Report from Research Trip to India

India is a country of sharp contrasts. It has been over 30 years since we first visited the country, and with every visit, India continues to surprise us. Econopolis recently traveled to Mumbai and its surroundings to assess the situation on the ground. We spoke with around thirty companies, consultants, investors, policymakers, and local analysts, and we now take stock of the opportunities and challenges.

Sustainable Growth Prospects

India has a large and very young population. The country currently has more than 1.43 billion inhabitants and surpassed China in 2023 to become the most populous country in the world. Moreover, over 60% of the population is between 15 and 59 years old, and nearly 27% is younger than 15. The average age in India remains low, currently around 29 years. For comparison, the average age in China is 39, in South Korea 44, and in Japan 49. As a result, India still has one of the most attractive demographic growth profiles among all emerging markets. A young population typically brings optimism and higher expectations for a better future, but failing to meet these expectations can lead to tensions. India's workforce continues to grow, and by 2030, an average of 10 million new workers are expected to enter the labor market annually. Therefore, India must create tens of millions of jobs over the next decade to absorb this anticipated influx of new workers and ensure economic stability.

Modi's Reform Agenda

The year 2014 marked a turning point for India. That year, the ruling Congress Party suffered its worst defeat since 1984, and reform-minded Narendra Modi of the BJP party was elected Prime Minister for the first time. Earlier this year, he began his third term in office. During our visit to Mumbai, parliamentary elections were taking place in the state of Maharashtra. The key takeaway was that the BJP increased its number of seats from 100 in 2019 to 132, once again earning Modi the trust of voters. This renewed mandate allows him to continue implementing the four growth pillars of his policy in the coming years.

Modi’s success stems from his ability to meet the high expectations placed upon him by carrying out numerous and significant reforms over the years. Examples include simplifying bankruptcy procedures, introducing a unified Goods & Services Tax (GST), and rolling out a national identification system, among others. As a result, India has made significant progress on the Ease of Doing Business Index. In 2014, India ranked 142nd; by 2020, it had climbed to 63rd—a remarkable improvement. These and future reforms are expected to further structurally lower the cost of doing business in India, which will have a positive impact on attracting investments in the long term.

I’ve always kept this May 2014 cover page as it symbolized its inflection point back then

The Four Growth Pillars

One of the four main pillars for further economic growth identified by the government is attracting new investments in specific sectors. This is being pursued through initiatives such as “Made in India”, whereby the Indian government provides subsidies to various industries to boost domestic production capacity (and thereby employment). During our visit, we spoke with the founder of Dixon Technologies, one of India's largest electronics manufacturers. The company collaborates with leading global brands such as Xiaomi, Samsung Electronics, Motorola, Philips, and LG to produce goods for both the Indian and international markets. A compelling example of this initiative is the impressive growth in smartphone production. In 2014, India produced relatively few smartphones, with nearly 80% of domestic demand being met through imports. Today, India is the second-largest producer of smartphones in the world, manufacturing almost 2.45 billion units over the past decade. Currently, 97% of smartphones sold in India are produced locally, with a significant portion of production (about 30%) being exported globally. The Indian government aims to transform the country into a major international hub for electronics manufacturing. In this context, Dixon informed us that, since Trump's re-election, they have been unable to keep up with demand from international companies seeking to accelerate their “China+1” diversification strategy, which aims to reduce reliance on China as a sole supplier. Other technology companies, such as the U.S.-based Micron, have also announced plans to build assembly and test facilities for semiconductor chips in the state of Gujarat.

Mumbai’s Coastal Road Project nears completion with 93% of the work complete

Investments in Infrastructure: A Key Growth Pillar

A second major growth pillar is investments in infrastructure. For anyone visiting India today and comparing the transportation infrastructure to 10–20 years ago, this is undoubtedly one of the most striking changes. And on your next trip to Mumbai, chances are you will experience the city’s second international airport, which is nearing completion. Successive Modi administrations have strongly focused on infrastructure, constructing approximately 54,000 kilometers of roads, 31,000 kilometers of railways, and 74 new airports over the past decade. During the same period, nearly 40,000 kilometers of railways were also electrified. This electrification is part of India’s net-zero emissions goal for 2030. But it doesn’t stop there. New underground metro systems are being built in various cities to alleviate road congestion. Plans are also underway for a bullet train between Mumbai and Ahmedabad—a more environmentally friendly alternative to car travel—and the introduction of electric buses is gaining momentum. In Mumbai, we observed electric buses from Ashok Leyland and Tata Motors in action. BEST (Brihan Mumbai Electric Supply & Transport) aims to fully electrify its fleet by 2026. To support this, solar panels will be installed on the rooftops of bus depots and surrounding buildings to provide green energy for Mumbai's rapidly expanding electric bus fleet. During a meeting with Hyundai Motor India (the second-largest car manufacturer in India after Maruti Suzuki), we learned about plans to launch four new electric models in India, starting with an electric version of the Creta model. Another key player in the automotive sector, Mahindra & Mahindra, pointed out the current low adoption rate of electric vehicles (just 2.5%) in India but highlighted the remarkable recent growth, describing the electrification trend as irreversible. Interestingly, Mahindra & Mahindra is choosing not to invest in hybrid vehicles, viewing fully electric vehicles as the ultimate end technology.

India’s first electric double-decker bus (left) and Tata Motors’ electric bus model (right)

Insights from Adani Green Energy and Power Grid Corporation of India

We also spoke with the CEO of Adani Green Energy, the largest publicly traded company in renewable energy generation. They plan to build 50GW of capacity by 2030, focusing primarily on solar and wind energy, along with renewable energy storage. The biggest challenge in this accelerated expansion is the availability of modern transmission lines. This brought us to Power Grid Corporation of India, the country’s largest electricity transmission company, where we met with several members of the management team. This company operates part of the regional electricity grids and transmission systems that connect India’s various states. Approximately 50% of all electricity generation in India flows through their transmission networks. Recently, they won 70% of the tenders they participated in, providing strong visibility for the years ahead. International companies supplying them, and thus positioned to benefit from this growth, include Siemens, Hitachi, and General Electric.

Inclusive Development and Financial Inclusion

A third growth pillar of the Modi administration is inclusive development, with a strong focus on financial inclusion. Over the past decade, more than 530 million new bank accounts have been opened, over 120 million toilets have been built, 100 million families have gained access to free gas connections, and 140 million households have been provided with running water.

Streamlining Bureaucracy and Simplifying Laws

This ties into the fourth growth pillar, which emphasizes reducing bureaucracy and simplifying laws, largely facilitated by the introduction of new technology. For example, the average time needed to obtain approval for a telecom tower has been reduced from 236 days to just 7 days in the past 10 years. Over 1,500 outdated laws have been repealed, and the number of regulatory criteria has been cut by 40,000.

With such significant progress, it is perhaps no surprise that Modi emerged victorious once again in the recently concluded elections. The country is indeed moving forward.

         These typical mom-and-pop shops account for 90% of grocery sales in India 

India Has Already Made Great Strides

In 2013, Morgan Stanley published a report highlighting five emerging economies it labeled the "Fragile 5": India, Indonesia, Turkey, South Africa, and Brazil. These countries were heavily dependent on foreign capital flows and thus quite vulnerable. Today, that characterization no longer applies to India. The current account deficit has been reduced from 5% to approximately 1%, making the Indian currency less volatile than before. A meeting with the IMF confirmed that India has consistently experienced the highest economic growth among all major economies globally for several years. It also appears to be on track to surpass Germany and Japan, becoming the third-largest economy in the world. The Reserve Bank of India (RBI) shifted its monetary policy stance from restrictive to neutral during its most recent meeting, which could further support economic growth. India’s average income per capita has seen phenomenal growth. It was just $450 in 2000, rose to $1,300 by 2010, reached $1,900 in 2020, and is expected to climb further to $5,700 by 2030 and even approach $10,000 by 2040. This marks the rise of a growing middle class, with many Indians being lifted out of poverty and joining this segment. This mirrors the transformation seen in China many years ago.

Challenges Remain Abundant

Earlier, we discussed Adani Green Energy. During our stay in India, the head of the Adani family was accused by federal prosecutors in New York of bribing officials with over $250 million over several years in exchange for lucrative multi-billion-dollar solar energy contracts. Last year, U.S. short-seller Hindenburg Research also accused the conglomerate of stock manipulation and accounting fraud. Most stocks within the Adani conglomerate promptly dropped 20-25% on the Indian stock exchange. This didn’t surprise us much, as we have avoided this conglomerate for years. Notably, French company TotalEnergies holds a 19.7% stake in Adani Green Energy and has announced that it will halt any new investments until the implications of these allegations are clarified. This episode once again highlights the crony capitalism that remains deeply entrenched in certain parts of the business world. While India has gradually climbed higher in the ESG rankings of the Asian Corporate Governance Association in recent years, there is still significant room for improvement. Selectivity and a strong focus on sustainable corporate governance remain critical when analyzing and evaluating Indian companies.

November newspaper headline: allegations and scandals against the Adani Group

IPO Frenzy

One of the factors that makes India unique within the universe of emerging markets is the significant development of a domestic investor base in recent years. This growth has been largely driven by the rise of systematic investment plans, where investors allocate a fixed amount each month. The average monthly contribution to such individual plans is approximately $30. In total, the net inflow into domestic mutual funds averaged $1.9 billion per month last year, a figure that has already surged to $3.9 billion per month this year. This represents a substantial and consistent monthly inflow into the stock markets, independent of the volatility caused by foreign investors. For the first time in 18 years, domestic investors now hold a larger share of the Indian stock markets than foreign investors. But what might truly surprise you is this: over the past decade, Indian stock exchanges have experienced extraordinary growth in equity options trading. While India's share in global equity options trading was about 15% in 2014, this has skyrocketed to an astonishing 84% by 2024.

Food and grocery delivery firm Swiggy’s November IPO was heavily oversubscribed

Booming IPO Market

Alongside the structurally higher demand for equities, there is also a growing supply. Companies are increasingly eager to tap into the markets to raise capital. Part of this is driven by private equity groups looking to cash in on their holdings, but there's also a booming IPO market. The number of IPOs has risen by more than 60% compared to last year, and IPOs now account for 1.5% of the total market capitalization. Historically, this level has often coincided with market peaks. At the moment, it’s fair to say that India is experiencing an IPO frenzy, with some stocks doubling in value within just a few days of listing. Everyone seems eager to get a piece of the action. We’ve seen similar episodes in the West, and those didn’t always end well. Even today, echoes of this can be felt in Western markets. For example, in November, Prosus, a Dutch-listed company, sold part of its stake in the online grocery delivery service Swiggy through an IPO in India. Swiggy was just one of 130 companies that have gone public in India so far this year.

Valuations Have Skyrocketed

Periods marked by true IPO frenzies have historically coincided with relatively high, if not expensive, equity valuations. India is no exception. For instance, we spoke with a consumer-focused company like Tata Consumer Products, which is trading at a price-to-earnings (P/E) ratio of 90. And this was far from unusual—we even came across a company trading at a P/E of 220. On average, the P/E ratio of the MSCI India currently stands at over 26, compared to a historical average of 15—a level that has rarely been sustainable for long in the past. Relative to other emerging markets, Indian equity valuations are now more expensive than ever. Several sentiment indicators point in the same direction: many investors are grappling with FOMO (Fear of Missing Out) and are determined to be invested in India at any cost. In contrast, in a country like China, uncertainty is high, and investors are only willing to commit if valuations are sufficiently low. In India, however, greater visibility translates into a willingness to pay significantly higher prices. This dynamic has led to many Indian equities being priced for perfection, leaving no room for error. Or, as Benjamin Graham might put it, there is little to no margin of safety. For our portfolios, we continue to focus on companies with strong track records and promising earnings growth prospects. Our valuation discipline prevents us, at least in the short term, from increasing our allocation to India. Today, our key positions include the globally active IT service provider Infosys and India’s largest automaker, Maruti Suzuki (which can be acquired at a discount through its parent company, Japan’s Suzuki Motor). Infosys, in particular, recently made headlines by raising its earnings guidance following the securing of several major client deals.

Conclusion

India is poised to remain the fastest-growing major economy in the world in the coming years. It represents a structurally long-term growth story driven by a growing middle class, a digital revolution, increased foreign investment, a broader investor base, infrastructure development, and the stability provided by a government that has made the right policy decisions. Given India's relatively low average income per capita, there remains significant room for further growth.

In recent years, inflows into India have often mirrored outflows from China. Ongoing uncertainty surrounding the Chinese economy has led many investors to exit China, redirecting a substantial portion of those funds into India. However, this also means that if the situation in China were to improve, investment flows could reverse direction. Coupled with valuations on the Indian stock market that are high both in absolute and relative terms, as well as from a historical perspective, it would be prudent to exercise some caution. The IPO and retail frenzy also raise concerns, and for now, we prefer to wait on the sidelines for more attractive valuations before increasing our exposure to India. Nevertheless, India remains one of the rare growth stories within the emerging markets universe, where higher economic growth translates into higher corporate earnings—and, over the long term, higher stock prices.