India versus China
With its favourable demographics, rising income levels and reform-minded government, India may be emerging from China’s shadow, by Kristy Fong
- Key drivers for India’s economic growth include the consumption potential from India’s growing middle class, the post-Covid recovery and digitalisation
- The growing strength of the manufacturing sector is another encouraging sign for the long-term strength of Indian companies
- While India is not immune to the problems facing the global economy, it looks more resilient.
India and China are the twin behemoths of the Asian economy, but China has long garnered more of the headlines. However, with its favourable demographics, rising income levels and reform-minded government, India may be emerging from its shadow. Today, there is real momentum to India’s growth, providing a favourable backdrop for companies.
This growth has a number of sources: the first is the consumer. The chief executive of Hindustan Unilever recently said India will overtake the US to become the group’s most valuable market. It speaks to a wider truth about the growing might of the Indian consumer.
India’s population of 1.4 billion people has recently hit the key income level of $2,200 per capita, which can often be a tipping point for an economy to grow faster. The International Monetary Fund (IMF) estimates that per capita income will grow to $3,769 by 2027, fuelling consumer spending. This strong backdrop should help consumer goods companies defy the global slowdown in spending. In the Aberdeen New India Investment Trust, we have been adding to consumer staples companies, including Hindustan Unilever.
At a time when China is still wrestling with Covid shutdowns and disruption to key industries, India’s has fully reopened. Urban consumption spending is back to pre-Covid levels and banks are willing to lend again.
The growing strength of the manufacturing sector is another encouraging sign for the long-term strength of Indian companies. Capital expenditure is growing, helping to revive a part of the economy that had previously been stagnant, giving balance to India’s growth and making it more resilient.
More global companies are setting up production facilities in India. For example, Apple recently announced that it would start to assemble its iPhone 14 in India as it shifts some production away from China. We believe this might become a broader trend, with the country an increasing beneficiary of the move by global companies to diversify their supply chains. This brings new skills and manufacturing capability to India.
India is also pulling ahead on digitalisation. The country’s internet usage has expanded significantly during the pandemic, and today, almost half the country is online. That makes it the second largest online market in the world after China. This growth is expected to continue, with increasing adoption seen in rural India.
Historically, India hasn’t the same large universe of listed internet companies as there is in China and has instead tended to be characterised by technology services companies, such as Tata Consultancy Services and Infosys. However, the technology universe has grown significantly after a slew of IPO listings in 2021, bringing in new options such as Info Edge, Nykaa and Policy Bazaar.
These three factors may help explain why India has been relatively resilient this year, in spite of global economic turmoil. The Indian economy is set to grow by 7.4% in 2022 and by 6.1% in 2023, almost double the rate of China.
India isn’t immune to the pressures facing the global economy. It has inflationary pressures, particularly from imported commodities. This has hiked input costs for companies as it has across the globe. Wage inflation has also picked up. Recent commodity price drops have nevertheless alleviated some of the pressures.
However, it is worth noting that India has gone through many periods of higher inflation and higher interest rates. Companies are used to dealing with this, having been through many cycles. They are inherently resilient. It helps that India has a stable political regime and the government continues to enact reforms. India has never had a currency crisis or a sovereign default. This creates a predictability for Indian companies that isn’t always there in a command economy such as China. This stability extends to the governance of Indian companies, which are generally well-run and with good governance procedures.
We believe India has more of its growth ahead of it than other emerging market peers, including China. Its stock market is well-balanced, with no individual sector dominating. It has been justifiably resilient this year and should be a powerful source of growth at a time when growth is scarce. We believe it merits its place in portfolio every bit as much as China.
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