Morgan Stanley reckons that if the primary fiscal deficit remains at 1.2% of GDP, public debt will fall to less than 60% of GDP by 2027, from 69% now. "This leads to a crowding in of private investments with a positive impact on interest rates and inflation," it adds. And as the GST is managed through an online network, taxpayers—both people and businesses—can easily share their income data with potential lenders, allowing creditors to better assess borrower risks and price them more accurately.
Real-time payments systems have been developed that can link biometrically identified, Internet-connected people with remote bank accounts to vendors of goods and services, allowing for immediate customer-to-customer and customer-to-machine transactions, signed with digital signatures. No physical infrastructure beyond a smart phone needed.
The initiatives, Morgan Stanley says, "have ‘digitized' India and brought the country to an inflection point in terms of growth, with a concomitant impact on stock returns, financial sector dynamics, consumption growth and e-commerce activity."
The sectors poised to benefit the most are consumer-oriented and financials. Total online shoppers in India are set to skyrocket from 60 million to 475 million in 2027, while online retail as a percentage of total retail will grow even faster, from 2.2% today to 12.1% in a decade. Unsurprisingly, Amazon, Alibaba and Naspers have been aggressively investing billions of dollars in India. Morgan Stanley figures Softbank alone has invested some $46 billion in local e-commerce and on-line payments, ride-hailing, and real estate platforms.
As for the financials, it sees total loans increasing 11 percentage points to 78% of GDP by 2027; total mutual fund assets under management jumping more than ten-fold over the same period; and collected life and general insurance premiums spiking, as well. Fin-tech companies should see exponential growth.
"As digitization takes hold, SMEs (small and medium enterprises) and consumers will have better access to credit, which should help boost domestic demand. Specifically, SMEs will be able to lift their capital spending, thereby raising sustainable growth, while households will be able to increase their discretionary spending," Morgan Stanley says, adding that the country should achieve upper-middle income status by 2027.
India is undertaking a massive social, economic and technological experiment. Linking individuals' identification, bank accounts, tax documentation with digital transaction infrastructure will certainly hit bumps along the way. But the pieces are in place. India is entering the digital age at breakneck speed.
The opportunities for investors are enormous, but not, of course, without risks. At 18.3 times, the BSE Sensex Index's next 12-month price-to-earnings ratio is trading at record-high levels, outside the Global Financial Crisis-valuation blip. Yet a number of companies will still experience huge earnings growth, supporting high and expanding multiples.
Some squeezing their free cash flows to fuel growth today for higher returns tomorrow may not ultimately generate good returns on capital. Others will. Distinguishing correctly between them will determine how much of the anticipated double-digit annual growth in expected returns investors actually realize.
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