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Step into the fastest-growing large economy in the world
February 28, 2019

In our previous article on India, we examined valuations of the SENSEX Index. In this latest article, we dive into its economy and look at its growth projections.

Author : Tan Chu Ren

After examining valuations of the SENSEX Index in our previous article, we look into India's economy and its drivers in this article.

Looking at the chart below, investment expenditure has become a major factor in driving GDP growth in the past two years. It is likely that investment will still be an important driver of growth for India, considering that there is still plenty of room for development.

(The below chart also seems to suggest that there might be something wrong with India's final GDP growth numbers as they a net importer, particularly in seemingly lower growth periods.)

Chart 1: Year-on-year GDP growth by expenditure


An article by BHP indicated that while there is already a high volume of transport infrastructure, most of them are not developed with 40% of India's total road network being unpaved and national highways consist of less than 3% of the overall road network. Expanding the infrastructure capacity would increase productivity and improve urban connectivity for rural villages, allowing India to realise its potential.

As such, it would not be wise to dismiss India's growth potential. However, due to state bureaucracies and significant time lag, there will be uncertainty surrounding this development. Furthermore, with the government being the one handing out contracts, its goals and contracts are transparent for all to see, and thus, most earnings should have been priced in.

The agricultural sector

Generally, for a developing country to join the echelons of the developed world, it has to progress from an agricultural-focused economy to one that is heavily focused on the services sector. India's economy has become less agricultural-centric, and it seems to be skipping the industrial phase to building up its services sector straight.

Looking at India's GDP by industry for the last 7 fiscal years, the contribution by the agricultural industry has decreased while contribution by manufacturing industry has remained relatively stable. Meanwhile, contribution by the services sector (including public service) has grown from 49.0% in 2012 to 54.0% in 2018.

Chart 2: Examining India's growth phases

However, World Bank estimates that 41.6% of India's employment is in the agricultural sector in 2018, despite it only contributing 14.8% of the nation's GDP. The earning power of farmers is a serious issue in the country, which is also the reason political parties are focused on supportive measures for farmers in the upcoming election.

Farms in India have to be more productive and cost-efficient. Looking forward, if investment starts pouring into the agricultural sector and the manufacturing sector, with the latter creating jobs for displaced farmers, we should start seeing more inclusive and stable growth.

However, due to the lack of quality data in India, it is difficult to confirm the above deductions but the recently leaked employment report seems to give us an inkling of how things really are in India.


The biggest elephant in the room

Looking at Chart 2, consumption has been a stable driver of GDP growth in the past years. Consumption, as a percentage of India's GDP, has averaged about 56% since 2011. However, if we examine India's income distribution, there appears to be a problem at hand.

Chart 3: Income share in India

Table 1: Income distribution in India, 2014


Income group

Number of adults

Income threshold

Average annual income (€)

Comparison to average income (ratio)

Income share

Total adult population






Bottom 50%






Middle 40%






Top 10%






incl. Top 1%






incl. Top 0.1%






incl. Top 0.01%






incl. Top 0.001%






All values have been converted into 2016 Purchasing Power Parity (PPP) euros at a rate of 1 EURO = 1 USD = 23 INR. PPP accounts for differences in the cost of living between countries. Values are net of inflation. Numbers may not add up due to inflation.

Source: World Bank, World Inequality Report 2018


Wealth is increasingly being solidified by the top 10% income group in India with the bottom 50% having seen their income grew about 2% annually from 1951 – 2014, after accounting for inflation.

The employment situation in India tells a similar story. In this comprehensive report by Azim Premji University, they found that labour force participation rate (LFPR) has been falling since 2011 while unemployment rate has been rising, particularly among the youth. Thus, despite enjoying high economic growth as a whole, growth has not been inclusive.

The leaked report also showed that unemployment in 2017 - 2018 was at its highest in 45 years. Young rural males are hardest hit with unemployment rate rising from 5% in 2011-12 to 17.4% in 2017-18. Together with the reports by World Bank and Azim Premji University, India does have a problem that is not going away with the recent announced policies.

As such, we believe that the consumer sector still has headwinds and that it would take some time before consumption, as driven by the middle income class, will be spearheading economic growth in India.

The Bloomberg consensus forecasts India's economy to grow at 7.2% and 7.3% in 2019 and 2020 respectively. Consumption is still expected to be a stable contributor barring any major unexpected events. A looser fiscal budget following elections could boost consumption and government expenditure slightly. The wild card here would be investment expenditure with it being a major contributor to GDP growth and more easily swayed by sentiment and events.

Fairly expensive large-caps; more value in small-caps

Similar to how wealth is concentrated in the top 10%, the two benchmarks - SENSEX and NIFTY have seen prices rise over 2018 due to the large caps - mainly Reliance (41.9%), Infosys (53.8%), Tata Consultancy (56.8%), HDFC Bank (14.2%) and Hindustan Unilever (36.2%).

We believe that the small-cap space offers more value for investors, and as such, we are wary on investing in Indian equities via ETFs due to their relatively larger exposure to large-cap stocks.


The Research Team is part of iFAST Financial Pte Ltd.


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