Franklin Templeton: India in 2024 and beyond

India is entering a period of self-sustaining expansion as prior reforms create a virtuous cycle of growth. This could drive nominal gross domestic product (GDP) growth as high as 10% annually in the coming decade. Voters in the country go to the polls in 2024 amidst a general election which the incumbent Bharatiya Janata Party (BJP) and Prime Minister Narendra Modi are expected to win. We have identified three primary drivers of growth which are linked to our investment themes of rising demand for financial services, infrastructure investment, consumerism and the green transition in India.

1. Broad-based infrastructure and manufacturing investment has joined consumption as growth drivers. Services exports are widening and deepening to include global capability centers focused on accounting, marketing and human resources.
2. A sustained switch from unorganized to organized economic activities is taking place, as prior reforms bring more labor into the organized economy and reduce the attractions of cash-based transactions.
3. There is more political and economic stability with low inflation and a sustained reduction in the current account and fiscal deficit. The government has recognized its role in kickstarting a new industrialization process to leverage opportunities from “make in India,” the diversification of global supply chains and the green transition.

Growth

The economic and policy foundations built by the Modi government create the potential for the Indian economy to join the United States and China in the US$10 trillion GDP club by 2035 if nominal GDP growth rises by 10% per annum¹.    

Exhibit 1: India growth scenarios to $10 trillion economy

India: Size of the Economy and Growth Scenarios

2022–2024 (f=forecast)

Source: Analysis by Franklin Templeton given projected growth scenarios. There is no assurance that any estimate, forecast or projection will be realized

Investment in manufacturing should act as a new growth driver, driven by the opportunity to leverage the “make in India” program and the diversification of global supply chains.

The “make in India” program is becoming a reality, with the world’s largest contract manufacturer announcing plans to double its Indian workforce to 50,000 and invest US$2.7 billion in Karnataka state.² This is the latest large-scale announcement following those related to research and development into artificial intelligence chips (4,000 jobs)³ and semiconductor investment (5,000 jobs).⁴

Household spending should remain resilient given increasing job opportunities for skilled workers and increasing wages for the unskilled. The switch to organized economic activities and a decline in the cash- based economy are driving the latter. We believe there is significant potential for growth in credit penetration in India, which is currently 40% of GDP, compared to an average of 63% in emerging markets.⁵  

Exhibit 2: Credit Penetration in India

Private Sector Credit-to-GDP Ratio    
June 2023      

Source: FactSet

Investment

Broad-based infrastructure development focusing on improving capacity, decarbonization and self- sustaining business models is becoming the norm. Mumbai plans to invest US$40 billion to decongest and decarbonize transport as well as improve water treatment and quality.6 The city plans a metro network of 14 lines—three are operational, five are under construction and the remaining six are in the planning phase with an estimated cost of US$14 billion.⁷

There is increasing breadth in the spread of investment and development across the country. There has been movement beyond the dominant states such as Gujarat, Maharashtra, Karnataka and Tamil Nadu to Rajasthan and Uttar Pradesh. Lower wage costs and availability of skilled labor are encouraging increased investment in these states.

Electronic toll collection and the introduction of a National Common Mobility Card are creating greater certainty and reduced risk of political interference for investors in road and rail infrastructure projects. The creation of self-sustaining transportation business models is enabling the government to recycle capital investment, creating a virtuous cycle of infrastructure investment growth.

New growth drivers include those beyond the traditional sources of investment and employment in the technology services sector. Global Capability Centers are expanding, focused on accounting, marketing and human resource services. Beyond services, India is a global leader in pharmaceutical manufacturing, producing 60% of global vaccines and accounting for 20% of global pharmaceutical exports.⁸

Economic and political stability

Greater policy certainty, a structural decline in inflation and a reduction in the current account and fiscal deficit has increased economic confidence. We believe this should lead to an eventual decline in real interest rates. As growth drivers become more diversified, broad based and less cyclical, the visibility of growth improves and the perceived country risk and thus the cost of equity can fall.

The government is playing an important role in kickstarting a new industrialization process. Prime Minister Modi kicked this off with the 2014 “make in India” program, which led to the launch of production linked incentives to leverage the opportunities that the diversification of global supply chains presented. The government’s target was to raise manufacturing’s contribution to 25% of GDP, and after a slow start, the goal is likely to be reached by 2025.⁹

The market is playing an increasingly important role in the efficient allocation of capital. This is driven by improved corporate governance with greater regulatory oversight, board independence reforms and increased activism by institutional investors. The professionalization of management in family-owned businesses is widening the universe of investible companies.

The economy is benefiting from multiple structural reforms such as the insolvency and bankruptcy code, goods and services tax, and digitization via the trinity of Aadhaar¹⁰ and Jan Dhan¹¹ utilizing mobile communications. This is leading to increased entrepreneurship, with new graduates seeking to join start-ups which are leveraging the India Stack and opportunities related to “make in India.”

Earnings + valuations

Market performance (represented by the Nifty 50 Index) over the past two years has been positive,¹² but it has lagged cumulative earnings growth of 31%.¹³ This has pushed valuations lower and created new investment opportunities. We believe 2024 could witness a re-rating of the market if there is increased acceptance among foreign investors at India’s growth is structural as opposed to cyclical.

Exhibit 3: India EPS Throughout Economic Cycles

India Corporate Earnings Remain Strong Double-Digit Growth in EPS Forecast    
December 2001–December 2025(F)   
CAGR= Compound annual growth rate.

Source: Bloomberg; Nifty 50 EPS estimates. The NIFTY 50 is a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. There is no assurance that any estimate, forecast or projection will be realized.

Domestic participation in the equity market looks likely to increase via the expansion of systematic investment plans and greater participation by insurers and pension providers. This could potentially drive US$30 billion in flows to the market.¹⁴ Increased foreign investor allocation can add further new capital to the market, supporting a market rerating.

The MSCI India Index price-to-earnings ratio (P/E) is currently trading one standard deviation above its 10-year average, based on 2024 consensus earnings forecasts.¹⁵ Looking ahead, earnings growth in 2024 is forecast to rise 17%,¹⁶ which is supportive of the current P/E. Other markets may trade on a lower P/E, but in our view, they do not have the long-term growth potential of India. 

Exhibit 4: India P/E Relative to Emerging Markets

Valuations: Price-Earnings Ratios    
December 2003–November 2023

Source: FactSet. The MSCI India Index is designed to measure the performance of the large- and mid-cap segments of the Indian market. The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging markets countries. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

Elections

Consensus is for the incumbent BJP and Prime Minister Modi to be returned for a third term in the 2024 general election. Modi’s win in 2014 was partially driven by first-time voters, who have since benefited from increased incomes via the Aadhaar, Jan Dhan schemes. Satisfaction with Modi is high, limiting reasons for voters to switch their vote in the upcoming election to the opposition.

The BJP has been victorious in December state elections, creating positive momentum heading into the general election. Even in states where the BJP is in opposition, it has witnessed a rise in its vote share: in Telangana, it doubled from 7% to 14%. Following the state elections, the probability of an opposition win has fallen further, in our view.

There are some concerns surrounding the “key-man” risk. However, we believe reforms are too well entrenched to result in a change if Prime Minister Modi were to step down. A surprise  opposition “India Alliance” win would likely push the market lower in the short term, but would be unlikely to alter the long-term trajectory for growth.

In opposition-controlled states such as Tamil Nadu and Karnataka, the local government is aggressively pursuing investment in industries including electronics manufacturing, electric vehicles and solar energy. A pro-investment stance is consistent among ruling and most opposition parties; hence, an unlikely opposition win is not viewed as significantly altering the growth trajectory for the economy.

Key investment themes

Rising demand for financial services. Our focus is on private sector banks with solid deposit franchises and loan pricing power, which we expect to gain market share from state banks. The under-penetrated insurance sector also has a long runway for growth, in our view.

Consumerism/premiumization. Favorable demographics, rising income levels, and under-penetration of goods and services drive the trend for increasing consumerism and demand for premium products.

Infrastructure and capital investment. The resurgence of manufacturing, public-led infrastructure investment and global supply-chain diversification are creating multiple investment opportunities.

Green transition. Electric vehicle manufacturing, solar panel production, and decarbonization of high carbon-emitting industries represent opportunities. Historically, India’s reliance on imported fossil fuels has negatively impacted the fiscal deficit and input costs. However, growth in cheap renewable energy is increasing the competitiveness in heavy industry and petrochemicals, as well as lowering the cost of transportation. India’s largest conglomerate, which is also its biggest petrochemical producer, has a net-zero target of 2035. This is earlier than India’s current net-zero target of 2070.

Endnotes

1. Sources: Franklin Templeton, FactSet.
2. Source: Foxconn to invest additional $17 bln in India’s Karnataka state.” Reuters. December 13, 2023.
3. Source: “Micron Announces New Semiconductor Assembly and Test Facility in India.” Micron. June 22, 2023.
4. Source: “Tata Partners with NVIDIA to Build Large-Scale AI Infrastructure.” NVIDIA. September 8, 2023.
5. Source: FactSet.
6. Source: CLSA, Urbanization Play. October 5, 2023.
7. Source: Maharashtra government.
8. Source: “India’s vaccine manufacturing prowess.” Invest India.
9. Source: Invest India.
10. Aadhaar is a unique identify number allocated to every Indian resident.
11. Jan Dhan is a financial inclusion program which includes opening a bank account opened for every citizen.
12. Source: Bloomberg, Nifty 50. December 17, 2023. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
13. Source: ibid.
14. Source: Jeffries.
15. Source: FactSet. December 6, 2023. There is no assurance that any estimate, forecast or projection will be realized.
16. Ibid.

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