New Delhi: While China is reeling under an economic slump bogged down by a property crisis, high youth unemployment and massive local government debt, India’s stock market is hitting record highs as the value of companies surpassed $4 trillion in 2023, with strong FDI inflow and investments expected in the future, leading many experts to believe that New Delhi offers a “real alternative” to Beijing, according to a CNN report.

India, already one of the fastest-growing economies in the world, is showing strong development since 2014 under Prime Minister Narendra Modi, who has pledged to make the nation a $5 trillion economy by 2025. India’s market value is expected to more than double to $10 trillion by 2030, according to a report by Jefferies, which would make it “impossible for large global investors to ignore”.

“China is a no go, so … which is the other country that can maybe replace China? There’s no country like China other than India … in some form or fashion, it is the substitute that maybe the world is looking for to drive growth,” said Peeyush Mittal, a portfolio manager at Matthews Asia, a San Francisco-based investment fund.

India is performing very well in the area of infrastructural sector and like China over three decades, it is only at the beginning of a transformation, investing billions in building roads, ports, airports and railways, the CNN report highlighted. Some of the biggest companies are expanding their operations in India, possibly including Elon Musk’s Tesla.

India’s performance in key economic sectors

Over the past decade, India’s GDP has surged at a compound annual growth rate (CAGR) of 7 per cent in USD terms, reaching $3.6 trillion and ascending from the 8th to the 5th largest economy globally. Forecasts suggested India’s GDP may breach the $5 trillion mark in the next four years, positioning it ahead of Japan and Germany to secure the third spot by 2027. 

India has improved in the quality of infrastructure, which has made investors excited about the country’s growth prospects. The latest revision by global stock index compiler MSCI reflects the bullishness towards India. MSCI said this month that it would increase India’s weighting in its emerging markets index to 18.06 per cent from 17.98 per cent, while reducing China’s to 24.77 per cent.

The MSCI indexes help institutional investors worldwide decide how to allocate money and where to focus their research. “India’s weight in the MSCI emerging market index was about 7% a couple of years back. Do I think that 18% [in the MSCI index] is naturally gravitating more towards 25%? Yeah, that’s kind of clearly where our conversations are leading us to believe,” said Aditya Suresh, head of India equity research at Macquarie Capital.

The International Monetary Fund expects India to grow by 6.5 per cent next financial year compared to 4.6 per cent for China. Analysts at Jefferies expect the country to become the world’s third-largest economy by 2027. India is also trying to capitalize on the rethink underway among companies on supply chains, according to the report.

China’s economic slump

India’s recent performance is in stark contrast to China’s economic challenges, including an “accelerated flight of capital” from the country, CNN notes. China’s stock markets have suffered a protracted slump since recent peaks in 2021, with more than $5 trillion in market value having been wiped out from the Shanghai, Shenzhen and Hong Kong bourses. Foreign direct investment (FDI) plunged last year, and fell again in January, down nearly 12 per cent compared to the same month in 2023.

China’s property sector, a pillar of the world’s second-largest economy, has lurched from one crisis to another since 2021 after a regulatory crackdown on debt-fuelled construction triggered a liquidity squeeze. A string of developers have defaulted on their repayment obligations since then, and many of them have either launched or are in the process of starting debt restructuring processes to avoid facing bankruptcy or liquidation proceedings.

Adding to their troubles, China’s new home prices slowed their month-on-month declines in January with the biggest cities seeing some stabilisation, but the nationwide downward trend persisted despite Beijing’s efforts to revive demand. China has been ramping up measures to arrest a property downturn, including ordering state banks to boost lending to residential projects under a “whitelist” mechanism.

Fleeing investors have expressed frustration that authorities have not unveiled a clear roadmap to fixing structural issues laid bare last year when the Chinese economy failed to replicate the explosive recovery experienced by other economies after COVID-19.

Market watchers hopeful of BJP’s third term

Apart from geopolitical rifts and an uncertain economic outlook, foreign companies and investors have grown increasingly wary of domestic political risks in China, including the possibility of raids and detentions. Institutional investors are still very wary about buying Chinese stocks, even though many now look like a bargain. 

“There are many good businesses in China, but with all the regulatory issues it becomes very difficult to predict what they will look like in the long run,” said Priyanka Agnihotri, portfolio manager at Baltimore-based Brown Advisory. India, on the other hand, enjoys healthy relations with the West and other major economies, and is aggressively wooing large firms to set up factories in the country. 

As India heads towards its national elections later this year, market watchers are hopeful that PM Modi’s Bharatiya Janata Party (BJP) will win a third term to bring greater predictability to economic policies for the next five years. Analysts say that it would be hard to stop the economic juggernaut India has set in motion, irrespective of what happens to China.

“If Modi is back with a majority and political stability is there, then I can certainly say with confidence that there’ll be a lot more investor interest in India on a more sustainable basis,” said Mittal. According to Hubert de Barochez, a market economist at Capital Economics, India is a prime candidate to benefit from the friend-shoring of supply chains as more and more businesses seek to distance themselves from China.

Tesla CEO Elon Musk said last year that his company is looking to invest in India “as soon as humanly possible”. “[Modi] really cares about India because he’s pushing us to make significant investments in India, which is something we intend to do,” he said.

Role of domestic investors

While interest in India’s economy is rising, some international investors are still wary of expensive prices of the country’s stocks, which are costlier compared to other emerging economies. However, domestic investors, both retail and institutional, seem to be brushing aside these high valuations, driving India’s stock market to unprecedented peaks, according to CNN.

According to Macquarie, retail investors alone own 9 per cent of India’s equity market value versus foreign investors at slightly under 20 per cent. Analysts, however, expect foreign investments to pick up in the second half of 2024, once the election is out of the way. 

India’s market performance is driven by domestic investors adds to the country’s strengths and reduces its dependence on foreign fund flows. In her budget speech in February, Union Finance Minister Nirmala Sitharaman said FDI inflows since 2014 stood at nearly $600 billion, which is twice the amount during the previous decade.

(with inputs from agencies)

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