CIO Insights: Here’s why you should consider investing in India
The bull case for India is hard to ignore. Take growth – it ranks among the world’s fastest expanding major economies. So far in 2023, GDP has grown an average 6.9% versus a year earlier, the quickest pace among the G20.
That rapid economic expansion is supporting robust equity returns, with the MSCI India Index posting gains of 7.4% in USD terms year-to-date. It’s also posted similarly strong returns over the past 20 years, with annualised gains of nearly 10%.
The question now: Are these returns sustainable over the longer run? In this month's CIO Insights, we examine both sides of India’s growth story, the good and the bad. Our conclusion: While the path ahead will inevitably see its ups and downs, we believe this growth is not only sustainable, but also has the potential to accelerate.
- India is the only country in the world with such a large, young, and growing workforce. On top of that, rising incomes are helping to create a rapidly expanding middle class. Those favourable demographics stand out among emerging market (EM) peers, and support a long runway for solid economic growth.
- That said, the country is not without its challenges. Most notable is a historical lack of investment. India has been under-invested due to lower levels of foreign direct investment and government spending – key to sustaining growth in emerging markets. But now the tides appear to be shifting, with a series of government reforms helping to lift the economy’s trajectory.
- High inflation has also been a challenge for India’s economy as the efficacy of monetary policy has historically been weak, and food prices (which tend to be volatile) have had an outsized impact. This has also contributed to a steady depreciation in the rupee against the US dollar – though we see evidence of this situation stabilising.
- Ultimately, we believe India represents a source of growth that a globally-diversified investor should not ignore. And given the structural shifts in its economy, we think the bull case for India will likely remain intact over the longer term.
Key to India’s economic promise: Its demographic dividend
When it comes to India’s growth story, its favourable demographics play a central role.
- Its population is large and expanding: The country overtook China to become the world’s most populous country earlier this year, and the UN projects it will continue to grow until the mid-2060s.
- It’s also relatively young: The median age in India is about 28 years, compared with 38 for the US and 39 for China, with more than two-thirds the population of working-age.
Such demographics are not just key to powering India’s services industry and its burgeoning manufacturing sector (more on that later). They also highlight the promise of the Indian consumer as a growth driver in the decades ahead – especially as incomes rise and the middle class expands. PRICE, an Indian think tank, projects that the country will add about 75 million middle-class and 25 million middle-rich households by 2030 – driving about $2.7 trillion in incremental consumption spending. For reference, that’s nearly the size of France’s GDP.
India’s “demographic dividend” also stands in contrast with other emerging economies. Its working-age population (or those between 15-64 years old) currently comprises about 961 million people, and is projected to increase by another 158 million by 2050.
Meanwhile, China’s working-age population consists of about 984 million people and is expected to shrink by 217 million over that same period. And even fast-growing Indonesia is projected to have a working-age population in 2050 that’s only a fifth the size of India’s.
A history of under-investment has weighed on India’s growth potential…
A young, large, and growing population is great when it comes to growth. But for an economy to reap its demographic dividend, it needs to have an adequate amount of high-quality jobs for its people. For developing economies in particular, a high level of capital investment is key to creating these jobs – and this is where India has faced challenges.
Investment in India has historically lagged behind other major economies in Asia, amounting to about 25% of GDP on average during the 1990s, compared with upwards of 30% for its neighbours. That’s more comparable with developed western markets like the US and EU, which don’t need the same levels of capital spending to propel growth.
For India, this has stemmed from several factors, including bureaucratic hurdles, inadequate infrastructure, and complex regulations. These challenges have deterred investment and job creation, and weighed on economic development overall.
The good news: This appears to be changing, with India’s government making progress on economic reforms over the past several years. These reforms aim to streamline regulations, widen the tax base, revive the manufacturing sector, attract foreign investment, and build out infrastructure. And the current administration’s continued popularity points to continuity in these policies – at least for the immediate future.
… But both private and public investment are now picking up
The impact of these reforms has started to take hold, driving increases in both domestic and foreign investment in India. Of particular importance is the revival in the country’s manufacturing sector, which is key to stimulating growth across an economy.
Here, a reduction in corporate taxes and government incentives, like those under its Production Linked Incentive (PLI) scheme, have helped to attract investment to the sector. That includes global electronics giants like Foxconn, with its plans to invest more than $1.2 billion on factories in India, which is expected to create about 100,000 new jobs.
We should note that supply chain diversification away from China also appears to be a factor in some companies’ decisions to invest in India, highlighting how the country has positioned itself to ride the tailwinds created by China’s geopolitical headwinds.
On the government’s end, it’s also ramped up its infrastructure investment, with total capital spending on infrastructure for the 2023-24 fiscal year set to double compared with pre-Covid levels. Better infrastructure helps to lower logistics costs and create a more conducive business environment, further attracting private investment.
High inflation has weighed on India’s economy, but this has also been improving
Another challenge for India’s economy has been a history of relatively high inflation. For an economy, high inflation is detrimental because it reduces people's purchasing power, making it harder for them to afford goods and services. It also creates uncertainty for households and businesses, which discourages saving and investment.
Part of the reason for this: the structure of India’s financial system, which impacts how monetary policy works its way through the economy – a complex topic that we won’t go into here.
Another factor is the composition of inflation in India. Food prices – which tend to be more volatile – account for a big chunk of the country’s consumer price index (CPI) basket, or about 46%. Such a high share for food in the CPI is not unusual for EMs, but it does mean more volatile inflation. As economies develop however, this weightage tends to decrease, naturally helping to reduce this impact.
To help contain inflationary pressures, India’s central bank, the Reserve Bank of India (RBI), has undertaken a number of measures to improve the ability for monetary policy to feed through to the broader economy. For example, in 2016 it adopted an inflation targeting framework, which aims for inflation in a range of 4% plus or minus 2%.
While its framework is still relatively young, early assessments suggest that India’s inflation is becoming relatively more stable as inflation expectations have become more anchored. Since its introduction, inflation has largely stayed within that target range – or 5% on average compared with 8% on average prior to this.
For foreign investors, all of this matters because India’s high inflation, especially relative to that in the US, has contributed to a steady weakening in the Indian rupee against the US dollar. Since the 1990s, that’s resulted in depreciation of 5% per year on average – which translates to lower returns on investments when converted back into USD.
The data point to long-term opportunity in India’s economy
A large and growing consumer base, business-friendly policies (particularly for manufacturing), a push towards better infrastructure, and a more stable macroeconomic environment: together, these factors tell us that India is undergoing a positive, structural shift in its economy. This underscores the country’s strong growth potential in the years to come – which should also provide continued support for equity returns. It’s this potential over a longer time horizon that makes the case for India particularly compelling.
Ultimately, we believe that there’s definitely space for Indian equities in a globally-diversified portfolio. Our General Investing Portfolios powered by StashAway have a market-weight allocation to the asset class, with exposure via emerging markets and broad-based global equity ETFs. To build your own India exposure, stay tuned for an update to our Flexible Portfolios!