Varghese says, adding Australia risks being left behind if it fails to seize on India's investment potential.
Macquarie Group's chief executive Shemara Wikramanayake urged Australian superannuation funds to invest in India—a market Macquarie entered in 2004. "India is a country that is very high growth," she said. "I think the reason that people have been reluctant to invest in India from Australia is that the risks have been higher historically, but things are starting to change now.”
Ellerston Capital chief investment officer Ashok Jacob, who also chairs the Australia-India Council, believes that "there is no more explosive structural growth story than India."
Indian elephant is starting to run
Keys to this India investment story are population and purchasing power. By 2035, the UN projects India's population will have reached almost 1.6 billion, on its way to a peak of almost 1.7 billion by the early 2060s. India is the world’s third largest economy measured in purchasing power parity terms and, on some measures, will be the fastest growing large economy in the world in coming years.
As Varghese notes, since 1970, India's real GDP per capita has increased fivefold. Millions of people have been lifted out of poverty, and a consumer-class has emerged that, since household consumption accounts for 60 per cent of India’s GDP, is grounds for optimism. In the words of the International Monetary Fund’s India mission chief Ranil Salgado, the $2.6 trillion elephant that is the Indian economy is starting to run. The IMF forecasts growth of 7.3% in FY19 to March and 7.5% in FY20. In contrast, China's growth is forecast to slow to 6.4% next year from 6.6% in 2018.
India’s middle class is tipped to eclipse that of America by 2022, according to the Brookings Institution. Hence the emphasis on education: this cohort will need "upskilling" and Varghese cites some compelling data to suggest Australia’s education sector may be in the box seat to capitalise. India is already Australia’s second biggest education market and the second most popular destination for Indian students after the US. And according to recent research by HSBC, the number of Indian parents wanting their children to study abroad has jumped from 47% in 2016 to 62% in 2017. While other surveys have found over 70% of Indian parents are willing to take on debt to fund education, higher than the global average of 60%.
Banking on new money
Another key factor in the mobilisation of India's middle class is banking reform. There has been a boost in the number of bank accounts due in part to a crackdown on black money and the shadow economy. Since his election win in 2014, Prime Minister Narendra Modi has embarked on the kind of macro reform economists welcome, including a bid to formalise the economy, widen the tax base through GST, and a campaign to curb red tape and corruption. But it's not been without hiccups. Recall the chaos following his decision to demonetise 500- and 1000-rupee notes, which account for 86% of the currency notes in circulation. Over time, however, bank queues have thinned and there's potential for long-term benefits.
"The shadow economy will be forced to pay taxes and cash-based corruption will become more difficult," says Nikko Asset Management portfolio manager Anuja Munde. "The Indian economy will benefit from higher GDP on a reported basis and a higher tax-to-GDP ratio from proper reporting of income in the future. The demand for real assets (such as gold and real estate) will come down and lead to higher financial savings."
Challenging investment landscape
Despite Varghese's upbeat note, he is alive to the challenges marking India's investment landscape. India's energy sector for instance is characterised by monopoly players, state-run corporations, controlled pricing and high barriers to market entry. Alongside are other concerns such as currency fluctuation and restrictive governance.
India's currency has been the worst performing this year, hitting record lows. Although it's worth noting the acclaimed Indian economist Raghuram Rajan, former governor of the Reserve Bank of India, and the man who in 2005 predicted the credit crisis, notes this is due in part to the overall strength of the U.S. dollar.
Another key sector, mining and heavy industries, which accounts for 40% of industrial output, has been sluggish, notes Bloomberg economist Abhishek Gupta, falling to a 10-month low in May due weaker steel and cement output and a contraction in crude and natural gas production.
And then there's corporate governance. As Morningstar UK's David Brenchley recently wrote, many Indian companies are run by families, who may not always prioritise the best interests of minority shareholders. On the flipside, Brenchley notes mid- and small-cap companies tend to be run by young entrepreneurs who have been educated in the US and UK, and who realise boosting value for minority shareholders also benefits family wealth.
The report cites Education and Training as the "flagship" sector, and Agribusiness, Resources, and Tourism as "lead sectors", followed by "promising” sectors: Energy, Health, Financial Services, Infrastructure, Sport, Science and Innovation.
Education and Training
Peter Varghese sees boosting our education links with India as a hedging strategy against an over reliance on the Chinese market, which accounts for roughly 30% of our education exports. "China is investing heavily in its domestic education institutions, is moving up the quality curve quickly and has adopted aggressive targets as a provider of international education. India’s tertiary-age (18–22) population is the largest in the world and is projected to peak at 126 million in 2026 before stabilising at 118 million by 2035. Indian enrolment in higher education (27%) lags far behind peers like China (43%) and Brazil (51%). By 2030, India aims to lift the enrolment rate to 50%, which would mean one in four graduates in the world would be a product of the Indian higher education system. Challenges remain, however. India created additional capacity for over 40 million students in the last two decades, but requires a further 200,000 secondary schools, 35,000 colleges and 700 universities to meet growing demand."
Agribusiness
According to the Varghese report, "India's overall food demand will grow at 2–3% until 2025, and demand will outpace supply out to 2035 even if Indian productivity increases. This is driven by demographics, a corresponding increase in volume demand and the growing consumer class, changing diets and a shift in favour of higher value products (such as proteins, fruit, dairy, packaged goods, high end products) similar to the trends seen in other developing countries. Growth potential for Australian exports remains in commodities India needs due to shortfalls in production (pulses, grains, horticulture, oilseeds). Opportunities also exist, or will emerge, for value-added products sought by the growing middle class (wine, processed food) and for providing specialised services to Indian governments, institutions and farmers." However, there are challenges. "India’s agriculture sector is politically sensitive (with a protectionist sentiment that is unlikely to fade). The central and state governments seek to balance smallholder and consumer needs with the broader goals of minimising social disruption and maximising electoral rural support.
The Indian government has three objectives: food security, food self-sufficiency, and income support for farmers. So, India will remain a difficult market, prone to fluctuating import demand and sharp policy changes—hedging against this volatility is part of spreading risk. But there is scope for it to become more predictable."
Resources
"India’s projected growth will keep resources trade high in our bilateral economic relationship," Varghese says. "Demand for Australian resources will be strongest where domestic Indian reserves are limited, including in metallurgical coal, copper, and gold. India’s demand for both metallurgical coal and copper is forecast to grow at about 5% per year to 2035; over 90% of this is expected to be met by imports. India will continue prioritising price over quality and product life-cycle costs, creating some unpredictability for resource commodity exports to India. As a result, the extent of our market share in these key commodities will depend primarily on the competitiveness of our exports against others."
Energy
A key challenge for India is that it is unable to produce enough energy for its swelling population. According to Indian government figures, the country’s share of the world population is 18% but its share of world gas and oil reserves are only 0.6% and 0.4% respectively. And it's estimated India’s energy consumption will grow at about 4.5% annually to 2035 (up from 3.5% from 2000–2017), driven by economic growth, urbanisation, rising incomes and industrial activity. "In terms of commodities, India will be heavily dependent on imports of oil and gas," Varghese says. "It will also provide a market for services and technologies that improve energy efficiency and the uptake of renewables."
A more detailed post initially appeared in Morningstar.co.uk and Morningstar.com.au.