試想一下：印度會是新的中國嗎？

Key points

• The fifth-largest economy in the world appears to be facing an unprecedented window of opportunity. International investors are asking: Is this the new China?
• India is big, it has a young population, and the government has implemented various “business-friendly” reforms. But it is still classified as a “low-income country” by the World Bank. The investment case for India rests on the assumption that it will make the move to “upper middle income” relatively easily, implying it doubles its gross domestic product (GDP) per capita to over US$4,466.¹
• Such a move would be exceptional and underlines the potential that India’s exciting technology, software and communications sectors present. The growth of the middle class has predictable positive impacts on all aspects of consumer, housing and related sectors.
• To realize these changes and unleash this potential, we believe India must deploy a combination of long-term-oriented policies to address structural constraints, and execute short-term, pragmatic infrastructure investments. The overriding principle should be to set the conditions to support growth, with a unified approach, covering employment, education, infrastructure investment, and climate change insulation.
• Trade is a big potential driver of economic growth and of employment. According to the World Trade Organization (WTO), which India joined in 1995, the average Most Favored Nation (MFN) applied import tariff India applied was 18.1% in 2022, the fourth-highest in the World Trade Organization (WTO), after Sudan (21%), Tunisia (19%) and Algeria (18.9%).² For reference, the European Union is at 5.1% and the United States is at 3.3%. For agricultural imports, India’s equivalent tariff is 39.6%. The pace of development could be further accelerated, and broadened across more sectors, by membership of free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which involve giving up domestic protection, but provide market access to 11 countries that represent 15.6% of world GDP. In our view, there is a window of opportunity for India to turbocharge its economic development and enable it to integrate meaningfully with the global trading system and “punch its geopolitical weight” in Asia and the world.  
• India’s young demographics are usually presented as a positive, but the reality is more complex. Having a lot of young people is clearly good, but they need to be healthy enough to work and educated enough to learn appropriate skills for the labor market. India doesn’t need millions of Ph.D.s, but rather, a relatively well-educated pool of young people, because they are more easily employable. Given the trend toward automation and artificial intelligence (AI), the growth of the “knowledge” economy drives demand for skilled workers. A young, well-educated labor force will attract investment in high margin, productive areas, providing a positive driver for economic growth.
• The country’s climate change vulnerabilities and their potential impact on social structure are not particularly well-known. India uses over 90% of its fresh water on agriculture.³ This is clearly inefficient, because the global average is 70%, but millions of farmers still depend on the monsoon rains, which have become less regular while heatwaves have become more frequent over the last 20 years. Meanwhile, the Indus, Brahmaputra and Ganges River basins are amongst the most water-stressed river basins in the world, according to a study by the European Commission.⁴ This is due to a combination of lower volumes of seasonal meltwater from the Hindu Kush Himalayan region due to the negative impact of climate change, the increasing populations in Pakistan, India and Bangladesh which strain existing water resource, and the threat of water diversion from China.
• Indian equity market valuations suggest that investors have high conviction in the likelihood of earnings growth, but also reflect the lower free floats, as the controllers/promoters of companies tend to maintain close to 50% ownership in public companies. Against that, middle-income households have only 10% of assets in mutual funds or capital market investments, implying a potential wave of domestic investors in future.⁵ Another relevant factor is that certain sectors in India, such as fast-moving consumer goods companies, deliver margins that are significantly wider than global averages. Meanwhile, the development of the domestic fixed income market bodes well for deeper financing availability for both government and corporates.
• Typically, international investors are drawn to fast-growing economies on the premise that these markets hold more promise for equity investors. However, experience suggests that it is unusual for equity returns to match nominal GDP growth over time. In the chart below, while Chinese GDP growth as averaged 8.65% per annum in the last 30 years, the equity market’s average total return has been +0.7%. By contrast, India has had GDP growth of 6.5% per annum, yet the equity market has delivered an average total return of 9.4% in the same period.⁶ 

• India remains an interesting place to invest, but in a more defined range of opportunity than in the past. For asset owners, we believe that India is not the new China. It is potentially a new India.