South Asia Strategy Report 2026 - Trade Strategy 2026
Consider investing in South Asia’s capital-intensive industry
We think South Asia is likely to see capital-intensive industries to emerge over the next 2 years and be far more likely to be able to take advantage of global trade transitions than labour-driven industries. As such, we think the current moment could be useful for both early expansions into such energy intensive industries and early preparation for competition from such industries. Our view is driven by South Asia’s cost structures and political economy allowing for capital-intensive industry in a way that it doesn’t support labour-intensive industry.
Overall South Asian manufacturing sector performance probably remains relatively flat across the next two years, but we expect new capital-intensive industries to grow at the cost of both existing and new labour-intensive manufacturing. Of the capital-intensive industries, the ones that takes in significant energy inputs is where we see the greatest potential. Given that entry into such industries will take time to operationalize, we think starting now would give firms a headstart in such preparation.
Despite very strong mainstream narratives about export manufacturing and supply-chain diversification, including being driven by cheaper labour availability, we think South Asia’s trade regime will remain well-short of the promise behind these narratives. We think the policy regimes required for this to succeed - low labour costs, land availability, fair investment incentives - are hard to justify in South Asia’s political economy which incentivizes greater imports, cheaper consumption, and upward economic and social mobility.
With South Asia holding relatively high levels of electrification but low levels of per capita energy consumption, we think that the integration of distributed solar energy (and distributed energy storage) in the region’s electricity infrastructure is far less costly than centralized renewable integration. As a result, we think South Asian energy costs are far more likely to fall relative to the rest of the world in the medium term. The resulting disinflation probably helps financial costs as well.
The combination of a political economy that would struggle to support a broad-based expansion of industrial policy incentives and a structural improvement in energy and financing costs combine to create our scenario where capital-intensive and energy-intensive industry can suddenly look far more attractive. While actual industrial growth will likely extend beyond the 2-year period, we think early entrants within this period have a significant headstart.
The main risk we see is if volatilities in the global environment or local financial conditions result in the two main cost reductions disappearing or even reversing. However, such a context would likely impact any form of manufacturing as well as make domestic import-based consumption weaker. Given the structural shift behind our view, we think that this risk might be worth taking on for firms with the balance sheet space to push through any temporary disruptions.
Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors.