India will be the third largest economy by 2027, thanks to continued reforms, reduced volatility, and the tailwinds of demographics (consistent labour supply), improving institutional strength and governance, according to brokerage major Jefferies Equity Research.
The US-based brokerage in its latest report "India’s March onto the Global Stage" says with a consistent history of 10-12% USD CAGR over the last 10 & 20 years, India is now the 5th largest equity market and its market cap will likely touch US$10 trn by 2030.
"Continued reforms should maintain India’s ‘fastest growing large economy’ status," Jefferies says, adding that strong trends in domestic flows have reduced market volatility and decadal low foreign ownership offers a valuation cushion.
It adds that the return-on-equity-focused corporate sector with 167 companies, with more than $5 bn market cap, leaves ample choices to investors.
Highlighting the recent reforms by the Modi government, Jefferies says the GST implementation in 2017 "simplified taxation and improved trade efficiencies", akin to the formation of the Euro. "Bankruptcy reforms drove a massive cleaning up of corporate and banking sector balance sheets and improved governance. RERA (Real Estate Regulation Act) cleaned up the housing sector laying the foundation for a multi-year housing upcycle. Govt's focus on physical (Roads, airports, railways etc) & digital infra (UID, UPI, DBT) has helped the start-up eco-system."
India’s market cap is currently the 5th largest globally, but its weight in global indices is still low at 1.6% (10th rank). Jefferies thinks it should change as market free float rises and some weight anomalies get sorted out. "Assuming market returns in line with the last 15-20 year history and new listings, India will become nearly a U$10trn market by 2030," the report says, adding that it'll be impossible for large global investors to ignore.
India will go to General Elections in April-May 2024. Jefferies says successive governments have adopted "consistent growth and external relations" policies. "India has excellent relations with the Western world, Japan, Australia and the Middle East, making it a key beneficiary of China+1."
On the rising entrepreneurship or start-up ecosystem, the brokerage says India is home to 111 unicorns with a market value of $350 billion, making it the 3rd largest unicorn hub globally after the US and China. "Govt’s focus on developing digital infrastructure, globally the cheapest data rates and the abundant homegrown talent pool have been the key drivers."
The country, it says, is now becoming a services export hub, which accounts for nearly US$450bn/year. "Several large global organisations have 10-20% of their employees based in India including cos like JP Morgan, Intel, NTT, etc. Superior digital infra, young & well-educated human resources should drive this segment to keep growing."
On markets, Jefferies says the RoE-focused corporate sector is a key positive for minority investors. A strong institutional framework of regulators (SEBI, RBI), and intermediaries (responsible asset managers) has helped develop a large domestic investor base, says the brokerage.
