India's equity market capitalisation has surpassed the Hong Kong stock market for the first time, becoming the fourth largest equity market in the world. This rapidly growing country, which is also the most populous in the world, may offer more and more investment opportunities. It is worth considering how fast India is growing and whether it is currently profitable to invest in shares from this market?
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India's economic success
In 2023. The International Monetary Fund (IMF) projected that India's real GDP growth will be 6.7% per annum, up from an earlier forecast of 6.4%. India is projected to achieve the highest growth rate among the world's 13 largest economies in 2024, with China in second place.
The last 10 years have significantly changed the picture of the Indian economy, which has grown nominally by 86.9%. One of the main drivers of growth has been the high population growth, increasing by 16.2% to reach over 1.4 billion people. This represents about 18% of the world's population, making India the most populous nation in the world, which has done much to push its country's development forward in recent years.
From the latest IMF report, we learn that India's economy is moving towards being a significant contributor to global growth in the coming years, thanks to its young population and improved physical and digital infrastructure. The launch of public investment has created a favourable environment for private capital raising.
The 2022 report estimated India's growth at 6.8% in 2022-23, while actual growth, according to preliminary estimates, was 7.2%. GDP growth projections for the next few years are optimistic, and private consumption is growing. Inflation is declining, which favours further growth in private consumption.
Structural reforms to improve the productivity and skills of workers may be responsible for much of the success. Programmes such as the Skill India Mission, the National Apprenticeship Promotion Scheme and the National Career Service portal aim to increase employment and improve working conditions.
From the latest Finance Bill released on 1 February this year, we learn that despite planned increased infrastructure investment of 17%, India is projecting a decline in the fiscal deficit to 5.1% in 2024 from 5.9% in 2023. Currently, India has a relatively acceptable debt-to-GDP ratio of 86.5%, which is not an alarming indicator. Moreover, India has a good level of foreign investment as a proportion of GDP, which stands at 1.5%. In comparison, China has a ratio of 1% and Germany at 1.2%. This indicates that India is becoming an increasingly attractive destination for investors, which could open up new opportunities.
Is it worth investing in Indian stocks?
India's NIFTY 50 index, comprising the 50 largest Indian companies, rose 20% in 2023, ranking only behind Japan's Nikkei 225 among Asian indices. The rise in India's stock markets is accelerating a flurry of new IPOs.
The profits of the Indian companies increase yet faster. The price/earnings (P/E) ratio has fallen from 42 to 22.3 in just three years, approaching its multi-year average. In comparison, this ratio for the largest US index is now 26.6, meaning that the current valuation of Indian companies relative to last year's earnings is lower than its US counterpart. The 2023 earnings of companies in the NIFTY index have grown at more than three times the rate of their US counterpart, at 16.3% compared to the 5% growth in the US market.
The highest expected economic growth rates among the G20 countries, strong corporate earnings growth and strong foreign investor interest appear to be creating favourable conditions for new investment opportunities in the Indian market, which is likely to surprise investors with high earnings growth rates in the coming years.
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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