Capitalising on India's growth: How to invest amid the new capex cycle

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For investors, the virtue of patience is certainly the most important trait. The 29 years I have spent in this field have shown me the virtue of patience, mostly during times when uncertainties and volatilities run rampant in the market. In the current scenario, when the country is fresh out of an election, investors need to understand the economic agenda of the new government and its implications on the economy and market.

Let’s analyse what’s in store for us, retail investors.

Continuity of policy reforms

The government has taken several policy reforms in the past decade. These include supply side reforms like lower corporate tax rates and the Production Linked Incentive scheme. There’s also formalisation of the economy through the GST law, allowing retirement funds to invest in stocks, the bankruptcy code, and RERA. These reforms have promoted investment-led growth. We believe more will come over the next five years, pointing to positive structural shifts. Fiscal consolidation, infrastructure spending to lower logistical costs, boost to select manufacturing sector, free trade agreements with major economies, focus on energy transition and more spending on social infrastructure are likely to be the focus of the government.

Macro stability

The government has focused on macro stability in the last decade. We believe that the government will continue to do so. It is targeting to keep inflation around 4 percent with a deviation of 2 percent on either side. Headline inflation is likely to come down to 4.5 percent in FY25 from 5.4 percent in FY2024. Fiscal consolidation is a stated priority of the government with a fiscal deficit target of 4.5 percent of GDP by FY26 from 5.6 percent of GDP in FY24.  A current account deficit of below 2 percent and forex reserves over $600 billion will continue to provide stability to the Indian rupee. The above factors have helped India to become the fastest-growing large economy and are likely to sustain growth above 6 percent for the next few years.

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Capex cycle

Private capex is showing nascent signs of recovery after being on a weak footing for most of the past decade. The confluence of proactive supply-side reforms, improving capacity utilisation rates, and resilience in corporate and financial sector balance sheets, are likely to provide the foundation to unleash a capex upcycle. Manufacturing as a share of GDP will rise from 14 percent currently to above 20 percent by 2030. This will happen through the government's policy focus, shifting global supply chains, and free trade agreements with major trading blocks. Household capex, which accounts for 37 percent of total capex, is expected to do well with a turnaround in real estate sentiment in both the residential and commercial spaces.

Energy transition

The Indian economy has been impacted in the past due to its high reliance on imported sources of energy, mainly oil and coal. When the international prices of these commodities rise, it impacts India's current account deficit and hence the country is heavily dependent on foreign portfolio flows to manage its balance of payment. With the focus shifting on renewables from fossil fuels, we are likely to see meaningful progress in this direction. Currently, 72 percent of energy comes from coal and oil, which is expected to come down to 58 percent by 2034. This will also help in managing pollution even as energy demand increases as the economy grows at a fast pace.

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The markets may consolidate until they get further clarity on future policies of the government. The union budget will be the first such announcement by the government. Looking at the structural drivers of the economy, we believe that such a correction offers a good opportunity to increase equity allocation from a medium-term view.

The writer is senior executive vice president of investment, Kotak Mahindra Life Insurance.