By
Rob Brewis, and
Aubrey Capital Management
May 4, 2023 3:33 pm ET
Fans of Kevin Costner may recall the movie Field of Dreams and the line, “If you build it, they will come.” It’s a sentiment that sprung to mind during our recent visit to India, a country soon to overtake China as the world’s most populous country.
For decades, India’s inadequate infrastructure has been a hindrance to investment and economic growth. But it is finally getting up to speed. According to a recent headline in The Economist, “India is getting an eye-wateringly big transport upgrade.” This development has the potential...
Fans of Kevin Costner may recall the movie Field of Dreams and the line, “If you build it, they will come.” It’s a sentiment that sprung to mind during our recent visit to India, a country soon to overtake China as the world’s most populous country.
For decades, India’s inadequate infrastructure has been a hindrance to investment and economic growth. But it is finally getting up to speed. According to a recent headline in The Economist, “India is getting an eye-wateringly big transport upgrade.” This development has the potential to unleash the kind of growth needed to get the most out of the country’s vast, young workforce. For investors in emerging markets, this is a mouthwatering prospect.
India’s previous investment boom a decade ago was fueled by public sector banks, whose balance sheets were compromised by excessive loans to businesses which subsequently went bankrupt. This was one of the thorniest issues Prime Minister Narendra Modi faced when he assumed office in 2014. But through a combination of mergers and recapitalization, his administration has finally resolved it. India’s now well capitalized banking system is a key reason why a cyclical upturn is poised to reinforce the country’s fast-growing economy with loan growth rising steadily there for the first time in a decade.
The current breakneck pace of infrastructure spending is most clearly seen in Mumbai. In India’s financial center and most populous city, urban planners are attempting to build out 10 metro lines simultaneously and, at the same time, construct a highly ambitious and partly submerged coastal expressway. It is the same story in Indore, India’s 17th most populated city, where another metro line is under construction. This is more of a pre-emptive build, the kind that has characterized China’s decadeslong growth efforts (“If you build it…”).
There are multiple drivers for what we forecast as a coming investment upturn in India. The main one, in our view, will be private sector corporate capital expenditures coming from domestic corporations, most of which are starting from a strong and underleveraged financial position. But foreign companies will play a part as well.
Direct investment in India reached a record level last year at a little over $80 billion (although compared with China, that is still a small figure). Modi’s Invest India initiative is helping, as are his production-linked incentive programs. So too are state incentives as competition to land new investments intensifies. Apple iPhone exports from India, for example, grew from $100 million a month in April 2022 to a staggering $1 billion in January. Domestic manufacturing investment is also broadening rapidly, with flows from 162 countries into 61 sectors and directed to 31 states and territories—that is, nearly all of them.
All of the above help to explain why India is now not only a realistic but self-evident destination for those seeking to diversify from China. None of this is to say foreign direct investment won’t continue to wash up on the shores of Vietnam, Indonesia, or Mexico, but an ever-increasing share is heading to India.
And this is where the potential for consumption comes in. India’s urbanization rate is low—around 35%—and opportunity lies in growing this figure more rapidly. But why would you leave the farm if there are no jobs in the towns or cities to go to? It is only urban job creation—in construction, manufacturing, or associated service jobs—that will drive urbanization. Experience tells us that an urban job comes with an income which is a multiple of the rural one left behind, and that multiplier drives consumption.
Our Mumbai Uber driver Sakir is a case in point. Hailing from Chhattisgarh, one of India’s poorer states, he taught himself decent English that allowed him to negotiate a rate of $30 for driving us around the city for a day. Sakir lives in a “small house” in an impoverished area with his two children and his wife, who makes clothes. An apartment isn’t yet within reach but is an aspiration. As well as keeping his family clothed, housed, and fed, Sakir also pays for some form of private education for his children and, no doubt, some funds find their way to relatives back home. That $30, less the cost of driving a half-respectable Maruti for the day, goes a long way.
PHOTO ILLUSTRATION BY BARRON’S ADVISOR; COURTESY OF AUBREY CAPITAL MANAGEMENT
Rob Brewis is a director and co-fund manager of the GEMs strategy at Aubrey Capital Management, where he has worked since 2014. He began his career in 1988 at Thornton Management in London and then spent 10 years in Hong Kong as an Asian fund manager with Credit Lyonnais International Asset Management. He went on to co-found emerging markets investment boutique BDT Invest LLP in London in 2000.
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