5 Reasons Why Indian Stock Market will boom in the next decade

Background

Indian stock market has fallen less in 2022, as compared to other larger markets such as US. To compare – US Stock Index (Nasdaq 100) has fallen 30% in 2022, whereas Indian Stock Index (Nifty 50) has gained ~4% in 2022. Hence when markets recover, probably by the end of 2023, other markets such as US might outperform India in the short term, as these lagging markets have more catch up to do.

I believe that going forward, in the long term, Indian stock market returns, adjusted for currency difference, will be ahead of other emerging markets, and even some developed countries. Investors are constantly searching for long term market plays, which can compound their wealth over time. I believe India is one such place, and will remain so for the next decade or so. Below are 5 main reasons why.

Reason 1: Improving Infrastructure to aid Growth

Infrastructure is the foundation on which companies are built, and then generate profits. A country’s infrastructure can range from highways and railway network – which supports fast and affordable transportation of goods, to availability of new age technology infrastructure such as 5G and data warehousing capabilities.

A good infrastructure helps in cost optimization, and leads to efficient operations. This attracts existing large companies, as well as budding entrepreneurs to consider India as the destination to establish and grow their business.

India is rapidly improving its infrastructure. This will not only aid, but propel existing and new age businesses. I will discuss three examples which will give an overall view of the improving infra in India.

[Infra Example 1]: Decreasing Logistics Costs by 30%

Indian government, in its National Logistics Policy revealed in September 2022, published their vision to reduce logistics cost. This reduction is envisioned to be from current 14% contribution of GDP to less than 10% of GDP (a reduction of 30%).

This vision will be achieved by a mix of building physical infrastructure (highway networks, railway lines), digitizing logistic paperwork requirements, and regulatory reforms. One can read the announcement on PMIndia site here.

This will benefit manufacturers, farmers, and basically any company relying on logistics. Raw material and finished products’ movement will cost less. Faster movement will lead to less wastage during transit. With reduced supply chain costs, and faster reach to end consumers, companies will find their balance sheets leaner, and their top line revenue rising.

[Infra Example 2] Financial Support from Indian Government

The Indian Government has been supporting Infrastructure development via various financial incentives, and budgetary allocations. Some noteworthy ones are:

1. Investment in Highways: Government is spending massively in creating highway network across India. In 2022–23 budget alone, government allocated INR 200K Crore for highway development via NHAI and Ministry of Road Transport. 60% of cargo in India moves via road. An elaborate highway network will not only reduce costs, but will reduce time by as much as 50% between important cities.
2. PLI Scheme: The Indian Government announce Production Linked Incentive (PLI) scheme in 2021. PLI scheme will provide target based incentives for the next 5 years. This scheme will boost overall manufacturing in India, across automobiles, pharma, semi conductor chips, Telecom etc. PLI scheme has incentivized both domestic and foreign companies to manufacture in India.

[Infra Example 3] Infra to Support Technology Businesses

Technology enabled businesses need certain basic infrastructure in order to grow. India is one of the first countries to adopt 5G services. 5G will lead to faster internet, enabling startups and companies to receive, process, and transmit data faster and in larger volumes.

For any tech company, having a data warehouse is critical. Data warehouse is where a digital company stores data, and processes it. Data warehouse is a significant cost center, and requires high skill set to establish and maintain. The Indian Government classified data warehouse under core infrastructure category in April 2022. This will make it easier for data warehouse companies and providers to raise funds through loans and investments.

Reason 2: Rise in Consumption

A company makes money by selling products or services. For the company to do this, it needs buyers of its products or services. The buying capacity of a country’s population is dependent on their income. This indicator is known as per capita income. Change in per capital income is often used by financial analysts as an indicator of change in consumption in that country. An increasing per capita income shows increase in consumption. Increase in consumption leads to increase in GDP. Increase in GDP in turn results in increase in stock market returns.

India’s Per Capita Income has grown from USD 1,200 in 1990 to a staggering USD 7,220 in 2022. This is a 6x increase in 20 years. And there is more increase to come. Here is why.

Emerging Middle Class

India’s middle class is emerging, and consuming more and more. The Indian middle class is expected to outpace other developed countries’ and emerging markets middle class growth, as shown below (article reference here).

The middle class goes beyond the basic amenities. It spends on lifestyle products such as sports shoes, High Definition TV. It spends on convenience, such as eating out or ordering in food. These spending habits create revenue for relevant companies, contributing to overall India’s GDP growth.

Dormant Rural Population

66% of India’s 1.5 billion population live in rural areas. This is a lot. And this bucket of population still has to raise their consumption habits and overall potential. The Indian rural economy is growing annually at 10%, faster than India’s GDP (refer 2022 Bain & Company report here).

The Indian rural economy is expected to grow at a faster pace going forward. The spending habits of middle class folks in the cities will soon trickle down to rural areas. The new generation of farmers are are expected to adopt technology products to improve their yield. These farmers are already finding alternative means of income such as agritourism, and are preferring an upgraded lifestyle.

Some leading equity fund houses in India have started rural economy focused stock portfolio funds, to tap the future growth in this sector. One such is a smallcase from Windmill Capital, as shown below.

With the emerging Indian middle class, and the dormant potential in rural Indian population, the overall domestic consumption in India is expected to grow. “Grow” might be a mild term here, and I believe the domestic Indian consumption will outpace that in other countries. This will boost Indian companies, and reward investors who invest early on in domestic consumption focused stocks.

Reason 3: Move from Unorganized to Organized

Is this reason confusing? Let me explain this briefly. Have you eaten momos or kathi rolls from a food cart (thela wallahs)? Have you bought locally made slippers or shoes from a corner shop? These are examples of the unorganized sectors. Food industry, apparel industry etc., are largely unorganized in India.

These unorganized industries are small business owners operating within a city, or within a small locality in a city. These small business owners may sell cheap, and ok quality products. However, these businesses are not completely contributing to the GDP of the country.

As organized players in these sectors emerge, they take away market share from the unorganized businesses. Organized companies bring in a brand image, expected quality and standardization in their produce offerings. This helps them become aspirational and preferred destinations for shopping.

How does it convert to stock market returns you ask? Well, organized companies get listed on the stock market, allowing retail investors like us to make money by investing in them. These companies pay taxes in full to the government. This increases the government’s investment chest, which is used to spur economic growth in the country. Unorganized players do not not do any of the above.

The shift of unorganized to organized will take some time. This will be driven by change in people’s preferences, and their increasing purchasing power. This combined with growing reach of organized players to tier 2 and 3 cities, the shift will surely happen. Does this mean that unorganized workers will lose their jobs, and become poor? Well, not exactly. Organized sector creates new jobs, and brings in efficiency in operations owing to their scale. Some sectors in unorganized sector will remain, and actually thrive. Example: local artisans’ craftwork.

There is another trend picking up in India, to create marketplaces for unorganized players. UrbanCompany (link here) is one such example, which is a marketplace of local plumbers, electricians, barbers etc. These marketplaces help organize local skilled workers. Hopefully, one day when UrbanCompany lists on the stock exchange, retail investors can invest in this company and make good returns as the company grows its revenue.

As of 2022, 90% of overall India’s workforce is unorganized (refer link here). This means that the impact of the shift to organized will be large. Investing in companies which are organizing these sectors, such as FMCG sector (Nestle, HUL), Footwear and Apparel sectors (Relaxo, Vedant Fashions), Quick Service Restaurants (Jubilant Foodworks, Devyani International) etc., will help you grow your investment in a consistent manner in the long run.

Reason 4: Rise of Technology Sector

New Age Technology Companies

Technology companies such as Apple, Microsoft, Amazon, have shown the world the potential to cause disparate positive impact on a country’s GDP, and generate massive return for their investors. Technology disruption creates a marked difference between traditional companies and new age digital companies. With rise of such companies in India, India is slated to show disproportionate growth in the future.

But the main question is – Are these tech companies coming of age in India?

Well, yes – they are. In 2021, we saw stock market listing of six Indian unicorn startups – Zomato (food delivery and discovery app), Paytm (Fintech firm for all your financial needs), Nykaa (fashion eCommerce company), Nazara (All about Gaming), Policybazaar (Digital Insurance marketplace), Delhivery (tech enabled logistics and warehousing).

Successful listing of these companies is an indicator of more such listings to follow. Other unicorn startups have shown interest in 2022 to list themselves on the stock market. Some notable names among these are Navi (Mutual funds and insurance); Oyo (managed stays for all purposes), Ola (Cab aggregator now entering into electric mobility).

These technology enabled companies are expected to usher in a new era of growth in the India stock market. Even traditional companies such as Tatas and Reliance have ventured into new age businesses such as eCommerce, unlocking value for their existing shareholders.

Do note that most of the newly listed technology companies in 2021 are trading at a discount in 2022. The main reason is macro economic headwinds, and lack of profitability in these companies. However, this is not a deterrent factor. Technology companies take a longer lead time to generate profit, while initially focusing on customer acquisition behavior shift towards convenience.

The overall venture capital investment in India is seeing an increasing trend over recent years. This increase is both in terms of total value of investment, and number of deals. (reference link here). This is another strong indicator of money finding its way into a high growth geography.

It might not be totally wrong to say that the technology sector boom that we saw in the US from 1990–2000, we might see a similar trend in the Indian stock market going forward. There might be some hiccups along the way. Some companies might go bust, maybe the ones with weak business models, or the ones with no path to profitability. However, it is difficult to stop the pace of growth of a sector whose time has come, and technology is here to stay and thrive.

Booming Tech Talent in India

As a kid I remember that the general chit chat in schools regarding career was – either become an engineer or a doctor. This was way back in 2000’s. During my college days in 2004–2009, the chit chat regarding career was to learn coding, and get paid well. Nowadays in 2022, the chit chat is to learn data science, ML, blockchain technologies. You get the idea, India is fast in adopting change in technology job trends. Refer image below, which shows banners of data science course in a boys’ hostels area.

All this talent, is going to either work for MNCs, or Indian companies. And some of this talent, will found new age companies in India.

The Indian IT Sector

The Indian IT sector has nothing more left to prove. They have grown consistently, and considerably, in the last decade (2010–2020). The IT service sector is a multi decade growth story, which is already playing out. As companies across the world go digital, they will use services of these companies to develop a digital transformation strategy, and then implement/maintain it, and upgrade to better technologies as they emerge.

The likes of TCS (Tata Consultancy Services), Infosys, HCL Tech are some of the notable large cap IT companies which are now part of the Nifty 50 index (portfolio of the largest 50 companies listed in India).

The Indian IT sector has evolved well over time – from providing website management services, to now cloud computing and AI/ML solutions. If you are not yet invested in the Indian IT sector, the downturn in 2023 is a good time to start accumulating Indian IT stocks. You can do so either by buying IT stocks directly, or by investing in a IT sectoral mutual funds such as Tata Digital India fund.

Reason 5: Support from Government and Regulators

The national government, and regulators act as enablers of economy growth. They help in boosting new age industry sectors, while ensuring that fraudulent practices are kept at bay.

The Indian government, via its annual budget, invests in country’s infrastructure – roads, railways, water ways, electric transmissions etc. This attracts companies to enter sunrise sectors such as semiconductor, pharma, electric batteries etc. The government’s focus on key industry sectors helps reduce bureaucracy in setting a business, and ensures smooth coordination across state and central governments.

The Indian government is leaving no corners unturned to make India a global manufacturing hub. They envision to make India self-sufficient in terms of food production, defense, and emerging technology such as semiconductors.

When it come to regulators, they are often seen as organizations creating rules to impede economy growth. These rules, in the form of compliance circulars, are required to be met by the operating companies. However, what is not easily seen is that the regulators ensure well being of the consumers and retail investors. They prevent any wrong-doing on part of the companies. They catch misuse of national resources by bad actors.

Some examples are RBI requiring digital transactions to have a second factor of authentication. This requirement has made India one of the lowest digital fraud reporting countries as a percentage of total digital transaction.

India still has to cover some distance in the ease of doing business scale. But it is on the right path, with a strong and visible intent to move forward.

Parting Thoughts

I hope this post gave you an overview of key growth triggers in the overall Indian stock market. The journey of India from a developing country to a developed one is accelerating with each passing year. This journey will reward investors over time. A retail investor should evaluate investing in India, if not already done so.

Happy Investing !

Disclaimer1 : I am an Indian, and I might be biased in my opinion on the future growth prospects of the Indian economy, and the Indian stock market. I have tried to use data wherever applicable to support my points in this post.

Disclaimer 2: Please do your own research before taking an investment decision.

Disclaimer 3: This post is an extended version of my answer on Quora on a similar topic.