As we approach the final months of 2024, India’s economic landscape is being shaped by a blend of strong domestic performance and evolving global influences. The recent US election outcome, with Donald Trump securing a second term, brings new trade policies and regulatory shifts that could significantly impact India’s financial markets and investment environment. Despite recent market pullbacks, robust macroeconomic indicators and substantial domestic investment highlight the underlying resilience of the Indian economy. In this month’s commentary, we delve into how these factors interact to shape India’s growth prospects and explore the opportunities and challenges that lie ahead. We hope you enjoy this update.
The MSCI India Index was down 7.64% (in USD terms1) over the month of October, as sustained foreign investor selling and weak earnings reports contributed to negative market sentiment. All sectors closed lower on the month, with Health Care and Financials outperforming on a relative basis, while Consumer Staples and Consumer Discretionary were the laggards.
Foreign institutional investors (FII) turned net sellers of Indian equities in October, leading to net outflows of USD 10.4 billion (vs net buy of USD 5.9 billion in September).2 However, outflows were buoyed by sustained domestic institutional investor (DII) activity led by mutual fund inflows, with DIIs investing USD 11.7 billion in Indian equities this month, marking their highest monthly purchase.3
Despite the equity market pull back, macro data points hint at a resilient economy. Goods and Services Tax (GST) collections rose to the second-highest monthly value of INR 1.87 trillion (~USD 22 billion) in October, with growth also improving to 8.9% y/y (vs. 6.5% in September).4 India’s Purchasing Managers’ Index (PMI) rebounded in October, reversing its recent downward trend. Manufacturing PMI rose to 57.5 from September’s 8-month low of 56.5, driven by accelerated output growth and stronger increases in both domestic orders and international sales.5 Services PMI also strengthened in October, rising to 58.5 (vs 57.7 in September), with notably robust employment growth.6 Buoyed by positive sales momentum and optimistic business outlook, surveyed companies increased their workforce at the fastest pace in over two years.
Headline inflation surged to 5.5% y/y in September from 3.7% in August, primarily driven by unexpected food price increases, particularly in vegetables and oils & fats. Vegetable prices were pushed higher by unseasonal rains and a tomato crop virus outbreak, while the mid-September import duty hike, implemented to protect farmer interests, drove up in the price of oils & fats. Core CPI (excluding food and fuel) showed a more moderate increase, edging up to an 8-month high of 3.6% y/y in September (vs 3.4% in August).
With the election outcome now confirmed, Donald Trump has secured a second term as President of the United States. This time, without the pressures of needing to seek reelection, Trump is positioned to pursue a more assertive agenda, raising critical questions for investors about the implications for Asian and emerging markets. But before we look abroad, it’s worth understanding the likely domestic policy trajectory in the US first.
Trump’s first term saw significant regulatory rollbacks across sectors, and we expect this trend to continue. Industry experts have indicated that 300+ executive orders may have been drafted during Trump’s first term focusing solely on deregulation, and these could be revisited once the new administration comes in.7
Deregulation measures in the oil sector are expected to result in lower energy prices, benefiting both consumers and businesses, particularly energy-intensive manufacturing in the US. In the financial sector, reduced regulations could boost business confidence and lending activities, further stimulating economic growth. While this pro-growth agenda of the Trump administration might spark near-term inflationary pressures, the combination of falling energy costs and productivity gains through deregulation and AI adoption should help moderate inflation over the medium term.
In healthcare, deregulation measures could lead to lower drug pricing and more streamlined drug approval processes. These changes present significant opportunities for Indian pharmaceutical companies, which dominate the global generic drug market, as faster approvals and reduced regulatory costs could accelerate their US market penetration while maintaining competitive pricing advantages.
On top of potential deregulation policies, Trump has pledged to extend the Tax Cuts and Jobs Act (TCJA) and implement further individual and corporate tax reductions. As he enters his second term in a stable, soft-landing environment, these tax cuts are designed to incentivize business investment and drive economic growth. However, a key concern is how the administration will finance these tax reductions. Without fiscal prudence, increased deficits could alarm bond markets, keeping yields high and potentially undermining the US’s pro-growth trajectory.
Looking toward Asia and emerging markets, the path ahead presents notable challenges. While US economic strength would typically be positive for the region, it may delay significant monetary easing, with Fed rates likely settling around 3.5% over the next year. As rates remain high, EM central banks will find it difficult to implement the interest rate cuts needed to accelerate growth without risking currency depreciation and capital outflows. For India, however, this higher-for-longer theme reduces pressure on the Reserve Bank of India (RBI) to cut rates too early while inflation remains somewhat elevated.
EMs will remain in an uncertainty corridor for the next 3-4 months as questions linger about US fiscal policy direction under Trump’s second term. Although Trump is scheduled to be inaugurated on January 20, 2025, work was already in progress from his prior term to assess various policies, particularly regarding taxes and tariffs.
Critically, we need to see how the tariffs will play out. Trump has proposed an expansion of tariffs from the current ~3% to a baseline of 10-20% across most countries. However, due to necessary legal processes, new tariffs will probably take some time to implement, and we expect they will focus on China first. For India, while initial 10% tariff increases would create some headwinds, we believe that the potential acceleration of the “China +1” diversification trend could create an even greater opportunity. India has already emerged as a beneficiary of the supply chain redistribution away from China. Thus, market corrections driven by the initial negative sentiment could offer attractive entry points for investors looking to capitalize on this ongoing structural shift.
For India, we believe the Trump administration will further strengthen the strategic partnership that has been developing over recent years, building on successful initiatives that have already attracted major US corporate investments, including Apple’s significant manufacturing expansion in India. While Trump’s administration will likely maintain its focus on addressing the complexities of US-China relations, India stands to benefit from its growing importance as a key strategic partner within Asia.
Proposed US corporate tax cuts could boost corporate spending power, potentially driving stronger IT investment despite trade headwinds. The business case for AI adoption is compelling, promising to enhance both process efficiency and cost optimization across any organization. However, implementation is complex, requiring extensive experimentation, proof-of-concept development, and thoughtful scaling of solutions. This is where IT services companies play a crucial role. With the market for outsourced IT services in data and AI expected to reach US$200 billion by 2029, growing at an estimated 19.1% CAGR, leading IT services firms are positioning themselves as essential partners in the AI transformation.8
Within this space, Indian IT services companies are leading the way, with companies like Tata Consultancy Services (TCS), Infosys, and Cognizant leveraging their global scale and deep domain expertise to drive enterprise AI adoption. These companies bring several unique advantages to the table – they have decades of experience in IT services, a deep understanding of enterprise systems, and vast pools of skilled technology workers.
Government spending slowed down in Q2FY25, impacting companies that rely on public sector contracts. The slowdown was stark: capital spending fell 15% in the first half of FY25, a dramatic reversal from last year’s robust 43% growth.9 Even day-to-day government spending barely grew at 3%, well below 10% from the same period last year. The slowdown is primarily attributed to the recent elections, which have led to a shift in focus away from capital projects.
The spending cuts ran across key departments. Defense has only used 31% of its capital budget so far, down from 39% last year. Central Public Sector Enterprises (CPSEs) didn’t fare better either – their spending dropped 11%, with railways slashing budgets by 20% and highways by 9%. State-level capex also contracted over 10% y/y during the first half of FY25, with some states prioritizing populist spending over infrastructure projects due to upcoming elections.
Despite weaker spending numbers, tax collections remain healthy, growing 9% in H1FY25 compared to last year. This could fuel a spending rebound in the second half of FY25, which is crucial for broader economic growth. However, if spending stays sluggish, corporate earnings forecasts may see some trimming. This pattern isn’t unusual though – during past election years (FY09, FY14, and FY19), government capital spending typically fell about 7.7% short of budget targets.
Recent Q2FY25 results reveal a concerning trend in the microfinance sector, with smaller banks (such as RBL and IndusInd) and microfinance institutions (MFIs) (such as Credit Access and Fusion) reporting deteriorating asset quality beyond expected levels.
This situation stands out because, unlike past asset quality issues—often isolated to specific regions affected by natural disasters (floods, droughts) or political disruptions (such as policies that affect credit culture)—this time, the MFIs themselves are largely responsible. Many borrowers now find themselves trapped in a lending spiral, taking new loans simply to repay existing ones. As institutions pull back on new lending, the underlying asset quality problems are becoming more visible.
The root of the problem lies in the sector’s lending model. With average loans just under INR 50,000 (~USD 600) to informal sector borrowers10, traditional credit assessment isn’t cost-effective. Instead, MFIs rely on joint liability groups (JLG) and basic criteria like home ownership to evaluate creditworthiness.
While we are not invested in India’s microfinance sector, we recognize that the declining asset quality may indicate rising credit risks that could extend more broadly, especially given the substantial credit growth we’ve already seen over the past two years.
In sum, India’s current market dynamics present a particularly interesting case. Recent excessive credit growth, especially in unsecured lending, requires a period of consolidation, and near-term growth may moderate. However, we anticipate improvement by Q2 or Q3 of 2025 on the back of revival in the government and the private sector capex.
While Indian equity markets may remain range bound until such time, we maintain a positive outlook on US-exposed exporters, particularly Indian IT services companies. As corporate profitability improves globally, increased spending on IT software and customization services should benefit this sector, which should be largely insulated from traditional tariff measures.
We are also focusing on companies with resilient domestic demand, such as Indian healthcare and hospital names. On the exporters, the emphasis is on identifying businesses that can capitalize on improving US business confidence while minimizing tariff exposure. Additionally, certain exporters will also benefit from the accelerating China+1 trend. We see India emerging as a compelling destination, especially in areas such as electronics manufacturing services (EMS), auto components, and pharmaceutical contract manufacturing. Even with potential 10% tariffs, India’s manufacturing cost advantage remains substantial compared to developed markets. Thus, the impact of tariffs should be manageable as long as the demand flow remains sufficient, and this demand flow will likely come from China+1.
Overall, we believe this is a manageable outcome. While Indian equity markets may trade sideways for 4-5 months pending policy clarity, market pullbacks should present attractive entry opportunities. The US economy is expected to maintain its strength, and though Fed rate cuts may be limited to 100bps rather than 200bps as the central bank moves toward a neutral rate over the next year, the broader outlook remains constructive. Thus, we maintain our conviction in India’s structurally sound economy, which we believe continues to offer compelling long-term growth prospects.
During a recent trip to meet with tech companies in India, our Senior Investment Analyst, Manish Nigam, took the chance to visit his family in Agra – home to the iconic Taj Mahal. Being a tier-2 Indian city, Agra reminded Manish of the eye-opening transformation that is currently taking place in India, which he shared with the team.
Beyond the more obvious economic changes, Agra is a testament to the rising aspirations of its people. The city is seeing an increase in educational opportunities, and the development of modern residential amenities such as gyms, yoga studios, and tutorial centers all signal a higher standard of living. The younger generation is particularly notable, with many pursuing advanced education and diverse career paths, breaking away from traditional roles. One local driver mentioned to Manish that her daughter was earning a PhD in Sanskrit! Even this reflects the new job opportunities that are emerging as a result of renewed focus on this ancient language. These developments reflect a broader trend of growth and optimism, and the signs of rising aspirations were palpable.
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Investment involves risk. Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the investment product will generate a return and there may be circumstances where no return is generated. Investors could lose all or a substantial portion of any investment made. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the investment product and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Shikhara’s investment products are suitable only for sophisticated investors and require the financial ability and willingness to accept the high risks and lack of liquidity inherent in Shikhara’s investment products. Prospective investors must be prepared to bear such risks for an indefinite period of time. No assurance can be given that the investment objectives of any given investment product will be achieved or that investors will receive a return of their investment.
Certain of the information contained in this website are statements of future expectations and other forward-looking statements. Views, opinions, and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance, or events may differ materially from those in such statements.
Certain information contained in this website is compiled from third-party sources. Whereas Shikhara Investment Management has, to the best of its endeavor, ensured that such information is accurate, complete, and up-to-date, and has taken care in accurately reproducing the information, Shikhara Investment Management takes no responsibility for the accidental publication of incorrect information, nor for investment decisions taken based on this website. Neither Shikhara Investment Management nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and nothing contained herein should be relied upon as a promise or representation as to past or future performance of any investment product or any other entity.
The contents of this website are prepared and maintained by Shikhara Investment Management and has not been reviewed by the Securities and Exchange Commission of the United States or the Securities and Futures Commission of Hong Kong.