Investing in India: A visual guide

Our clients are inquiring about investment opportunities in India at a rate we haven’t seen in over a decade. This renewed interest in the country is justified and likely to persist. Here's a short visual guide for what’s behind the hype, and whether allocating capital to the country’s assets makes sense today.

This year our clients have inquired about investment opportunities in India at a rate we haven’t seen in over a decade. We view this renewed interest in the country as justified and likely to persist. Here we present a short visual guide for what’s behind the hype, and whether allocating capital to the country’s assets makes sense today.

Making its way to the podium

India’s economic prowess is markedly increasing. The country moved up the ranks of global GDP from 10th place 20 years ago to fifth place today and is en route to become the world’s third-largest economy by 2028, according to the IMF. It is growing at the fastest pace of any major global economy and should continue to deliver annual GDP growth of 6% over the next few years.

Driver 1: Human capital

With over 1.4 billion people, India became the world’s most populous nation in April this year. According to the UN, almost one-fifth of the world’s 15- to 64-year-olds will be Indian by 2030. With a median age of 28, a full 10 years below that of China, India has a key advantage in terms of labor supply. Until 2030, each year, an average of 10 million people are expected to enter India’s working-age population, which is about 920 million currently.

Driver 2: Reforms

Prime Minister Narendra Modi has been in power for almost 10 years and intends to seek a third five-year term during next year’s general elections. A priority of his administration has been to boost the country’s productivity through a series of ambitious economic reforms and initiatives.

The goods and services tax launched in 2017, for example, replaced several indirect taxes with a single levy, leading to increased tax compliance and formalization of the economy. An insolvency and bankruptcy code was introduced that same year, providing a unified and time-bound process for insolvency resolution. Introduced in 2016, the locally developed Unified Payments Interface (UPI), an instant payment system that facilitates interbank peer-to-peer and person-to-merchant transactions, has become widely accepted: Digital payment-based QR codes are expected to reach 1 billion transactions per day by 2026. These are just a few illustrations of a wide range of efforts to improve India’s ease of doing business.

Driver 3: A geopolitical swing state

The global geopolitical order has evolved from being a unipolar to a multipolar one. The United States is no longer as widely perceived to be the undisputed, preeminent power. China seems willing to challenge the global order established by the US and its allies. Against this backdrop, terms such as “middle powers” and “geopolitical swing states” are being used to describe those countries that are seeing an opportunity to avoid picking sides and pursue their interests with flexibility. Many consider India today as such as state.

By nurturing ties with Western democracies, for example, India has benefited from “nearshoring” trends, attracting multibillion-dollar investments from large companies such as Apple, Foxconn, and Amazon. Yet the country remains simultaneously willing to purchase millions of barrels of Russian oil per month and is an active member of the so-called BRICS bloc.

Risk 1: A country of contrasts

Despite its growing economic might, India remains a country of contrasts with low GDP per capita and high wealth inequality. In addition, governance indicators that measure progress in areas such as voice and accountability; political stability and absence of violence or terrorism; and government e?ectiveness, regulatory quality, rule of law, and control of corruption have largely moved sideways in recent years.

Risk 2: The other side of assertiveness

India is getting ready for whatever the future may bring. The country currently ranks third in global military spending, after the US and China, up from 8th place 20 years ago. A more assertive India, for example, has this year been engulfed in diplomatic spats with certain countries.

Punching below its weight

Despite their recent gains, Indian stocks and bonds remain grossly under-represented in global asset markets relative to the size of the country’s economy. Indian equities make up only roughly 2% of the global stock universe, and it was only last month that JPMorgan began to incorporate Indian local-currency sovereign bonds into the GBI-EM family of indexes, which are among the most widely tracked benchmarks for emerging market debt.

India’s relevance in global equity and debt markets should continue to grow, aided by a gradual easing in regulatory restrictions on foreign investor participation, as illustrated by recent changes to the capital gains taxes applying to certain foreign institutional investors.

A good portfolio diversifier

With asset markets that have a clear tilt toward the domestic economy—the three largest sectors in the MSCI India index are financials (25% of market capitalization), tech (15%), and consumer discretionary (over 10%)—Indian assets provide attractive diversification benefits. In a complex geopolitical world, the benefits of markets with relatively low correlation to typical portfolio holdings should increase over time.

Indian stocks are already reflecting a good amount of good news, with MSCI India trading close to 20x 12-month forward price-to-earnings ratio, which is 1 standard deviation above the 15-year average. That said, we see little reason for valuations to pull back, especially given our view that solid earnings growth in India should be a structural phenomenon. Over the next few years, corporate profits look likely to grow at a low- to mid-teens annual rate on average, led by financials and infrastructure players.

For investors not yet familiar with India, we think diversified vehicles such as mutual funds and exchange-traded funds are the best place to start.

Co-authored with Alejo Czerwonko, Ph.D. , Chief Investment Officer Emerging Markets Americas, and originally published as an editorial within the "Investing in Emerging Markets" publication.

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