The rally has many legs to take markets higher

It is not very easy to be bullish when Nifty is trading at over 19,400, close to its all-time high, but this rally has many legs like liquidity, strong fundamentals and many economic indicators moving at an all-time high. Consider a few data points. GST collections, the opening of new demat accounts, systematic investment plan (SIP) flows and UPI transactions reported robust growth over the last five years. Capital expenditure by the private sector and government has also picked up. Still, the overwhelming fact remains that a large proportion of India’s population is yet to participate in this rise.

Let me share a few anecdotes:

— About 1 percent of India’s population equates to 45 percent of unique airline traffic;

— About 1 percent of Indians take approximately 22 percent of the country’s income;

— About 3 percent of Indians make up all unique credit card holders;

— Less than 3 percent of Indians invest in mutual funds; and

— About 8 percent of the population account for almost 100 percent of car ownership.

These statistics indicate a skewed concentration of income, but viewed from a positive perspective, a massive opportunity is waiting to explode for deeper penetration.

I believe growth in India may be delayed but cannot be denied. There was a quote attributed to Napoleon some two centuries ago: “Let China sleep, for when she wakes, she will shake the world.” Well, China did wake up, and the world was shaken. The whole economic landscape of the planet, the geopolitical balance of power, and even the Earth’s environment were irrevocably changed over the last three decades by the addition of 1.4 billion human beings to the ranks of the (more or less) developed world. Now India is aiming to migrate another 1.4 billion to the developed world.

India always gives me a feel of four different countries in terms of per capita. The top ~0.5 percent makes income equivalent to Swiss per capita, the next 9-10 percent earns around $9,000 which is alike Mexico’s per capita, the next 10 percent earn approximately $3,200-3,500 per capita like in the Philippines’ economy, and the rest are at $1,200-1,500 per capita like any under-developed country. The Indian government must work more towards narrowing this gap and moving a larger proportion of the population to higher income brackets.

The biggest challenges for India include finding ways to quickly create infrastructure, improve education and industrialise to meet the demands of the over 1.4 billion population. India’s growth till now, unlike China, was driven more by consumption and services. The question here is whether India can industrialise or become a manufacturing base of the world. There are enough indicators that India is keen to be the next China in terms of becoming a global hub of manufacturing; it may not execute at the speed of China due to a variety of reasons, but it is surely going to do it. In the last five years production-linked incentive (PLI) schemes, corporate tax cuts and friendly foreign policies have paved the path to achieving that goal.

A lot of hard work has been done by the current government on the infrastructure and manufacturing front. However, education reforms have lagged. We need similar improvement in the education sector as we have seen in other sectors. For example, we have doubled the number of airports in the last nine years, and defence manufacturing capabilities, and railway and road infrastructure are going through a massive overhaul. Needless to say, the value of mobile phone production in India has more than doubled from Rs 1.32 trillion in FY2018 to Rs 2.75 trillion in FY2022 and continues to grow rapidly. The Vande Bharat trains have big export potential. Indian Railways is looking at becoming a major exporter of these trains by 2025-26 to markets in Europe, South America, Africa and East Asia. The latest version of the indigenous trains with sleeper coaches will be operational by the first half of FY24. Indian Railways want to clock 10-12 lakh kilometres on 75 Vande Bharat trains over the next few years so that they can be export ready.

India’s defence exports have reached an unprecedented peak, rising from a modest Rs 686 crore in FY 2013-14 to about Rs 16,000 crore ($2 billion) in FY 2022-23, representing a remarkable 23x increase, boosted by policy initiatives of the past nine years. India’s defence industry has demonstrated its prowess in design and development with 100 firms, across the public and private sectors, exporting to more than 85 countries.

Last, but not the least, Apple began manufacturing its products in India in 2021. About seven percent of its total production is made in India and this is set to grow in the next decade. For Apple, India’s vast domestic consumer market is a major attraction, rather than a China+1 strategy or the low cost of manufacturing. Like China, India offers a dual advantage of market opportunity and a low-cost manufacturing hub. From any outsourcing giant’s perspective, agglomeration effects are easy to understand. Companies want to locate near their customers, workers, and suppliers and prefer people, who are both employees and customers. Smart capital allocation model suggests that money should be deployed only where an investor can take profits out. The Apple store at Jio World Drive in Mumbai's Bandra Kurla Complex (BKC) is spread over 20,000 square feet over two levels and is about a third the size of Apple's flagship store in New York but similar to the outlet in London's Regent Street. This reminds me of the scale and size of the Louis Vuitton shop at Marina Bay, Singapore spread over 25,000 square feet.

Coming back to markets, which has been on an upward journey over the last three months, though it appears that nothing can go wrong, one needs to watch out for uneven monsoon and global slowdown that can have its own impact on inflation and business. China’s revival can also put some pressure on subdued commodity prices.