India rising

19 July 2023

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Long in the shadow of neighbouring China, India is projected to be the world’s fastest growing economy this year and next. Walter Scott investment manager Alan Lander and investment analyst Connor Graham recently spent two weeks in the country, speaking to management teams and taking the pulse of Asia’s “other superpower”.

We have been regular visitors to India for more than thirty years, witnessing in that time an economic transformation on an epic scale. Often overshadowed by China's dazzling metamorphosis from Communist backwater to global powerhouse, India’s own journey from socialism to capitalism has been one of the great economic tectonic shifts of recent decades.

Yet for all its impressive accomplishments – hundreds of millions lifted out of poverty, a rapidly expanding middle class and highly educated workforce – an air of promise unfulfilled has often clung to the Indian economy, no more so than when comparing its progress to that of neighbouring China.

That perception may be about to change, however. At a time of great economic uncertainty for much of the world, India is projected to be the fastest-growing major economy this year and next¹. On track to surpass China later this year as the world’s most populous nation, there is a growing sense that India stands on the cusp of an exciting new stage in its development.

A new age of prosperity?

Mr Modi’s ambition may be as bold as some of his policies and rhetoric are divisive, but there is no denying that he is deploying considerable resource in its service. India’s once creaking infrastructure, for example, is undergoing a massive upgrade. In the February 2023 budget, capital expenditure as a share of total expenditure was the highest in fifteen years. Evidence of this investment was abundantly clear in Mumbai, the first stop on our two-week trip. Whether it is a new eight-lane coastal road set to halve the north-south travel time across the city or the ongoing expansion of the metro rail network, building work is happening everywhere you look.

Another area of government focus is manufacturing. Long in the shadow of India’s service sector, manufacturers across a range of industries are benefiting from initiatives aimed at facilitating investment, easing barriers, fostering innovation and encouraging onshore capacity expansion. The hope is that these measures will not only support import substitution but also help grow exports too.

These aspirations have received an unexpected but potentially game-changing boost from the emergence of the ‘China Plus One’ strategy. Scarred by geopolitical uncertainties and the legacy of Covid-19 disruption, companies around the world are seeking to diversify their supply chains away from a sole reliance on China. And as a geopolitically ‘neutral’ player, India stands to benefit.

Rising incomes, growing opportunities

As well as an important manufacturing hub, Mumbai is also India’s financial centre and home to the country's insurance industry. Life insurance in India remains a nascent market –penetration stood at only 3.2% of the population in 2021 – but the long-term opportunity is enormous². As the country's 1.4 billion population grows more affluent, demand for wealth protection products will also grow. Whilst this same narrative is playing out across the developing world, few markets hold the potential of India.

India pulls ahead

Source: World Bank – Global economic prospects January 2023.

Despite the very large and very obvious opportunity, however, progress to date has perhaps underwhelmed. In our conversations with some of India’s leading insurance companies, we got the sense that the industry had somewhat lost its way in recent years. For some time, sales efforts were aimed at the very affluent end of the market, with less emphasis placed on increasing penetration across India’s social spectrum. That dynamic is now changing, however, and companies are starting to address the real long-term opportunity – selling products to the swelling ranks of the Indian middle class.

Reflections

Ending our trip in Delhi, we could reflect on two weeks of constructive and insightful meetings. Our discussions with the Indian subsidiaries of overseas companies provided informative updates on the ongoing opportunity in the country for global players, whilst conversations with domestic businesses allowed us to dig deeper into some new and potentially interesting investment candidates. Many of these businesses have strong product or service offerings in parts of the Indian economy that are currently enjoying macro and geopolitical tailwinds, whether that be the country’s fast-growing middle class, alignment with government policy, or the diversification of global supply chains. Even if they don’t translate directly into portfolio investments, the insights afforded by these meetings will prove valuable inputs and into our ongoing research and analysis back in Edinburgh.

One of the enduring benefits of trips such as these is the chance to take the pulse of a country and of those involved in the ‘day-to-day’ of its economic life. From our meetings in India, a picture emerged of a nation confident in itself and its future, both in the near and in the long term. And whilst it would be unwise to underestimate the scale of the challenge that lies ahead for the country as it aims for developed nation status by 2047 – India remains beset by high levels of corruption, poverty and inequality – it would be equally misguided to downplay the considerable efforts now underway to accelerate the country’s development. Progress may not prove linear but these are undoubtedly exciting times for India.

¹ Source: World Bank – Global Economic Prospects January 2023

² Source: Invest India