Blogs from Our Experts | January 27, 2017
India is set to become one of the fastest growing major economies in the world over the next several years. New forecasts from the World Bank show India will be a bright spot amid a gloomy outlook for developing countries in the next two years. The bank says that India is "well positioned to withstand near-term headwinds and volatility in global financial markets" compared with other major emerging economies and predicts it will grow at 7.9% by 2018. These forecasts are echoed by other leading institutions such as IMF and RBI. For the first time since independence, India faces favorable tailwinds which make it one of the most attractive investment destinations. Three of the most important ones are – demographics, investment potential and a vibrant economic engine.
First and foremost, India is experiencing extremely favorable demographic trends. With about 1.2 billion people, India is the world’s second most populous country and its largest democracy. Life expectancy at birth is now estimated to exceed 65 years, the United States’ level right after World War II, and is on track to continue its rise. The UN Population Division (UNPD) medium variant projections envision India 2030 as a youthful country of about 1.5 billion people with a median age of 31–32 years and a steeply rising working population. The next 50 years will be marked by a healthy youthful India with low ratio of dependents, a generational transfer of high savings, rising consumption and trappings of higher quality of life. Contrast this with a country like Japan where population fell by a million people in 2015 or most western economies where birth rates are falling consistently.
The proportion of retail investors in India’s equities markets is strikingly low currently. Less than 1.5% of the population invests in securities, compared with almost 10% in China and 18% in the U.S. Just 2% of India’s household savings are exposed to equity; in the U.S., the long-term average is 45%. Over the last few decades, Indians have invested in fixed deposits, life insurance, real estate and precious metals. This is not surprising given the frauds and scam discovered in stock markets in the last 25 years. However, fixed deposit rates have fallen to one-third of what they were 20 years ago and banks are becoming reluctant to offer it beyond 1 to 2 year tenors. Real estate has priced itself out with last few years being seeing a tapering and fall in prices. Though precious metals are under assault by the government policies, it is not a large enough category to absorb the cash in the system. Returns from life Insurance and pension benefits are facing headwinds due to falling interest rates. The Aadhar card as a tool for identification, its usage for Direct Benefit Transfer (DBT) to end beneficiaries and the tremendous effort on card based payment mechanisms being developed by National Payment Corporation of India (NPCI) are going to have a significant impact over next 5 years on moving India from a cash to a card economy and transform investing as a consequence.
Finally, India is an economy unlike many. It has a robust domestically led consumption model (60% of GDP) much like United States. The demand curve is natural and one that is embraced and embedded in the populace. Even countries like China are only now trying to transition into a consumption led economy and finding it to be a difficult process. The fact that the Indian economy has limited reliance on product and commodity based exports dramatically reduces the volatility faced by externally dependent major economies such as Japan, Germany, China and Russia. Further, with exports concentrated in the higher value added knowledge and technology sector, India has the intrinsic capacity to grow and sustain growth without relying on the world at large except for commodities and energy – which we expect is going to be plentiful and cheaper over time