by Jeffrey Kleintop, CFA® Managing Director, Chief Global Investment Strategist, and Michelle Gibley, Charles Schwab & Co., Inc.
India's growth initiatives and demographics may help its economy continue to advance; its stocks seem to have priced in high expectations for the world's fifth-largest economy.
India's strong second quarter
Source: Charles Schwab, Bloomberg data as of 6/30/2023.
Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested indirectly. Past performance is no guarantee of future results.
India's rising relevance
- India's economy is now the world's fifth biggest, recently surpassing the United Kingdom. India's GDP is expected by economists to grow faster than 6% in each of the next three years, compared to the U.S., which is expected to grow less than 2%. The International Monetary Fund forecasts India to be the third-largest economy by the end of the decade, overtaking both Japan and Germany.
- India's population is set to surpass China's this year according to the United Nations, which has predicted India will end 2023 with 1.429 billion people. China is forecasted to end the year with 1.426 billion. Thirty years of a "one child" policy in China and the high cost of raising children has resulted in the fertility rate falling to 1.2 births per woman in China, while India's rate is 2.0 births per woman.
India becomes most populous country
Source: Charles Schwab, United Nations, Macrobond, as of 6/27/2023.
Gray shaded area is United Nations' forecast.
- India has the world's largest democracy, with a capitalist economy and the world's most popular leader, Prime Minister Modi. As the world looks to "de-risk" supply chains in Asia, some are looking to India. Demonstrating the desire to work with India on their shared goals, President Biden threw a formal banquet for Modi at the White House and the leaders of Congress invited him to address a joint session in early June.
India's positive momentum
- India is making changes to increase its attractiveness as a manufacturing base. India is known for IT outsourcing, but the sector only employs a small fraction of the workforce. The pandemic highlighted the supply chain risks of concentrated manufacturing bases in Asia, and western policymakers desire to "de-risk" Asian supply chains may mean a shift to India. Modi's government is making efforts to attract companies by offering incentives for producing in India, easing regulatory burdens and investing billions of dollars in improving the country's infrastructure. It is showing some signs of success. For example, Apple is expected to move some iPhone manufacturing to India.
- India's currency may become less volatile through the purchase of Russian oil. India may be less prone to capital outflows as Russia receives rupees in exchange for oil exports to the country. Should the trade relationship become longer lasting, Russia may avoid converting the rupees into western government bonds and instead hold them in Indian government bonds used to fund India's massive infrastructure needs. This should lead to capital inflows and a stronger rupee, which would be a powerful combination that may lower long-term rates in India, supporting stocks and real estate values and potentially contribute to greater stability in India's monetary policy.
- India is benefiting from cheap energy, a critical manufacturing input. India's purchases of Russian oil, coal, and other energy products since the war began in Ukraine offer a cost advantage to manufacturing.
Russia-sourced oil (Urals) trades at a big discount to Europe-sourced oil (Brent)
Source: Charles Schwab, Intercontinental Exchange, Macrobond data as of 6/27/2023.
India's risks
- India's path to becoming a manufacturing powerhouse is not easy. India is challenged with lower productivity, labor-skills mismatch, inconsistent manufacturing quality, poor infrastructure, complicated investment rules, labor and land-use regulations. In contrast to India, China's government takes quick and decisive action with little political opposition in the way.
- Climate could pose a challenge to India's growth. This past June, temperatures in India soared as high as 115˚ F, part of an increasing pattern of intense heat waves in the country over the past decade. The World Bank has flagged India as likely to be one of the first places in the world where heat waves breach the human survivability threshold. The potential for increasingly intense heatwaves poses a risk to lives, agriculture, manufacturing, and political stability.
- India's stocks are typically expensive but are even more so now. India has a unique growth story relative to the emerging-market (EM) universe, as it has been more domestically focused than other Asian economies. Its young demographic and small manufacturing share of GDP gives it a runway for growth and as a result, its stocks tend to trade at a premium to the EM universe. However, Indian stocks are currently even more expensive than their longer-term average and a larger premium to the EM universe than usual.
India's stocks trade at a premium
Source: Charles Schwab, FactSet data as of 6/26/2023.
Price-to-earnings ratio based on analysts' next 12 months' estimates.
Michelle Gibley, CFA®, Director of International Research, and Heather O'Leary, Senior Global Investment Research Analyst, contributed to this report.