Getting to the heart of India's "revolution"

As a consumer, you may have long associated “Made in China” with products of less than sensational quality. As an investor, you may wish to associate “Make in India” with something altogether more encouraging.

Before going any further, I perhaps ought to quickly acknowledge what “Made in China” means today. With the world’s second-largest economy ever more determined to focus on high-end goods, this tag should no longer be treated as a kind of warning sign.

So what about the country that is routinely tipped to become the world’s third-largest economy? And what the heck does “Make in India” – that was no typo in the opening paragraph – mean anyway?

Unlike “Made in China”, this is not a descriptor. Rather, it is – to quote the official spiel – “a rallying cry”. It is the name of a far-reaching initiative that was launched 12 years ago in a bid to spark much-needed growth.

India was far from in the best of health at the time. Along with its fellow BRICS nations – Brazil, Russia, China and South Africa – it had suffered from a broader slump in emerging markets (EMs) and earned unwanted membership of the so-called “Fragile Five”.

Prime Minister Narendra Modi’s government responded with a plan to augment manufacturing, promote innovation, create jobs and attract investment. The Make in India campaign demanded new procedures, new infrastructure and new sectors.

Crucially, it also demanded a new mindset. Business-related policymaking swiftly shifted from strict enforcement to manifest facilitation. It was decided that the future would lie in deregulation.

The rewards of this approach are now being reaped in earnest. This is perhaps most apparent in India’s increasing strength in the arena of capital goods.

Where China has led…

Capital goods can be thought of as products that are used to make other goods. According to its Ministry of Commerce and Industry, India is in the midst of nothing less than a “revolution” in this regard .

All things considered, the Ministry’s term of choice is no exaggeration. By any standard, India is fast becoming a leading player in fields such as electrical equipment, machinery and construction.

The phenomenon of “leapfrogging” is key here. This is a process by which economies are able to bypass intermediate stages of development and jump directly to the cutting edge.

Few countries fit this bill better than India. Like many EMs, it is has unexpectedly come to benefit from missing out on some of the most momentous advances of the 20th century. Once a laggard, it now has a blank canvas on which to keep pace with rapid technological progress.

The reshaping of international supply chains is another major dynamic. Sectors and industries that were once especially likely to offshore to China are now instead choosing India.

This switch is taking place not just because of geopolitical concerns. A vast labour force, a sizeable graduate demographic and other factors are proving crucial to India’s appeal.

All this underlines how India has in many ways mirrored China’s own economic journey. Where the world’s second-largest economy has led, the world’s soon-to-be third-largest economy has largely followed.

But there is, of course, an added twist here. As well as emulating it, India is now actively taking business away from China.

The enduring importance of “being there”

As investors in Asian equities, we see opportunities in India and China alike. At present, though, the former enjoys a slight edge in our affections.

India has accounted for around a fifth of our holdings in recent months, while China has accounted for around a sixth. Reflecting the investment philosophy we apply across the region, our preference in both cases is for smaller companies.

In our view, the value of on-the-ground insights cannot be overstated when seeking to identify the brightest prospects for long-term growth. There are several reasons why.

First, as we repeatedly point out, most smaller companies in Asia are consistently overlooked by the wider investment analyst community. This alone underscores the significance of in-house, in-depth research and direct engagement.

Second, “being there” can count for a great deal when an economy is in the throes of sweeping, positive change. In India, for example, many long-held assumptions might no longer hold true as the nature of the economy continues to be transformed.

Third, it is unwise to assume that what happens at a macro level has uniform impacts at a micro level. An individual business’s own attributes are usually a better guide to informed investment decisions than whether a country as a whole is on the rise or in decline.

We firmly believe the success of the Make in India initiative, on balance, is adding to India’s investment attractions.

Yet there is still the challenge of discovering precisely where those attractions have been enhanced – and, just as importantly, where they might have been reduced. It is a challenge we relish.

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