India was known as the “Golden bird” which all us would have read in our history textbooks but, this golden bird was caged and its wing cut for the best part of 150 years. The golden bird attained freedom in 1947, save for it lacked the strength which restricted it from flight. However, today in 2023 that same golden bird has reached its immaculate maturity spanning its wings set to soar high with the world at notice. Today we shall take a dive into how India has positioned itself to become the growth story of the upcoming decade.

In a world that is under duress from war, high inflation, impending recession, rising environmental issues and much more, the Indian economy is a story of Aatmanirbharta (Self-sufficiency). The logic behind this statement can be understood by our 3I’s framework.

1. Institutional Reforms

Maintaining financial prudence has been one of the building blocks on which the Indian economy will be built in the upcoming decade. The current government must be credited for this to a large extent for bringing in reforms such as Insolvency and Bankruptcy Code (IBC) speeding up the resolution process and reviving distressed debtors; Goods and Services Tax (GST) enabling the government to simplify taxation, improve tax revenue generation and collection; Production Linked Incentive (PLI) scheme in various sectors enabling reduced dependence of India on other countries; Income tax reforms making India competitive at the global level for Multi-National Companies (MNC’s); PM Jandhan scheme bringing in financial inclusion etc.

2. India Stack

Who knew that a high-ranking official of an Indian IT MNC would lay the foundation of a government program that will create a unique system which would later be called the India Stack transforming the economy like never before. India Stack is a unique ecosystem comprising of 3 layers a) Aadhar-enabled Identification b) Aadhar – UPI Payment infrastructure c) Data Empowerment. Let us take a brief overview of each layer.

• Aadhar-enabled Identification

Aadhar was introduced in 2010 as a unique identification number (UIN) for all citizens of the country. It was the brainchild of Infosys co-founder Mr. Nandan Nilekani. However, its true potential was unlocked after 2014, when the government linked Aadhar with the banking system and opened millions of Jandhan accounts giving them access to the financial system. Further Aadhar is now linked with Digi locker, wherein citizens can access all personal government documents online.

This is the only system in the world capable of providing e-KYC and e-Sign through which businesses can digitally authenticate and complete the onboarding of customers seamlessly. It is this capability that empowered Reliance Jio to gain millions of customers in a brief period during the initial stages.

• Aadhar-UPI Payment infrastructure

Unified Payments Interface (UPI) is a public payment infrastructure that enables real time payment across platforms to anyone anytime. The simplicity of the technology has made it ubiquitous and UPI transactions account for 55% of the GDP.

This gave power to the government to make direct benefit transfers to the intended recipients, which in the yester-years were syphoned off in transit. The utility and success of UPI has made it go global, with Singapore integrating UPI with PayNow for real time payment between the countries.

• Data Empowerment

Armed with the data and information flow in the India Stack two more layers 1) Open Network for Digital Commerce (ONDC) and 2) Open Credit Enablement Network (OCEN) are imminent for integration. ONDC will forever change the way e-commerce would be executed in India. OCEN on the other hand would make credit ubiquitous revamping the lending and credit ecosystem.

Therefore, we would like to give a special mention and thank Mr. Nandan Nilekani for his work on Aadhar and the India Stack with the government.

3. Industrial Revolution

The irony of the economic reforms in 1991 was India went from being an agricultural economy to a service economy. Therefore, technically we have not experienced an industrial revolution, in which the manufacturing sector is a significant contributor to the GDP.

The world realized during and after the pandemic that having all eggs in one basket is not a smart move. What we mean is, China was the factory of the world, and the United States was the consumer. When the pandemic began and the supply from China was shutdown, the world came to a stark realization of its need to diversify. That gave birth to the China + 1 strategy, which has led large corporations to shift massive parts of their operations from China to other countries.

India is and will be the direct beneficiary of this play over the years to come. Simply because a) India has over the past decade built the necessary infrastructure b) made the reforms mentioned earlier and c) is a growing economy with high consumption. The moral of the story is that this has created a platform for global players to divert their production investment to India. For example, Apple has committed to export 25% from India, directly impacting the Smartphone exports of India which doubled to $11.1 bn during FY23 against $5.48 bn in FY22.

Eventually, India will become a factory to the world for a vast variety of products ranging from smart phones, chemicals, pharmaceuticals, and more. India is already a massive exporter of services to the world, the combined effect of an increase in the export of goods and services will mean the economy will grow bigger and faster than it historically did. In 2021 the share of exports of Goods and Services rose to 21.4% of GDP from 18.71% in 2020.

Golden Investing Opportunities

Knowing India is entering a Golden phase is one thing, to benefit from its and make money is another. Therefore, based on the 3I framework we believe the following four themes / sectors can be the most lucrative to create a long-term wealth generating portfolio.

• MSME Credit – Banks / NBFCs

The Banking sector has undergone a seismic transformation since 2018, as banks and financial institutions started to clean up their balance sheets and ensured prudent credit distribution. Growth of credit was not the issue for the banks, the issue to ensure they did not give credit which put them at risk to massive loss. Today balance sheets of banks are stronger, with robust Returns on Asset and high Net Interest Margins.

As mentioned earlier credit in India is not ubiquitous. Credit was made available to those who could jump through the hoops of the traditional lending system of the banks and NBFCs, which meant for unorganised MSME entities, credit was very expensive or non-existent. This is already changing on account of the India Stack; small individual businesses can avail credit basis the information collection through their UPI transactions. Once OCEN is integrated on to the India Stack the lending sector would likely undergo a transformation.

• Manufacturing Hub – Electronics / Chemicals / Defence

With China creating a disadvantage for itself with its strict COVID guidelines during and after the pandemic, it made large corporations to move parts of their operations outside China. This is already materializing as Apple has committed to export 25% from India. Samsung setting up the largest mobile phone manufacturing factory in India, Foxconn in talks with Vedanta to setup a semiconductor plant etc. are all pointing towards India being a preferred destination for manufacturing.

With regards to the Chemicals space, India has the necessary infrastructure, policies and labour required to become a hub for chemical manufacturing over the decade. It is estimated that India would triple to 10-12% of the global share by 2040. Herein, Agrochemicals and Speciality Chemicals would be the most attractive.

The Union Budget of FY24, allocated a record Rs. 5.94 lakh crores, which will boost the aim of the government to develop indigenous defence equipment reducing the dependency on other countries for defensive supplies. The government is also expected to allow a greater private player to contribute toward this objective.

• Financialization of Savings – Healthcare / AMC

As per capita income of India rises, there will be greater emphasis placed by individuals for making proper utilization of their savings. The general public, especially the younger generation understands the value of investing into financial assets over traditional assets such as gold, land, home etc. boosting the demand for MFs, ETFs, PMS, bonds etc. Therefore a fundamental shift from investing in traditional assets to financial assets will create massive opportunities for companies who provide these products such as AMCs and intermediaries (Brokers).

Further, with improving financial literacy and increased disposable income, the prominence of insurance would increase directly boosting demand for insurance-linked products. Consequently, it would also increase healthcare spending on preventive medicine, diagnostics etc. With the government also promoting affordable healthcare through Ayushman Bharat, demand for healthcare services is headed in the upward direction.

Another reason why healthcare sector would outperform is due to the China + 1 strategy. China is the largest manufacturer of Active Pharmaceutical Ingredients (APIs) and a strong player in the Key Starting Materials (KSMs) segment. With large pharmaceutical companies seeking to diversify their operations to other countries, India would be the best alternative as it already has the necessary 1) infrastructure 2) R&D capabilities and 3) technical know-how along with being a leading Generic Medicine manufacturer. 

• Digitalization – IT

Again referring to what we explained earlier, the Indian economy went from being agriculture dependent to services heavy, bypassing manufacturing. The IT sector has been at the helm of the Indian innovation & ingenuity paving the path towards where it is today contributing immensely to the growth of the economy and the services sector. The Services PMI data for the month of Apr’23 stood at 62.0 which is at a 13-year high indicating India’s service is resilient despite the global headwinds.

We believe this theme will continue as the India Stack will be an integral part of the growth story wherein the Indian IT sector is pivotal. How businesses will adopt the Digital India initiative, incorporate digital solutions in their business activities and use technology for efficient process and provide customers with results as per their expectations.