After months of predictions by experts that India’s growth rate will overtake that of China in the next 2-3 years, the International Monetary Fund (IMF) has said this crossover will happen in 2016 when the Indian economy will grow at the rate of 6.5% against the 6.3% expected in China (see chart). Earlier, the World Bank had said India will overtake the Chinese growth rate in 2017 with 7% against China’s 6.9%. So what does this mean for you the investor?The stock market in India responded euphorically to the IMF report by taking the Sensex and Nifty to new all-time highs. The Sensex also rewarded investors with a handsome one year return of 36%. So should you take this opportunity to exit? Experts say no.According to them, much steam is still left in the market and therefore, there is no need to panic. The ‘India growth story’ has just started and is likely to continue for several years.The Indian growth rate is already picking up due to cyclical upturns. “The recent correction in oil and commodity prices has been good for us. It will bring inflation down, helping RBI to cut rates further,” says Nandukumar Surti, MD & CEO, J P Morgan MF. Initiatives by the new government can also boost growth rates further. The government has already started taking steps to revive stalled infrastructure projects. Several state governments have initiated labour reforms. Implementation of goods and services tax (GST) is another factor that will help boost growth.The government is continuing the FDI philosophy followed by the previous regime and steps are being taken to open up restricted sectors and increase caps in others. “The direction is very clear. Increased FDI in insurance, railways, defence, etc should help to accelerate the GDP growth rate further,” says Surti. The government’s plan to develop 100 smart cities will reduce pressure on existing cities and increase the per capita income.

The Chinese growth rate, meanwhile, continues to decelerate. “The Chinese export-led growth will get affected in the medium term by the slowdown in Europe and Japan. China faces long term challenges as well as it doesn’t have the demographic dividend of India,” says Debopam Chaudhuri, Chief Economist, ZyFin Research. Demographic dividend implies that a country with more young people than old, like India, will grow faster.

Slowing down of the Chinese economy could trigger significant foreign funds inflow (both FDI and FII) into India. There is a tendency among global investors to chase the ‘fastest growing economy’. When will this inflow happen? “India may attract disproportionate amount of inflows due to the fastest growing country tag. However, these inflows will be based on expectations and not after the actual cross over’, says Phani Shekhar, Fund Manager-PMS, Karvy Stock Broking.The exact impact on the broader stock market will depend on the route the money takes. The immediate impact on the market will be more if the inflows are thorough the FII route. We are already getting around Rs 100,000 crore as FII inflows to equities and more is expected. “Since the broader market valuations are not very high, it could easily absorb the additional inflows by re-rating,” says Shekhar. And the Sensex is now trading at a trailing PE of 19.62, only slightly above the 10 year average PE of 18.29 (see chart). However, experts warn that there could be a problem of plenty.“Too much FII inflows may create a new set of challenges. The RBI may have to intervene to keep the rupee stable,” says Shekhar. The broader economy may benefit more if the inflows are through the FDI route.This should increase our capacity and help India become a manufacturing super power. Though the stock market will benefit in this scenario as well, it will be with a time lag. Sectors that will benefit: “The manufacturing and infrastructure sectors should take the lead in growth, so these two segments should perform better than FMCG and IT in the coming years. Their valuations are also reasonable now because they have not participated in the recent run-up in the market,” says Sanjay Sinha, Founder, Citrus Advisors.The government’s efforts to make India a global manufacturing base, marketed as ‘Make in India’, is going to play a crucial role in the growth story. With the Make in India thrust, the share of manufacturing in GDP may move up from the present 16% to 20% in 10 years.That means investors can’t afford to ignore this fast growing segment. “There has been a major change in the composition of the Sensex over the decades. It shifted from manufacturing to IT then to banking. Due to the faster growth, manufacturing may become a major component again,” says A. Balasubrahmanian, CEO, Birla MF. “Major sectors, which are expected to benefit from this manufacturing upswing are auto (including ancillaries), pharma, consumer durables, electrical and electronics,” he adds. Due to the cyclical downturn, global metal prices may remain stagnant for some time. It is better for investors to avoid companies that are into mining or making base commodities.No economy can sustain growth without the infra push and therefore, infrastructure is the next big segment the government is focussing on. The successful auctioning of coal blocks should increase the availability of coal and give a fillip to the power sector.The government is also taking steps to improve roads and railways. “The government has laid down the groundwork for infrastructure push in the last six months. Things should improve in the coming years. The pick in profits should be visible in the next 3-4 quarters,” says Sinha. However, several companies here faces impaired balance sheets. Corporate governance is another issue facing investors. So it is better for investors to stay restricted to fundamentally strong large cap firms here.The selective services sectors will also benefit from the growth happening in the manufacturing and infrastructure space. Banking will be a major beneficiary. “Transport and logistics sector should do well due to infrastructure push. Metros are coming up in several cities and this should help the transportation sector,” says Chaudhuri. Several other service sectors will continue to grow including tourism and telecom.