What’s road ahead for India to become world's 3rd largest stock market by 2027? Analyst highlights top 7 triggers

By - Niraj Kumar, Chief Investment Officer at Future Generali India Life Insurance Company

Over the years, the Indian economy and markets have seen steady compounding in terms of growth and consequently India’s share in global Market cap has been steadily growing vis-a-vis other emerging and developed nations. After becoming the world’s fifth-largest economy, India now ranks 5th in the world market cap (with a share of ~3.5% of global M-Cap currently) vs 10th rank a decade ago, only behind developed nations like US, China, Japan and Hong Kong.

We believe this strong growth and resilience in Indian Economy and markets is a culmination of multitude of idiosyncratic and structural factors being at play and hence identify the following as key pillars that will drive the path ahead for the Indian Economy and Stock Markets:

• Transformative structural policy reforms by the government: Strong aggression from the side of the government is exemplified by its pro-growth policy reforms announced in terms of capital spending towards Infrastructure, Healthcare, Financial sector reforms, divestment of Air India along with Atmanirbhar Bharat, Production linked Incentive (PLI) and National Infrastructure Pipeline and successful implementation of the same would start manifesting in the growth numbers over the next few years.

•China+1, Europe +1 themes will make India an attractive Manufacturing & outsourcing hub: Reforms such as the reduction in corporate taxes, make in India, focus on green energy and the Production Linked Incentive Scheme (PLI) have incrementally turned India into a favourable manufacturing hub and this will result in increasing India’s share in exports to GDP and huge employment opportunities for the country.

Global tailwinds, most prominently the need for supply chain diversification given the supply chain disruptions caused due to the pandemic during the past year, is further supportive for growth.

Thus we see a structural push to manufacturing coming from the China+1 strategy (a strategy in which companies diversify their businesses to alternative destinations other than China), and PLI schemes and the next decade may probably see the rise of India’s manufacturing sector, filling the missing piece in India’s growth puzzle.

The emergence of Europe +1 theme due to the looming energy crisis in Europe would bode well for India as it becomes an attractive investment destination given its lower cost advantage and macro stability of the country.

We see huge potential in India emerging as an attractive destination for manufacturing outsourcing, given the immense manufacturing thrust by the government and the fact that it has rightly laid the building blocks by announcing key policy reforms.

• India on the right path to become self-sufficient and Atma Nirbhar: The manufacturing push reforms by the government are steps in the right direction to make India self-sufficient and Atma Nirbhar and will reduce India’s dependency on imports to a great extent.

Further this will also increase India’s share in exports to GDP and the gain in manufacturing exports will further complement India’s existing strengths in services exports. Overall, we expect the share of manufacturing share in the GDP pie to increase from hereon (15.6% currently), given the favourable manufacturing landscape in the country.

• Fortified Corporate Balance Sheets, strong credit growth and supportive Interest rate environment: The supportive interest rate environment along with reforms such as the Insolvency & Bankruptcy Code have facilitated clean-up of corporate balance sheets, setting the stage for the next leg of growth.

Also, capital has been raised across banks during COVID, which gives them the wherewithal to push credit into the system. With respect to interest rates, while we are seeing elevated interest rates in the current environment, we believe interest rates are likely to be structurally lower for India in the ensuing years.

This belief stems from the fact that inflation in India, which has been in control despite the global mayhem is likely to get within the comfortable range and is likely to be a prime beneficiary as inflation abates globally and the interest rates will soon turn supportive.

• Strong DII flows and increased financialization of savings: Domestic Institutional Investors (DIIs) are now a formidable force against foreign portfolio investors (FPIs) in the equity market, and their salience is only set to grow with increase in financialization of domestic savings.

Household financial savings in equity are ~2-4% in India whereas it is around 40% in US and ~10% in UK. Increasing domestic flows into equities is likely to be a driving force for rising market capitalisation in India.

• Favourable Demographic quotient and socio-economic landscape: Besides, anecdotal evidence and commentary also suggests that India may garner a larger share of FPI flows into EMs on the back of favourable demographics and democracy, as China’s socio-political landscape makes it a less attractive investment destination. Some global asset managers have started launching EM Ex China fund. If this trend picks up, India will be the single biggest beneficiary)

• Rising Technology and Digitisation: Increasing Technology is enabling greater reach and penetration to new markets and is enabling business to scale up at a faster pace and relatively lower cost. Roughly 50 to 55% of the e-commerce business comes from tier II and tier III cities.

Consequently, with rising share of digital sales, organised businesses are likely to grow bigger and at a faster pace, which will be a tailwind for rise in market capitalisation.     

Thus, our conviction in the economic recovery is reinforced and much more pronounced than ever before and that the consumption and demand engines are set to improve aided by government support and reforms hereon. 

As indicators such as credit growth, capacity utilization and private investments pick up, GDP growth is expected to move up further in coming years. Growth in the next few years will be driven by spur in consumption and demand, which will translate into revival in the capex cycle.