A year ago The Economist noted that India is likely be the world’s fastest growing large economy for several years to come – see https://marcellus.in/story/the-economists-cover-story-india-is-likely-to-be-the-worlds-fastest-growing-big-economy-this-year/.This year The Economist’s special issue on India notes that “The difficulties of doing business in India and the lack of broadly available finance are two reasons why large conglomerates have dominated the economy—they have been able both to obtain finance and handle a prickly state. But there are hints of change. A study by Marcellus, a money-management firm, concluded that in 2019 the top 20 companies in India earned 79% of all profits. The figure fell to just 38% in the fiscal year ending in March 2023. The share of the BSE500’s market capitalisation held by the top 10 firms has fallen from 33% to 26% in the same period. The shift is being driven by the expanding breadth of successful companies. The number of listed firms valued at more than $1bn has increased 20-fold since 2000.” 

So what exactly are the changes taking place in India which “are allowing Indian firms to become more dynamic”?

Firstly, there has been a revival in manufacturing especially in southern India: “….smaller manufacturing firms are growing. States such as Tamil Nadu…are being transformed by them. Along the new roads there, a vast electronics-assembly industry has emerged, led by local firms like Tata and foreign ones like Foxconn and Pegatron. There are new factories for electric vehicles, green-energy products, shoes and clothing. Since 2021, $10bn has been invested in 130 new projects in the state, with another 48 under way.”

Secondly, as the Western economies run out of people who are capable of doing white collar work such as coding, accounting, HR, sales & marketing, etc, such economic activity is shifting from the West to India. Says The Economist: “One important new development is “global capability centres”—tech centres used by the world’s biggest firms. Unlike the outsourced call centres of old, these also provide engineering, semiconductor design and r&d automation, as well as product development. In Tamil Nadu new entrants include ups and Roche Pharma. Some 1,600 others across the country serve firms such as hsbc, Target and Tesco. These centres are, in some ways, like the Chinese factories manufacturing for foreign firms, but more important. They do not just take orders; increasingly they give them, too…A new study by Wizmatic, a consultancy based in Pune, says they employ 3.2m people, generating $121bn in revenues including $102bn in foreign currency from exports, making them one of the biggest sectors in India.”

Thirdly, some of the red tape & taxes that made life difficult for small businesses have been removed and this has freed up such businesses to spend their time, resources & energies on more useful activities: “The government has become increasingly pro-active in helping all of these changes. It has done much to clean up and stabilise the financial sector. Administrative changes have led to a surge in business creation. A central-government department has been created to remove obstacles to doing business. In 2020 it became possible to set up a company entirely online. In the same year the government introduced “production-linked incentives” (PLI) in 14 sectors, which involve direct payments of at least 4% of revenues, to help firms get established and then phase them out once scale has been achieved. In 2019 corporate taxes were reduced from 35% to 25%.

Against this background, India is becoming more innovative. A study by PatentVector, an analytics firm, showed the valuation of Indian patents has more than tripled over the past five years, as the filing process has been simplified. A private space industry has emerged, with more than 200 firms filling the sector. Two are on the verge of launching rockets.”

As one would expect in the world’s largest democracy, it is not all sweetness & sunshine. The same article in The Economist, and the special issue more generally, goes on to highlight the challenges India faces. However – and this is what those of us who earn a living in the stockmarket pin our hopes on – the direction of travel is positive.

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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