India has long been seen as a country with massive “potential”, but far from realizing it. The one with both the talent and the red tape. The top colleges and high unemployment rates. Instead, our neighbour China was the one in the spotlight.

But over the past many months, political and market factors have come together to favour India. Once part of the 'Fragile Five' countries, India is now being endorsed by Goldman Sachs and Morgan Stanley as the primary investment destination for the next decade.

Morgan Stanley even predicts that India’s stock market will become the world’s third-largest by 2030, as FIIs flee China due to its stock market slump and increasingly heavy-handed market controls. 

Vikas Pershad, an Asian equities portfolio manager at M&G Investments in Singapore, said. “People are interested in India for several reasons — one is simply that it’s not China. There’s a genuine long-term growth story here.”

However, the old problem of India’s potential not translating into reality, still looms over us. For this opportunity to not fizzle out, India must build up its manufacturing capability and drive exports. India faces stiff competition as a China alternative and global manufacturing hub. Other developing countries are in the race for the same sweet investment money.  

High import duties and the difficulties in doing business here could hurt India’s chances. Can we take the steps needed to become the top new manufacturing destination?

In this week’s Analyticks,

• The Window of  Opportunity: Can India gain from China’s fading popularity? 
• Screener: Exporters outperforming Nifty 50, with YoY growth in revenue and net profit

Indian stock market in top gear while China stumbles 

In professional dance, a key role is that of the ‘understudy’. This is the person who shadows the main performer, and knows the role as well as them. The understudy is there to step in, in case the dancer gets injured.

Now the understudy, India, has a chance as China stumbles. Investors are withdrawing billions of dollars from China's faltering economy and turning to India. Besides Goldman and Morgan Stanley, the $62 billion hedge fund Marshall Wace has positioned India as its biggest net long bet after the US, in its flagship hedge fund. 

Nifty50 outperforms Shanghai Composite and Hang Seng over past four years

Despite efforts by China's government to rescue its crashing stock market, the outlook is weak. A monetary stimulus, and the national team (a group of Chinese state funds tasked to support the markets) buying 70 billion yuan ($9.7 billion) of onshore Chinese shares have failed to turn things around. Censorship and recent curbs on Chinese industries like tech and gaming are discouraging investors. 

But even as investments are flowing into Indian equities, some economists warn that India faces multiple speedbreakers in becoming a global manufacturing hub. 

India’s high import duties and ease of doing business are a major hurdle

The US Ambassador to India, Eric Garcetti, highlights India’s missed opportunities, “Foreign direct investment isn’t flowing into India at the pace it should be. Instead, it is going to Southeast Asia, particularly Vietnam.” 

Garcetti criticized India's tax strategy in particular, suggesting that high taxes create a limited market rather than a protected one, by taxing both inputs and outputs. 

India’s FDI inflow falls 16.4% to $70.9 billion in FY23

High FDI inflows in FY23 were seen in sectors like computer software & hardware, pharma, chemicals, automobile and auto components, and infrastructure. 

Singapore accounts for 24.3% of India’s total FDI in FY23 

High taxes have limited big investments from economies like the US. Singapore and Mauritius together accounted for 32.9% of India’s overall FDI inflows, followed by the US and Netherlands. 

And despite these inflows, India’s FDI fell YoY in FY23. Meanwhile, Vietnam continues to be a major competitor, offering an alternative to global companies trying to diversify away from China. 

Foxconn Technology Group’s recent decision to spend $100 million on a new plant in Vietnam highlights this trend. Mexico, Thailand, Indonesia and the Czech Republic are also in the running to win investments to expand global supply chains in the computer and electronics segments. 

Countries competing for FDI typically offer a mix of incentives, including tax breaks, free-trade zones, discounted utilities like water and electricity, free land and commitments to supply workers. However, India stands out here with higher import taxes, This encourages domestic setup for local consumption, but reduces export competitiveness. 

 India's import duties higher compared to other emerging markets

Data from the ICEA reveals that India faces a 3.6% cost disadvantage compared to Vietnam, due to tariffs on smartphone components. This gap could prompt multinational companies to consider countries like Vietnam as alternative manufacturing bases, potentially posing significant competition to India.

Elon Musk has also raised the issue of high import taxes. Tesla has expressed willingness to invest up to $2 billion for an electric vehicle factory in India, if the government cuts import duties on its vehicles to 15% for the first two years of operation.

It’s just not Asian countries that India is competing with. Mexico replaced China as the top exporter to the US in 2023. 

India needs to take measures to boost exports and attract foreign investors. It looks like the Centre is keeping a close eye on this. On January 31, the Indian government reduced tariffs on a range of imported components, including battery covers, lenses, antennae and mechanical parts, to 10% from 15% to attract global manufacturers. 

In addition, India is also close to finalizing a first-of-its-kind trade deal that could bring in up to $100 billion in investment from a group of European nations over the next 15 years. 

These measures indicate a commitment to attracting foreign investment. But India still has a long way to go to position itself as a leading manufacturing alternative to China. Relaxing FDI rules, setting up special economic zones,  and a relook at import duties on key raw materials are essential. 

To become, as the government says, “the growth engine of the world”, India has to tackle the political and legislative roadblocks businesses currently face. The logo of Make in India is a lion; these moves are essential to ensure that the reality is not a pussycat.

Screener: Exporters outperforming NIFTY 50 with YoY growth in revenue and net profit

Cummins leads in Nifty 50 outperformance and revenue growth among top exporters

With exporters in the spotlight, we look at a screener that finds export-focused stocks which are outperforming the Nifty 50 in month change, with growth in revenue and net profit. The screener consists of sectors like automobile & auto components, pharmaceuticals, general industrials and consumer durables. 

Major stocks in the screener are Cummins India, Blue Star, Sun Pharmaceutical Industries, Lupin, Hero MotoCorp, Cipla, Bajaj Auto and Voltas.

Cummins India has surged the most over the past month, outperforming the Nifty 50 index by 26.4 percentage points. The general industrials company’s revenue grew by 16.3% YoY to Rs 2,509.8 crore in Q3FY24, owing to an increase in sales and services in the engines segment. Meanwhile, its net profit improved by 20.6% YoY to Rs 498.9 crore, helped by reduced raw material costs. 

Sun Pharmaceutical Industries’ stock price has risen by 16.2% over the past month, outperforming the Nifty 50 index by 15.5 percentage points. This pharma company’s Q3FY24 revenue grew by 10.1% YoY to Rs 12,156.9 crore on the back of higher sales from its India and US formulations, and global specialty segments. Its net profit rose by 16.5% YoY to Rs 2,523.7 crore, thanks to lower raw material and finance costs.

You can find more screeners here,