Rebecca Lewis, Partner and Co-CEO
India is currently experiencing a cyclical economic slowdown, marked by a 15%+ market correction in January, one of seven such occurrences in the past 20 years. Similar downturns have been seen during the Global Financial Crisis, Taper Tantrums, Trump’s policies, and COVID. International investors have flocked to the ‘safety’ of US markets, leading to USD 20bn in outflows from India over the last four months, with foreign ownership at a 12-year low.
Source: Bloomberg, Arisaig Analysis
Domestically, India is working through its own challenges. The election year of 2024 has seen slower GDP growth, driven by lower government capital expenditure, rising food inflation, and a dip in consumer sentiment after the post-Covid spending boom. The regulator has also stepped in to curtail unsecured lending. While this pause in growth is noticeable, there’s little to suggest it’s structural. After a decade of significant infrastructure investment, Prime Minister Modi’s first Budget of his third term has shifted focus towards consumption, with personal tax cuts. This shift comes after a period of successful reforms, which doubled personal income tax collection from 2% to 4% of GDP, still half the OECD average.
On the ground, households continue to prioritize savings—USD 3bn flows into mutual fund accounts each month—but India’s economy remains driven by consumption (70% of GDP). As consumption grows, it will gradually boost corporate earnings, continuing the strong returns India-focused investments have seen over the last 25 years.
The formalization of retail in Tier 2+ cities is a key driver of future growth. Companies like MedPlus (pharmacy) and Nykaa (cosmetics) are seeing solid results, with MedPlus benefiting from its growing private label offerings and Nykaa continuing its 25%+ growth due to increased discretionary spending, particularly among women. Modi’s “Viksit Bharat” plan to double female workforce participation to 70% by 2047 further strengthens the economic outlook.
Despite higher valuations, the growth potential for businesses in India remains unparalleled in Asia. In sectors like cosmetics, per capita spending in India is still only 10% of China’s and less than 1% of developed markets. This gap presents a significant growth opportunity, and the recent addition to beauty exposure through Honasa is seen as a strategic move. While the market’s high valuations may seem concerning, India’s long-term growth prospects, coupled with consumer portfolio valuations now below their historical average, make moments like these are painful but precious for long-term investors.
