More income, more investment

As per capita income in India moves higher and as we converge towards $2,000 per capita bracket, it would be interesting to look at the potential investment opportunities as the next phase of income growth begins.

With higher incomes, its "discretionary" component will be a big determining factor in generating business opportunities. Investment opportunities will emerge in a wide variety of consumption driven sectors, and the corresponding supply chains.

Some of the sectors that will benefit from the consumption boom triggered by the rise in income are communication, transportation and automobiles. Essentially, as consumers move past demanding the "basic" goods, the demand for higher-end consumer services and products will pick up.

Perhaps, the Chinese experience with rising incomes can provide us with some interesting clues about the sectors that stand to gain hugely. In the paper "Consumer Spending in China: The Past and the Future", Jun Nie and Andrew Palmer present interesting data that as household spending in China increased three times (in real terms) in 15 years since 2000, the expenditure on transportation and communication services jumped seven-fold!

This jump helped boost demand for products and services across industries. While we see similar trends in India, the next leg of income growth should provide the sectors with a substantial growth fillip.

The communication services business encompasses the entire gamut of telecom and entertainment ecosystem, including telecom, smartphones, and the broader entertainment sector. India for sure has seen significant business activity and investments in this industry with the likes of Reliance Jio and Netflix entering the market. However, the next phase of income growth should further push investments into it. The demand for higher quality of product and service will require the entire ecosystem to evolve, with the primary driver being the availability and quality of data. Low-latency data availability will drive the telecom tower infrastructure, digital initiatives and increase data consumption. Businesses in the communication services ecosystem stand to benefit significantly from the trend.

The transportation sector that should gain from the rising per capita income encompasses travel, accommodation and tourism. Airline traffic in India has seen phenomenal growth. For example, domestic passenger traffic at Mumbai airport increased almost six times in two decades since 1997-1998 to 2017-2018. Going forward, we should see more of this growth feeding into creating attractive transportation assets to invest into for a wide array of investors. The recent decision by the Indian government to privatise six airports provides investors with an opportunity to access such attractive assets that will surely benefit from the increased demand for transportation services.

Besides aviation assets, within the broader transportation industry, as the demand for travel picks up, both outbound tourism and India-focused tourism hubs (such as the Buddhist circuit or the Jaipur-Agra-Delhi Triangle) should witness significant demand. There has been a lot of focus in recent years on further improving the tourism infrastructure in India. Over and above the inflow of foreign tourists, going forward there will be significant domestic demand for such tourism infrastructure.

The auto industry in India will also enjoy greater demand with both higher number of automobiles being sold and a larger market for luxury cars with rising incomes. Thus, the entire auto supply chain should benefit concomitantly to the auto businesses, experiencing a significant surge in demand. Growing demand across the supply chain will create investment opportunities for investors not just in automobile companies but also in companies such as those that supply auto components.

One must also view the rising income levels within the framework of the regulatory changes & policy targets (such as the percentage target of electric vehicles) sweeping through the various industries. For instance, in the automobile business, the focus on electric cars will create opportunities not just through disrupting the traditional supply chain but also through new opportunities such as battery and charging businesses.

The auto supply chain will have to realign and create new production lines that will cater to the electric car industry in more significant numbers. This realignment with a new focus will require both financial and operational expertise across the supply chain, thereby creating opportunities.

As income levels rise, the next phase of growth will create business opportunities in value-added services and products that are mostly "discretionary" in nature. Trends seen in other developed countries such as China provide us with some clues on the broader direction the Indian consumption markets are heading.

(The author heads Development Tracks, an infrastructure advisory firm. The views expressed are strictly personal)