Global brokerage Jefferies on February 21 said India will be the third largest economy by 2027 thanks to consistent GDP growth rate, supportive geopolitics, surging market cap, continued reforms and strong corporate culture.
“Over the last 10 years, India’s GDP has grown by 7 percent CAGR in USD terms to $3.6 trillion - jumping from the eighth largest to the fifth largest economy. Over the next 4 years, India’s GDP will likely touch $5 trillion making it the third largest economy by 2027, overtaking Japan and Germany, being the fastest growing large economy with the tailwinds of demographics (consistent labour supply), improving institutional strength and improvement in Governance,” wrote Mahesh Nandurkar, India Equity analyst at Jefferies.
India has a consistent history of growing at 10-12 percent in USD terms over the last 10 and 20 years. India is also now the fifth largest equity market in the world and the market cap will likely touch $10 trillion by 2030, said Jefferies.
“Continued reforms should maintain India’s fastest growing large economy status. Strong trends in domestic flows have reduced market volatility and decadal low foreign ownership offers valuation cushion. RoE-focused corporate sector with 167 companies having more than $5 billion market cap leave ample choices to investors,” said Nandurkar.
He cited several reasons behind his conviction.
Continued reforms: India has laid the foundation of 7 percent long-term GDP growth. GST implementation in 2017 simplified taxation and improved trade efficiencies, akin to the formation of Euro. Bankruptcy reforms drove a massive cleaning up of corporate and banking sector balance sheets and improved governance. RERA (Real Estate Regulation Act) cleaned-up housing sector laying the foundation for a multi-year housing upcycle. Govt's focus on physical (Roads, airports, railways etc) & digital infra (UID, UPI, DBT) has helped the start-up eco-system.
Surge in market cap: India’s market cap is currently the 5th largest globally ($4.5 trillion) but India’s weight in global indices is still low at 1.6 percent (10th rank). This should change as market free float rises and some weight anomalies get sorted out. Assuming market returns in line with the last 15-20 year history and new listings, India will become nearly a $10 trillion market by 2030 - impossible for large global investors to ignore.
Supportive global geopolitics: India has a vibrant democracy with 57 national/regional parties. Successive governments have adopted consistent growth and external relations policies. India has excellent relations with the western world, Japan, Australia and the Middle-East making it a key beneficiary of China+1.
Rising entrepreneurship: 10 years of investment downcycle and risk aversion trend has now inverted with housing upcycle and corporate debt-to-equity ratio at an all-time low. India is home to 111 unicorns (market value $350 billion) making it the third largest unicorn hub globally after the US and China. Govt’s focus on developing digital infrastructure, globally the cheapest data rates and the abundant homegrown talent pool have been the key drivers.
India, a services exports hub: Services export now accounts for nearly $450 billion/year. Several large global organisations have 10-20 percent of their employees based in India including companies like JP Morgan, Intel, NTT etc. Superior digital infra, young & well-educated human resources should drive this segment to keep growing.
Strong corporate culture: RoE-focused corporate sector is a key positive for minority investors. Listed equity market is among the most diversified emerging markets. Strong institutional framework of regulators (SEBI, RBI), intermediaries (responsible asset managers) has helped develop a large domestic investor base. Sustainable investment habits give visibility of $50 billion/year flow into equities from domestic investors, which will likely keep the valuations on the expensive side but also reduce market volatility.
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