India entering phase of self-sustaining expansion, says Franklin Templeton, highlights key investment themes

India is entering into a phase of 'self-sustaining' expansion, thanks to the reforms that have created a cycle of growth. This could drive nominal gross domestic product (GDP) growth as high as 10 per cent annually in the coming decade, said a report from global investment firm Franklin Templeton.

The financial firm, in its report, said the reforms initiated by the current government have the potential to make India join the ranks of the US and China by 2035 if nominal GDP grows by 10 per cent per year.

"The economic and policy foundations built by the Narendra Modi government create the potential for the Indian economy to join the United States and China in the $10 trillion GDP club by 2035 if nominal GDP growth rises by 10 per cent per annum," said Franklin Templeton.

The investment firm underscored three primary drivers of growth for the country - (i) broad-based infrastructure and manufacturing investment, (ii) a sustained switch from unorganized to organized economic activities, and (iii) political and economic stability.

"Broad-based infrastructure and manufacturing investment has joined consumption as growth drivers. Services exports are widening and deepening to include global capability centres focused on accounting, marketing and human resources," said Franklin Templeton.

"A sustained switch from unorganised to organised economic activities is taking place, as prior reforms bring more labour into the organised economy and reduce the attractions of cash-based transactions," Franklin Templeton said.

"There is more political and economic stability with low inflation and a sustained reduction in the current account and fiscal deficit. The government has recognized its role in kickstarting a new industrialisation process to leverage opportunities from Make In India, the diversification of global supply chains and the green transition," Franklin Templeton said.

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The investment firm pointed out that the Indian economy is benefiting from multiple structural reforms such as the insolvency and bankruptcy code, goods and services tax (GST), and digitisation via Aadhaar and Jan Dhan.

Franklin Templeton highlighted that these reforms are leading to increased entrepreneurship, with new graduates seeking to join start-ups which are leveraging the India Stack and opportunities related to Make in India.

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Key investment themes

Franklin Templeton pointed out that the performance of Nifty 50 over the past two years has been positive but it has lagged cumulative earnings growth of 31 per cent which has pushed valuations lower and created new investment opportunities.

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The investment firm believes 2024 could witness a re-rating of the domestic market if there is increased acceptance among foreign investors that India’s growth is structural as opposed to cyclical.

Franklin Templeton mentions four key investment themes:

(i) Rising demand for financial services: Franklin Templeton's focus is on private sector banks with solid deposit franchises and loan pricing power, which may gain market share from state banks. Moreover, Franklin Templeton believes the under-penetrated insurance sector also has a long runway for growth.

(ii) Premiumization: "Favourable demographics, rising income levels, and under-penetration of goods and services drive the trend for increasing consumerism and demand for premium products," Franklin Templeton said.

(iii) Infrastructure and capital investment: The investment firm pointed out that the resurgence of manufacturing, public-led infrastructure investment and global supply-chain diversification are creating multiple investment opportunities.

(iv) Green transition: Franklin Templeton underscored electric vehicle manufacturing, solar panel production, and decarbonisation of high carbon-emitting industries represent opportunities.

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Disclaimer: The article is based on a report from Franklin Templeton. The views and recommendations above are those of the investment firm, not of Mint. We advise investors to check with certified experts before making any investment decisions.