Why You Need to Buy India
India is expected to become the world's third-largest economy by 2030
India is where China was in 1984, Modi is Deng Xiaoping
- Ray Dailo (YouTube Clip)
‘India’s moment has arrived’ is a bit of an understatement. In the Global Financial Markets, India has gained significant prominence since Covid and no conversation about emerging markets is complete without mentioning India.
India’s moment, however, is not all because of India and it has a lot to do with China shooting itself in the foot. One child policy, covid lockdowns, vaccine ego, Taiwan, targeting local tech companies and founders, the list goes on and on. China does not have free-markets and therefore, the global industrial machine is looking for a replacement.
India, now with the world’s largest population and about 616.2 million people between the ages of 0-24 years, with a growing middle class and rapidly improving infrastructure is ideal for global commerce to start substituting China with.
S&P Global Ratings predicts that India will become the world's third-largest economy by 2030, forecasting a GDP growth of 7% in the fiscal year 2026-27. Despite a projected 6.4% growth in the fiscal year 2023-24, S&P expects India to be the fastest-growing major economy in the next three years, reports showed.
Source: The Economic Times
India is a unicorn on the global stage, the only nation of any real size expected to grow around 6-7% which is also a democracy with a stable government and rule of law. It is a counter balance to China from a geopolitical perspective, with young demographics and improving infrastructure. India is at the start of a 20 year bull run.
Economic liberalization in India:
The journey to ‘India’s Moment’ started with India’s economic liberalization beginning in 1991 when then Finance Minister Manmohan Singh presented the budget alongside his outline for broader reform. During the speech he laid out a new trade policy oriented towards promoting exports and removing import controls. Specifically, he proposed limiting tariff rates to no more than 150 percent while also lowering rates across the board, reducing excise duties, and abolishing export subsidies. (As a frame of reference, China began liberal economic reforms in 1978, 13 years before India).
India was open for business 3 decades ago but it took a while until India built the infrastructure and global clout needed for it to shine on the world stage.
Make In India:
Make in India is Indian Prime Minister Narendra Modi’s flagship government initiative launched in 2014 to encourage companies to develop, manufacture, and assemble products in India. The initiative's goal is to make India a global hub for manufacturing, design, and innovation.
In the six financial years from 2014–2020, India received USD 358.30 billion in foreign direct investment (FDI), which is 53% of the FDI reported in the previous 20 years.
Source: Government of India
The Production Linked Incentive (PLI)
Launched in March 2020, PLI is strengthening India’s manufacturing sector by incentivizing domestic and foreign investments and by developing global champions in the manufacturing industry.
The scheme targets 14 sectors of strategic and economic importance for India’s economic growth. By providing targeted incentives and support to sectors like electronics, automobiles, pharmaceuticals and MedTech devices, food, telecom, solar, textiles, drones, the scheme encourages companies to invest in areas where India has the potential to become a global leader.
Through the PLI scheme, the government is encouraging companies to increase their manufacturing capabilities by spending on plant, machinery, equipment and associated utilities, R&D, and transfer of technology. The government, in turn, is providing incentives for a period up to five years on the increased manufacturing. The percentage of incentives varies for various sectors keeping in mind the specific needs of the industry.
As a result of the policies, early estimates of the impact of the PLI scheme show encouraging trends in some sectors. As per the Economic Survey, the PLI scheme for large-scale electronics manufacturing has attracted an investment of ~$575 Million and contributed to a total production of ~$24.5 Billion, including exports of ~$9.7 Billion (as of September 2022).
Programs like Make in India & PLI helping India build indigenous technology and fueling India’s export capabilities.
If China is the world’s factory, India has been the world’s back office for decades now. India has always been the IT backbone for most large tech companies and for developed economies around the world. However, now India is also trying to model itself after China to add manufacturing prowess as well as become a center of innovation and not just the back office. Check out this CNBC video for more on this.
G20 and the India-Middle East-Europe Economic Corridor (IMEC)
India was at the center of global commerce in September 2023, as it hosted the G20 summit in New Delhi, India.
Not only did India successfully host the summit, India also got all the leaders with disparate views on a single platform to unanimously agree on the New Delhi Declaration. India became the voice of the global South. India brought a developmental agenda, green agenda and emphasized on the way to take the entire community forward.
The other big win out of the G20 summit was the India-Middle East-Europe Economic Corridor (IMEC). The India-Middle East-Europe Economic Corridor is a planned economic corridor that aims to bolster economic development by fostering connectivity and economic integration between Asia, the Persian Gulf and Europe. It is being billed as a direct competitor to China’s Belt and Road Initiative.
In the initial days of the war in Gaza sparked speculation that IMEC might get put on hold. But that is not the case. The Middle East Corridor is still ongoing with each country continuing to build the infrastructure they are responsible for.
So a country that has cheap and abundant labor supply, a free market economy that wants to participate in global trade, rapidly evolving infrastructure to support all these business activities, a stable government that is pulling all stops to make India a global business destination. And now after agreements made during the G20 summit, India has trade partners and relationships it needs to grow.
The stage is set.
Relationship with the US:
With China’s gaining more prominence in Asia over the last 2 decades and the US’s souring relationship with India’s arch-nemesis Pakistan, primarily owing to dubious claims on fighting terrorism has pushed US and India closer than ever before.
The US looks towards India as a like minded (democratic) country which offers everything that China offered 2 decades ago and more.
In recent years, the two nations along with Japan and Australia have established The Quad, with a commitment to work as a force for global good and to support an open, free, and inclusive Indo-Pacific that is prosperous and resilient. The four countries have been promoting practical cooperation in various fields, including vaccines, infrastructure, climate change, and critical and emerging technologies, to realize a "Free and Open Indo-Pacific (FOIP)". The four countries have also concurred on the importance of making positive contributions to the region.
These geopolitical considerations have increased India’s clout which is evident by prime minister Narendra Modi’s popularity in the west. As an example, we can look at the PM Modi’s visit to the United States in June 2023 which led to multiple positive developments for both nations with companies like GE Aerospace (GE), Applied Materials (AMAT), Micron Technology (MU), Google (GOOG) (GOOGL) & Apple (AAPL) making new investments in India. See a summary of all developments here.
Apple in India:
Apple and India are a match made in heaven. Apple is looking for a new market to replicate what it did with China over the last decade and India is looking for world class companies to come up and set up their factories in India, giving a boost to India’s manufacturing sector. The world’s largest company opening up manufacturing in India is a huge vote of confidence in the country improving capabilities and will drive other companies to come to India for their manufacturing needs.
Apple in an effort to diversify its supply chain, and for the simple fact that it makes sense to manufacture the phones in the country you want to sell it in (specially when it has abundant cheap labor), has been increasing its manufacturing presence in India. Here are a few headlines that capture some of the Apple/India story.
Apple plans to make 25% of its iPhones in India - Seeking Alpha News Article - Dec. 08, 2023
Apple sees highest ever phone shipments to India, research firm says - Seeking Alpha News Article - Nov. 01, 2023
Foxconn (Apple Supplier) aims to double investment, jobs in India in a year - Seeking Alpha News Article - Sep. 18, 2023
Tesla in India:
Just like Applied Materials (AMAT), Micron Technology (MU), Google (GOOG) (GOOGL) & Apple (AAPL), Tesla can also see the benefits of setting up a factory in India, at the very least to service the India market. I would argue Tesla is the new age manufacturing where robots are operating robots and India is eager to have such cutting edge manufacturing in India. There has been a lot of chatter about Tesla entering the India market soon. Here is a headline from November 2024 which goes into a little more details:
Tesla's plans for India appear to be heating up
Tesla (NASDAQ:TSLA) is willing to set up an electric vehicle factory in India if the government approves a concessional duty of 15% on imported vehicles in the Austin-based company's first two years of operations in India, according to Economic Times.
Earlier in the week, Bloomberg reported that Tesla (TSLA) is close to signing an agreement with India to allow the automaker to ship its electric cars to the nation in 2024 and set up a factory within two years. Sources indicated that an announcement could come at the Vibrant Gujarat Global Summit in January. The states of Gujarat, Maharashtra, and Tamil Nadu are said to be under consideration because they already have well-established ecosystems for electric vehicles and exports.
Tesla (TSLA) CEO Elon Musk said in June that Tesla plans to make a significant investment in India. Tesla (TSLA) has a broad goal to set up an electric vehicle factory in India to build a car priced around $24K and has held discussions directly with Prime Minister Narendra Modi. Expanding on that stated goal this year, Tesla (TSLA) also proposed supporting India's battery storage capabilities with its Powerwall system.
Link to Seeking Alpha News Article - Nov. 24, 2023
Infrastructure & Government Policy:
Mobile Phones:
In 2002, Reliance introduced mobile phones for less than $10 in India (based on current exchange rate, not adjusted for inflation). Overnight, everyone had a mobile phone. I cannot stress on this fact enough, EVERYONE had a phone. They may not have had a landline phone at home, but they had a CDMA mobile phone which only works on Reliance’s network.
Internet:
In 2016, Reliance revolutionized Indian telecommunications once again by offering cheap or free data, unlimited talk time, and no roaming charges.
In 2021 when I was visiting India, I was shocked to see how cheap data on mobile plans were in India compared to the US. Everyone in India was on their phones surfing the internet all day long.
India leapfrogged the desktop age. By the time, Indian families could afford a desktop, almost everyone who could afford a desktop, already had a smartphone. Owing to this, India completely skipped the desktop generation. Now, most Indians have access to reliable electricity and growing presence on the internet - the two most essential commodities in this digital age. This should fuel India’s growth in this digital age further.
In a world where you can access educational and skill based content from the best schools, professors, and professionals for free, in multiple languages on YouTube on any topic: A country with 600 Million+ youngsters should deliver outsized growth.
Payments:
India is also likely to leapfrog credit cards and is already using peer-to-peer & person-to-merchant payment systems using the Unified Payments Interface (UPI). UPI is a real-time payment system that allows users to transfer money between bank accounts instantly and free of charge. It runs as an open source application programming interface on top of the Immediate Payment Service (IMPS), and is regulated by the Reserve Bank of India (RBI).
Open Network for Digital Commerce (ONDC):
Open Network for Digital Commerce (ONDC) is another example of how India is digitizing fast. Last mile delivery services, especially for the restaurant sector, take a large chunk of the restaurant profits as commissions. In order to address such issues, the Government of India launched the ONDC program. ONDC protocols standardize operations like cataloging, inventory management, order management and order fulfillment. Thus, small businesses would be able to use any ONDC compatible applications instead of being governed by specific platform centric policies. This will provide multiple options to small businesses to be discoverable over network and conduct business. It would also encourage easy adoption of digital means by those currently not on digital commerce networks.
Developing economies will continue to leapfrog developed nations across various technologies and evolve rapidly as the global economy evolves rapidly.
Such initiatives are a shining example of the Indian Government understanding its responsibilities and acting accordingly to move India forward.
Manufacturing & Robotics:
And just like that India is also likely to skip the manufacturing boom that we saw in China, as robots become more prevalent. While this can be seen as a negative for India’s vast population which might not get the same opportunity as China, India is also a IT powerhouse and likely to be a key player in robotics, AI and eventually Quantum Computing.
Take a listen to Balaji Srinivasan talk about why India should go straight to robotics in manufacturing (Clip) & why the Indian mindset is ideal for robotics - Clip
Physical Infrastructure:
Additionally, India is also rapidly developing its physical infrastructure by building highways, bridges, railroads. One such example is Atal Setu bridge in Mumbai which was inaugurated today by the PM.
The $2.2 billion bridge, under construction since 2016, will cut travel time between central Mumbai and the rapidly developing areas of Navi Mumbai - home to one of India's biggest ports as well as new hospitals and universities and global retail chains like IKEA - to 20 minutes from two hours, said Sanjay Mukherjee, head of the Mumbai Metropolitan Region Development Authority.
Source: The Economic Times
In the same vein, India also signed an agreement with Japan to bring the bullet train to India. These trains will use the ballast-less Slab Track system (popularly known as J Slab track system) as used in Japanese Shinkansen high speed railways.
India’s Global Policy:
India has done extremely well in maintaining neutrality in the ongoing global conflicts and maintaining diplomatic relationships with all sides. This speaks to India’s maturity in diplomatic relationships. In the current woke climate, it is very easy to voice your support for what you believe is the right thing but a nation state needs to watch out for its own interests first and India has done that exceptionally well off late.
India’s Inclusion in JP Morgan's Government Bond Index-Emerging Markets (GBI-EM):
India will be included in JP Morgan's Government Bond Index-Emerging Markets (GBI-EM) index on June 28, 2024.
The AUMs benchmarked to the suite are worth US$236bn. Of this, almost 90% is earmarked to the GBIEM global diversified index (GBI-EM GD), in which India is expected to have a weight of 10%. Only two other countries i.e. China and Indonesia have a weight of 10% in this index, and their weights have been kept unchanged.
The inclusion will take place over a 10-month period, with India's weight in the GBI-EM Global Diversified Index (GBI EM GD) expected to reach 10% by March 2025.
Inclusion in the bond index will bring in approximately 25 billion over the next year and a half to India.
Source: JPMorgan CEO Jamie Dimon on India
As I close out my bullish arguments for investing India, I encourage you to check out this 14 minute video comparing India to China: CNBC: Then & Now: India Versus China: Link to YouTube Video (14:14 Mins) - Dec 21, 2023
Risks:
Every country, no matter how great, has its issues and India is no different. Let’s take a look at some of the risks that India faces in its journey to become a global superpower.
Religion:
India is obsessed with religion. Being a secular country, India is home to eight major religions of the world. The eight major religions in India are Hinduism, Islam, Christianity, Judaism, Buddhism, Jainism, Sikhism, and Zoroastrianism.
Hinduism and Islam in particular has had the most fraught relationship. “Governments” governing/ruling India have taken advantage of religion to pit one religion against the other for political gains for centuries, made most famous by the British policy of ‘Divide and Rule”. As goes with politics, this division continues today for the political benefit of the ruling class.
Religion reigns supreme in India and religious divides are deep, sometimes blinding people to the potential of collaborative success.
Religion is an underlying theme in India which is more powerful than capitalism, business, commerce, economic growth & even more powerful than self care or care about family & friends in some instances. I think it would serve India well if economic progress was the central theme in India.
Corruption:
Corruption is another big reason for why India may have difficulty in scaling the heights of being a global superpower. Yes, India has rule of law but it is not always implemented as it should be.
Also corruption is an issue everywhere, no country is free of corruption. Having said that, I think corruption in India has reduced over the last decade or so as the government puts more stringent rules in place to prevent corruption.
Skilled Labor:
Yes, India has the largest young population in the world but how many of them are educated/skilled? 616.2 million people between the ages of 0-24 years. India has the opportunity as well as an uphill task ahead of it to make sure it educates this population and makes them contributing members of society.
India also has a lower female participation rate in the workforce when compared to global figures. However, female participation in the workforce is rising, which can be a huge positive for India going forward.
Low per-capita income leading to limiting purchasing power:
While India is the 5th largest economy of the world with a GDP of ~$3.7 Trillion, its GDP per capita is very low at $2,610. China by comparison has a GDP of ~$17 Trillion and a GDP per capita of $12,540. The UK which is the 6th largest economy has a GDP of ~$3.3 Trillion has a GDP per capita of $48,910.
Source: Forbes India
This stat tells a story of India being a wealthy country as per GDP but not so much when it comes to GDP per capita. The GDP per capita in India needs to grow in order for the middle class to start consuming more products and services, creating the market that India has the potential to be.
Here is a note from Bernstein echoing some of the points I made above about India’s ability to replace China from Apple’s Point of view.
Can India become a new China for Apple? - Bernstein
"The bull case -- of course -- is that India becomes the next China for Apple," Sacconaghi said. "If so, our analysis suggests that India could grow 40%-plus annually and add 200 bps-plus to annual iPhone unit growth and company revenue growth over the next five years."
And economists are careful to note that it may be harder for India to reach the sustained 7-9% economic growth that China pulled off, for reasons including a less centrally planned economy, accompanying low manufacturing jobs, and low female employment (24% vs. China's 61%).
Link to Seeking Alpha News Article - Monday, May 22nd, 2023
Sectors I am bullish on:
I am bullish on Infrastructure, Manufacturing, Tech, Banks and everything targeting the middle class, including and not limited to cars, home appliances, food and beverage, etc…As things stand now, most of my investments in India are still through broad ETFs and I have not increased focus on any of these sectors specifically yet, except tech.
ETF Analysis (All data pulled from Seeking Alpha on Jan 2nd, 2023):
I compared 7 India ETFs for the analysis below. The ETFs compared are EPI 0.00%↑ , INQQ 0.00%↑ , PIN 0.00%↑ , INDA 0.00%↑ , NFTY 0.00%↑ , INDY 0.00%↑ & FLIN 0.00%↑ . Here is a Seeking Alpha link to follow along.
Comparing All ETFs:
All ETFs have an expense ratio between 0.78% and 0.90% with the exception of FLIN at 0.19% and INDA with 0.64%.
In the last 1 year, INQQ delivered the highest total return with 29.47%, followed by EPI with 25.49% and NFTY with 23.19%
In the last 3 years, EPI returned 53.12%, followed by NFTY at 50.47% and FLIN at 39.75%, INDA with 30.6% (INQQ does not have enough data, so it wasn’t considered for 3 years and above).
In the last 5 years, EPI leads again with 82.67%, PIN with 70.68% and NFTY with 68.02%, FLIN with 66.37%.
In the last 10 years, EPI returned 183.33%, PIN returned 149.96%, INDY returned 148.99% and INDA returned 129.76%.
Summary by ETFs:
EPI has been consistently beating all other ETFs across all time frames with the exception of 1 year where INQQ beats it. EPI along with its 480 holdings also gives broad exposure to the India market. It has 96% of all NFTY holdings, 85.6% of all FLIN holdings and 87.8% of all PIN holdings. In other words.
NFTY has returned towards the higher end of the range in all time frames, except in the last 10 years. NFTY being the top 50 stocks in the India market is almost fully represented in FLIN and PIN too. FLIN has 98.0% of NFTY's 51 holdings and PIN has 86.0% of NFTY's holdings. Both FLIN and PIN are much broader than NFTY though, with less than 30% of both ETFs holdings also in NFTY.
FLIN has delivered good returns in a 3 years and 5 years time frame. We do not have data going beyond 2018, so it is not in the competition for 10 years. FLIN also has the advantage of having a very low expense ratio at 0.19%
PIN did well in the 5 years and 10 years time frame but has underperformed more recently.
FLIN and PIN are very similar in composition. 77.2% of FLIN's 213 holdings also in PIN and 100.0% of PIN's 156 holdings also in FLIN. Given that FLIN and PIN have very similar performance over the last 5 years & FLIN’s expense ratio is significantly lower than PIN, I think one could just own FLIN and skip PIN. If you hold FLIN instead of PIN, you basically hold all of PIN and a few more stocks that are not in PIN.
EPI and FLIN seems to be the broadest coverage of all the ETFs.
Conclusion:
Based on the analysis above, I think EPI, FLIN & INQQ are the best ETFs to gain exposure to the Indian Stock Market. While we don’t have a lot of data for INQQ, I am adding it to get exposure to India tech. And for the duration available (1 year), INQQ leads all ETFs.
One could also consider adding NFTY since it has delivered decent performance in recent years. Adding NFTY to a portfolio can give more optionality as the other two ETFs are quite broad. NFTY can be used to increase concentration on the 50 largest and most liquid Indian securities listed on the National Stock Exchange of India. It can be used strategically to trade around your position.
Indian Markets are close to all time highs with what some might call “stretched P/E”. Nifty is trading at around trailing P/E Ratio of 23, Forward P/E around 18-19. I wrote about fair value market multiples in August 2023 where I made the case that the fair value market multiple for S&P 500 is closer to 20 and not 16-17 like a lot of pundits often presume.
The S&P 500 multiple can be easily extrapolated to the Indian markets, given that Nifty 50 has outperformed S&P 500 in the last 5 years by 33% and that India is expected to grow at 6-7%.
My readers also know that I don’t put a lot of faith in P/E ratios when buying stocks (the best example I can think of is Nvidia).
Based on the argument above, one could make the case that the Indian Markets are in fact undervalued right now. However, since the human mind plays tricks on us which makes us uncomfortable buying all time highs, thinking it might be the top, I recommend dollar cost averaging into Indian ETFs and make larger buys if the Indian Markets pull back.
Dollar cost averaging is the best strategy to enter the market when you don’t want to miss the train but you think the stock may be overpriced, yet you also feel that the market could become even more overpriced or if you simply think that earnings will outpace the valuation.
Contrary to common belief, buying something at an all time high is a good strategy. Dollar cost average is a win-win, low-stress way of doing the same.
Borrowed Conviction Rarely Works
Past performance is no guarantee of future results.
The ideas discussed in this article should not be constituted as investment advice.
I reserve the right to change my mind if the facts change.
Disclosure: We own positions in some/all of the tickers mentioned in this article.
I noticed you didn't tag the tickers in your article. This often makes it invisible to Substack's obscure tool for searching stocks. It exists, but hardly anyone knows about it.
Put a dollar sign on Infront of the ticker on the first mention.
"This list includes Amazon (AMZN) $AMZN."
The $ mention won't show up in the app yet, so you should still have it in parenthesis.
Thanks for being another stock analysis site on Substack. The more of us there are, the more we can pull for features that improve Substack as a stock research site.