India: Growth drivers are in place

Tushar Poddar, PhD, Macro Strategist
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I recently visited India for two weeks and was struck by how much has changed, predominantly for the better, in terms of its macroeconomic picture. With that in mind, here are my latest thoughts on the macro environment, along with my high-level take on India’s equity market.

The macro picture

  • India has already gone through a debt deleveraging cycle. As a result, company balance sheets are healthier, especially in the banking sector, while credit growth is picking up. The 2017 – 2019 crisis involving India’s non-banking financial companies (NBFCs) now seems a distant memory.
  • Jobs growth in India continues to be strong (Figure 1), driven not only by the post-pandemic bounce, but also by the country’s receipt of outsourced services from the global finance, insurance and other sectors. This is leading to a virtuous cycle of increased consumer demand.
  • After eight years of stagnancy that plagued India’s real estate sector, a new real estate cycle began in late 2020, fuelled in part by the employment growth described above, but also by a trend of better housing affordability throughout much of India.
  • On the capex front, the Indian government’s incentive plan to attract foreign direct investment (FDI) is gathering momentum. As of this writing, the production-linked incentive scheme had already garnered US$30 billion in FDI commitments.
  • I did not observe any significant latent inflationary pressures, even in the rebounding hospitality and travel/airline sectors (Figure 1). Food prices are more or less in check amid a normal monsoon season thus far and can hopefully remain so, barring any unexpected shortages. 
  • My outlook for the Indian rupee (INR) and for India’s local interest rates has improved recently. Commodity prices have corrected sharply, foreign portfolio inflows have resumed and the currency does not look expensive to me from a valuation standpoint. 
  • Politically, there is no serious opposition at this time to Prime Minister Narendra Modi and his ruling Bharatiya Janata Party. In fact, Modi appears to be a “shoo-in” to win the 2024 election. Translation: a measure of political stability in India, at least for now.
Figure 1

India’s equity market

On Indian equities, I think the catalysts of cleaner company balance sheets and strengthening business and consumer demand augur well for both nominal gross domestic product (GDP) and corporate earnings growth. I see India’s economy as being in much better shape structurally than it was pre-pandemic and expect GDP growth of around 7% for full-year 2022, followed by annual growth in the neighborhood of 6% – 7% over the next few years. Rising interest rates are a potential headwind, but I suspect the Reserve Bank of India will be unlikely to hike rates too aggressively for fear of dampening demand and growth.

Bottom line: While overall market valuation has been quite elevated lately, I continue to believe discerning investors should look for opportunities to “buy the dips” in India’s equity market going forward. While not my base, the biggest risk to my view is a large and sustained upward move in commodity prices, which could adversely affect India’s current and fiscal accounts and push broader inflation even higher.


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