India’s ascendancy: Foreseeing India’s leadership in emerging markets for the next decade

Tim Love, Joaquim Nogueira and Rachit Chirania of GAM Investments’ Emerging Markets Equity team believe India could lead emerging market outperformance over the course of this decade. They outline seven reasons why they think the country presents a rare secular and cyclical growth story at a time when major economies are struggling.

06 July 2023

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1. Economic resilience in a challenging global environment: India has acted as a relative haven both during the Covid-19 pandemic and more recently during a period of heightened geopolitics. Its economic activity is already closer to its pre-pandemic path despite a challenging global environment. The World Bank predicts India has the potential to be the world’s third largest economy by the end of the decade, with its GDP expected to surpass USD 5 trillion by 2026.


2. Significant structural reform: India’s resilient economic growth has been supported by an economic shift facilitated by policymakers bringing in various structural reforms, including:


• Improved governance delivery: In an effort to reduce the informal sector, India’s policymakers are reducing regulatory barriers and moving to a digitalised governance model. Aadhaar, the world’s largest biometric ID system, has documented the identities of more than 94% of India’s population and drastically reduced the cost of identity trust. It has also allowed millions of Indians direct access to government subsidies without having to rely on middlemen, as well as access to affordable formal financial services.


• Rationalised labour laws and the creation of land banks


• Corporate tax was reduced from approximately 35% to 25% in 2019 and indirect taxes have been subsumed into one tax for the entire nation to reduce system leakage.


• Removal of retrospective taxation law: India removed a controversial 2012 law that retrospectively levied capital gains tax on companies for the indirect transfer of their Indian assets, which was previously unpopular with foreign investors.


• India is now the most populous country in the world: Prime Minister Narendra Modi views the extra population as an opportunity for growth, rather than as a hurdle.


3. India’s demographics: Currently, India’s population is 1.428 billion with 40% below the age of 25. Therefore, we believe India’s greatest strength lies in its domestic consumption, which makes up more than 60% of GDP and helps protect the economy to some extent from global economic events. The country’s per-capita income is widely expected to double from less than USD 2500 currently to more than USD 5000 and the number of households earning more than USD 35 000 is likely to rise fivefold by the end of this decade, setting the stage for a discretionary spending boom.


4. Geopolitical dynamics: India is emerging as an active player in global politics and we believe the country is positioned favourably, with strategic relations with most countries in the world. Recently, it has signed free trade agreements with Australia and will most likely clinch a deal with the UK and Europe on trade barriers. Western economies keen to diversify away from China to hedge against future conflict are finding India to be strong competition.



5. Global supply chain diversification and hedging: Given geopolitical issues in China and Europe, India, together with Vietnam, is likely to be a beneficiary as companies continue to diversify their supply chain to mitigate political risk. The Indian government has focused on the supply side, progressively cutting corporate taxes since 2019 to attract manufacturing investment and lifting public capex as a share of GDP to a near 17-year high. India has also introduced World Trade Organization (WTO) compliant production-linked incentive schemes to benefit from the decentralisation of supply chains. The government also aims to bring down the current high cost of the country’s logistics sector via infrastructure development and process-related reforms.

   Furthermore, according to UN estimates, by 2030 India will emerge as one of the largest suppliers of labour, accounting for almost 23% of the increase in the global working-age population. Its wage rate per employee is among the lowest in the world, which creates a competitive advantage for Indian firms to lower the cost of production.

6. Banking reforms: This sector in India has staged a drastic turnaround recently. Gross non-performing assets (NPA) for Indian banks have reduced from highs of 12-13% in 2016 to 5.8% in 2022. Net NPA currently stand at 1.7%, implying a provision coverage of more than 70%. Meanwhile, retail credit has grown at 19.7% year-on-year year-to-date, while corporate debt to GDP has reduced to approximately 47% in 2022 from highs of 62%.


7. The energy transition: India committed at COP 26 to increase its non-fossil energy capacity to 500 GW and to fulfil 50% of its energy requirements from renewable sources by 2030. In the last six years, India’s installed renewable capacity has gone up by more than 2.5x. The energy transition theme will reduce the country’s oil dependency and will positively contribute to its terms of trade, as well as reduce inflation volatility and create new markets for electric vehicles and hydrogen powered vehicles.

India was overvalued, overowned and overloved in the Covid pandemic as a safe-haven investment, but following a period of derating, we believe the rare and cyclical growth story we have outlined above has not yet been priced in. As always, selectivity remains key and we currently see the best opportunities in the mid-cap sector.