Six structural changes are playing out in the Indian economy and they could set off an upcycle across capex, real estate, credit growth and startups, besides lowering fiscal and current account deficits, a BofA Securities report has said.
The analysts write that the country has the potential to shrink its current account deficit by 74 percent over the next five to six years “even if the planned initiatives in select sectors play out successfully”.
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They are optimistic about domestic cyclicals such as financials, industrials and select autos. They are cautious about earnings for external-facing sectors such as information technology, energy and materials given the global macro headwinds.
The six structural themes are rapid infrastructure ramp up, de-carbonisation, curtailing imports, stepping up exports opening up government monopolies, improving tax compliance and improving digitisation and financial inclusion.
According to the analysts, capacity additions in transportation infrastructure in 10 years from FY15 to FY25 could exceed cumulative additions seen over 65 years (FY50-15).
The report also points to the increase in sanitation access (89 percent in FY23 versus 43 percent in FY15), cooking gas coverage (100 percent vs 56 percent) and affordable housing (25 million till now vs 1 million till FY15).
The analysts also note that India has taken a holistic approach with its Atmanirbhar initiative, “addressing issues around factors of production (land, labor, power and capital), simplifying processes and curtailing infra deficits”.
If the country succeeds in curtailing imports with its indigenisation drive and steps up exports, they estimate that India’s current account deficit could shrink by 74 percent over five to six years.
With the government looking to open up monopolies such as coal mining, defence, city gas distribution, airports and railways, and aiming only to operate four strategic sectors, BofA’s analysis shows that it could “attract large private & foreign capital and results in rapid increase in capacity adds (>3x capacity adds seen in short time)”.
Tax collections have seen 30 percent to 56 percent year-on-year growth in FY22 and FY23YTD, the report said.
“We believe tax collections could continue to outpace nominal GDP growth in the medium term led by tax simplification, rationalisation and digitisation helping step up tax base and curb tax leakages. Also, we expect India's economy to rapidly formalise. We see huge opportunity for consolidation across sectors, given the high share (16 percent to 94 percent) represented by unorganised firms currently,” wrote the analysts.
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