India’s Comeback Story – How, Why, and Whereinvestments.miraeasset.eu/docs/India_Comback_Story_Short_Final.pdf · The gross NPA ratio for private banks at the end of FY2019 was

India’s economy is slowing down. GDP growth for 2Q FY19/20 recorded at 4.5% – the lowest since 20131. In contrast, the country hit over 8% GDP growth for FY16/17. The government is also unlikely to achieve its fiscal deficit target.

These have sparked concerns about the health of the Indian economy. While understandable, they are overblown.

While concerns over the health of the Indian economy are understandable, they are also overblown. India’s economic fundamentals remain strong, and ongoing government reforms are continuing to unlock the country’s full potential.Rahul Chadha, Chief Investment Officer of Mirae Asset Global Investments (Hong Kong) Ltd.

By Rahul Chadha, Chief Investment Officer of Mirae Asset Global Investments (Hong Kong) Limited

India’s Comeback Story – How, Why, and Where

February 2020

The India Story – Long-Term Growth versus Short-Term HeadwindsThe Indian economy is facing a short-term slowdown. But its structural and fundamental factors should allow it to weather these near-term storms and thrive over the longer term. Its current headwinds are, as the World Bank2 notes, mostly driven by external and cyclical factors.

India’s Nominal GDP Growth Bottoming Out

0

2

4

6

8

10

12

(% YoY)

10.7

Mar 17

Jun 1

7

Sep 1

7

Dec 17

Mar 18

Jun 1

8

Sep 1

8

Dec 18

Mar 19

Jun 1

9

Sep 1

9

Dec 19

Mar 20

10.7 11.4 11.5 10.912.6 12.0

11.09.4

8.0

14GDP (Nominal) Base to get lower

significantly lower by 2HFY20 driving a growth bottoming

Source: Bloomberg, November 2019

Meanwhile, country-specific issues are or have already been resolved – their impact has just yet to impact economic figures. Indeed, we expect further declines before an eventual bottoming out. Subsequently, India’s structural and economic fundamentals will come to the fore. These include a 37-year demographic dividend, a rising middle class, and ongoing government reforms.

Unlocking the Potential of India’s Financial SectorFour main structural challenges have hampered the realisation of the Indian financial industry’s potential. But as these are resolved, the sector (and economy) will stand poised for substantial long-term growth.

CHALLENGE #1: Disproportional State Dominance State-owned banks hold almost 70% of sector assets3. Reducing this is thus a significant step toward a healthier system. This is being achieved through public-sector bank consolidation and bank licensing liberalisation. The number of state-owned banks is being cut from 27 to 124, while final guidelines for a new licensing regime were recently issued.

CHALLENGE #2: Persistent Asset Quality Issues While non-performing assets (NPAs) continues to drag on the economy, the private sector has emerged mostly unscathed. The gross NPA ratio for private banks at the end of FY2019 was 3.7%5 compared to 12.6% for public sector banks. Public sector issues are also being resolved through asset-quality reviews, capital injections, regulations6, and write-offs7.

But not all sectors will benefit equally. We will next study how these will affect each area of the market, beginning with the financial industry.

Period of Demographic Dividend in Large Economies

0102030405060

PAST AND FUTUREINDIA’S DEPENDENCY RATIO:

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

708090

77%

81.5%

49.8% 49.5% 52%

1964 20041984 2002

1987 20271991 2014

19941994

20312028

2006 203820182018 2052

2055

(START OFDEMOGRAPHIC

DIVIDEND)

(END OF DEMOGRAPHIC DIVIDEND)Japan 40 Yr

Italy 18 Yr

Republic of Korea 40 Yr

Thailand 34 Yr

Brazil 32 Yr

India 37 Yr

Bangladesh 34 Yr

Spain 23 Yr

China 37 Yr

Source: CARE Ratings

GOVERNMENT OWNED BANKS (PSB)

FY14 FY15 FY16 FY17 FY18 FY19

GNPA 4.7% 5.0% 9.3% 11.7% 14.6% 12.6%

NIM 2.5% 2.3% 2.2% 2.1% 2.1% 2.4%

RoTA 0.5% 0.5% -0.1% -0.1% -0.8% -0.9%

PRIVATE BANKS (PVB)


GNPA 1.9% 2.1% 2.8% 4.1% 4.7% 3.7%

NIM 3.3% 3.4% 3.4% 3.4% 3.3% 3.8%

RoTA 1.7% 1.7% 1.5% 1.3% 1.1% 1.2%

ALL BANKS (SCB)


GNPA 4.1% 4.3% 7.5% 9.3% 11.2% 9.3%

NIM 2.7% 2.6% 2.6% 2.5% 2.5% 2.8%

RoTA 0.8% 0.8% 0.4% 0.4% -0.2% -0.1%

CHALLENGE #3: The Shadow Banking Liquidity Crunch The 2018 default of India’s leading infrastructure finance company created a panic about liquidity in the NBFC (Non-Bank Financial Company) subsector – responsible for over 20% of system credit. But nothing happened beyond several isolated defaults. Their diverse business models shielded them from contagion effects. Further, the affected NBFCs and concerned loans only accounted for a tiny percentage of total system credit.

CHALLENGE #4: Low Financial Inclusion Despite having 190 million unbanked adults in 20178, the government’s financial inclusion agenda has been highly successful. Its PMJDY initiative saw 377 million bank accounts opened from 2014 to 2019. The programme’s even more ambitious successor was launched in 2020.

As financial inclusion grows, Indians’ savings are also increasingly financialised9 and less physical. This development will have a deepening effect on capital markets.

INDIA’S COMEBACK STORY – HOW, WHY, AND WHERE

Savings are Expected to Rise Sharply Going Ahead

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

E20

21E20

23E20

25E

Financial savings (% of GDP) Physical savings (%of GDP)

Source: RBI, Kotak, Swiss Re, JP Morgan Research, Mirae Asset Global Investments

Mirae’s strategy is heavily weighted toward the financial sector. We focus on the disproportionate beneficiaries of sectoral reforms and the recovering economy: quality private sector banks, strong NBFCs, and large insurance companies (which will gain from higher financialisation).

Mirae’s strategy

Protection Gap is Large in India

0

10

20

30

40

50

60

84

TW AU SG HK MY ID TH PH KR CN IN

67

44

30 28 2722 21

15 128

70

80

90% insurance needs covered

Protection gap of US$369 bn

TREND#1 Rising Incomes Concentrated Around the Middle ClassIndia is becoming a middle-class economy. From 2018 to 2030, India is expected to add about 140 million middle-class and 21 million high-income households while lifting 25 million households out of poverty.

India Households Growth

Low151M (69%)

Upper mid16M (7%)

High1M (1%)

Lower mid51M (23%)

2005

219M

Low127M (43%)

Upper mid61M (21%)

High8M (3%)

Lower mid97M (33%)

2018

293M

Low157M (15%)

Upper mid168M (44%)

High29M (7%)

Lower mid132M (34%)

2030 forecast

386MHIGH INCOME & UPPER MIDDLE INCOME SEGMENT

~70M fewer low income households by 2030

• 1 in 4 households today• 1 in 2 households by 2030

Households>>

This growing wealth will lead to a premiumisation effect – the increased consumption of higher-quality goods, which will be reflected in higher spending on more nutritious food, better healthcare, modern appliances, and discretionary outlay.


Domestic consumption already accounts for 60% of GDP. Trends within the consumption narrative thus play a huge role in the direction of the economy. Each of the following five trends will have positive implications for specific sectors such as consumer durables, consumer discretionary, real estate, and healthcare. Mirae Asset’s strategy is to carefully research and pick out the winners within those sectors.

The Evolution of the Indian Consumption Narrative

Population by Age Cohort

Source: Euromonitor

TREND#3 Digital Influence on Consumer HabitsThe Internet’s reach is becoming increasingly democratised. By 2030, an estimated 1.1 billion Indians will be online, supported by falling prices of data and smartphones. This premiumisation effect will thus influence the consumption patterns of even the lower-income classes.

Strong Growth in Digital Retail Transactions

0%

F200

4

F200

5

F200

6

F200

7

F200

8

F200

9

F201

0

F201

1

F201

2

F201

3

F201

4

F201

5

F201

6

F201

7

F201

8

F201

9

FYTD

-20

5%

10%

15%

20%

25%

30%Digital Retail Transactions (% of GDP)*

Source: As of Oct 2019, Morgan Stanley Research

TREND#4 Greater Urbanisation and a Shrinking Urban-Rural DivideIndia’s vast rural population creates massive long-term growth potential. By 2030, 40% of the population will be urban residents, primarily driven by the government’s ambitious infrastructure development projects. These moves will also aid industries with high logistical costs, such as mining, construction, agriculture, and FMCGs.

Sectors with High Logistics Costs to See Gains

0%

Min

ing

Cons

truct

ion

Phar

ma

Chem

ical

s

Elec

trica

ls

Auto

& A

uto

Com

pone

nt

Capi

tal G

oods

Agric

ultu

re

Dairy

FMCG

Lifts

tyle

(org

aniz

ed)

Cons

umer

Dura

bles

10%

20%

30%

Manufacturing Consumer

Logistics Costs as a Percentage of FY18 Sales

25-27%

15-17% 15-17%

6-8% 6-8%5-7% 5-7%5-7%

3-5% 3-5%

10-12%8-10%

Source: KPMG, BofA Merrill Lynch, June 2019


With its demographic dividend expected to last till 2055, India will be dominated by a young and tech-savvy generation. By 2030, millennials and Generation Z will comprise 77% of the total population. Generation Z will itself consist of 370 million people – ‘digital natives’ who will be accustomed to and even prefer technology-enabled consumption models.

TREND#2 The Continued Prevalence of a Younger, Tech-Savvy Demographic

The gap between rural and urban population will also continue to shrink. From 2018 to 2030, per-capita consumption is forecast to grow by 3.5x for urban dwellers and 4.3x for rural ones. But the true potential of India’s rural population will be unlocked once the long-term catalyst of large-scale infrastructure development takes effect.

Consumer Expenditure in India across city types

45% 42% 35%

13% 15% 20%

23% 22% 20%

5% 6% 7%

14% 15% 18%

FY05 FY18 2030

Metro Boom Town Rest of urban Developed Rural Rest of rural

% total

Source: PRICE Projections based on ICE 360o Surveys (2014, 2016, 2018)

Your Vehicle for Investing in India’s Established and Future Sector LeadersOnce the Indian economy blows past its short-term headwinds, all signs point toward it continuing its path of steady long-term growth. But not all companies will benefit equally. Certain businesses will gain disproportionately. These are the companies the Mirae Asset India Sector Leader Equity Fund methodically identifies and invests in. For investors looking to leverage India’s long-term economic trajectory, our fund could be the perfect choice.


TREND#5 Increased Demand for Quality Healthcare ServicesRising incomes and premiumisation trends among the middle class and expanded access (the National Health Protection Scheme provides US$7,000/year to over 100 million families) will combine to boost healthcare demand. The growing incidences of lifestyle diseases will support the longer-term trend.

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1Reuters, as of 29 November 2019.2 World Bank Group, as of Fall 2019.3 Business Standard, as of 13 Oct 2019. 4DB Research, Imagine 2030. 5 UNFPA, as of 31 Jan 2020. 6 The Economic Times, as of 22 Jul 2019. 7 World Economic Forum, Insight Report, January 2019. 8 Bain & Company, as of 8 January 2019. 9 Reuters, as of 28 August 2019.