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India’s Economic Surge: A Look at the Fifth-Largest Economy’s Growth Drivers

India has solidified its position as the fifth-largest economy globally and is now home to the fourth-largest stock market. This blog explores how well-run companies, both domestic and foreign-invested, are driving this rapid economic expansion and giving rise to a new Indian elite.

Over the past decades, India has outperformed several global economies in terms of dollar returns. Both India and the U.S., the two largest free-market democracies, have achieved consistent double-digit returns, propelled by the contestability of both political and economic power.

India vs. China: A Decade of Investment Returns

If you had invested $10,000 in India a decade ago, you would have more than doubled your investment in dollar terms. Conversely, the same investment in China would have stagnated. Even within the broader emerging markets, which have delivered almost no returns in the past decade, India has stood out. In fact, India’s stock market has consistently doubled investor money over the past ten years, a stark contrast to other emerging economies.

Despite this success, India remains the 140th poorest country in terms of per capita income. So, how is India generating such massive returns for companies like Suzuki, Honda, and the broader stock market?

The Power of Consistent Compounders

One key reason behind India’s success is its high number of “consistent compounders”—companies that have sustained 10% annual revenue growth and 10% return on equity for at least a decade. India has 162 such companies, outpacing China, which has 126, despite China’s economy being four times larger. No other emerging market comes close to this achievement.

What’s even more remarkable is that Indian compounders have delivered returns of 26% in dollar terms over the past 20 years, while their Chinese counterparts have managed only 10%. Companies like Suzuki and Honda are prime examples of these consistent compounders, driving the success of modern Indian capitalism.

The Rise of New Challenger Companies

A decade ago, India had around 600 high-growth companies, but today, that number has exploded to 6,000. These companies have grown their profits at 15-16% annually over the past decade, with profits accelerating to 24-25% over the past three to four years. The growth of these smaller “Challenger” companies has been nothing short of transformative for India’s economic landscape.

India’s corporate tax data shows that smaller companies, rather than the large firms that dominated in previous decades, are now driving much of the growth. These Challenger companies, which account for about 1.5% of India’s total businesses, now generate 25% of corporate profits, outpacing the larger firms in terms of growth.

Key Drivers of India’s Economic Boom

India’s success over the past decade can be attributed to three critical factors:

  1. Digital Infrastructure: India’s Unified Payments Interface (UPI) has revolutionized commerce, with 55% of the country’s GDP now linked to mobile payments. UPI enables seamless phone-to-phone payments at zero transaction costs, making it easier for businesses to receive payments and establish creditworthiness.
  2. Cash Flow Financing for Small Businesses: The widespread use of UPI has allowed banks to track small businesses’ cash flows, enabling lenders to offer cash flow financing. This has led to a surge in lending to small businesses, with growth rates of 35%. The cost of working capital for these businesses has dropped from 20% to 10% in just four years, further boosting their profitability.
  3. Affordable Mobile Data: India has the world’s lowest mobile data costs—just 1/50th of what it costs in the U.S. This has been a boon for businesses, particularly small and Challenger companies, allowing them to leverage mobile data for marketing, customer engagement, and transactions at minimal cost.

A Broader Set of Opportunities

The rise of India’s economy is not confined to its well-established industries like real estate and manufacturing. Smaller companies in sectors such as IT, pharmaceuticals, and even niche industries like medical devices are now driving much of the growth. India has the potential to become a leader in areas like mobile phone production and pharmaceuticals, which have benefited from global shifts away from China.

  • Mobile Phones: India has rapidly scaled up its mobile phone production, with companies like Apple moving part of their manufacturing operations to the country. India now produces $22 billion worth of iPhones annually, up from $2 billion just a few years ago. The potential for further growth in this sector is enormous.
  • Active Pharmaceutical Ingredients (APIs): India is also poised to capture a larger share of the global API market, which is currently dominated by China. As American pharmaceutical companies seek to reduce their reliance on Chinese suppliers, India is emerging as a preferred alternative. Companies like Divis Labs, which produces 80% of the world’s naproxen and a significant share of global cough syrup APIs, are set to benefit.
  • Medical Devices: India currently produces only $2 billion worth of medical devices, compared to China’s $200 billion. However, with increasing global demand for medical equipment, India has a significant opportunity to expand in this sector.

A Growing Economic Engine in Southern India

Southern India, in particular, has become the country’s economic engine, contributing 60% of its GDP growth. Cities like Bangalore, Chennai, and Hyderabad are doubling in size every six years, driven by highly educated workforces, stable law and order, and advanced infrastructure. Peninsular India, home to just 25% of the population, now accounts for half of India’s GDP and 60% of its economic growth.

The Rise of Global Capability Centers (GCCs)

Another exciting development is the growth of Global Capability Centers (GCCs) in India. With skill shortages in Europe and the U.S., companies are increasingly outsourcing white-collar jobs to India. There are now over 1,600 GCCs in the country, with one new center opening every day. This trend is expected to accelerate, with companies outsourcing not just IT services, but also HR, payroll, sales, and marketing operations to Indian cities.

India’s rapid economic growth, driven by a combination of digital infrastructure, rising Challenger companies, and an expanding manufacturing base, has made it a key player on the global stage. The country’s transformation into the world’s fifth-largest economy and the fourth-largest stock market is a testament to the strength of its well-run companies and the emergence of a new, dynamic business elite. With continued investments in technology and infrastructure, India is poised to maintain its upward trajectory, offering substantial opportunities for investors and businesses alike.

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