India: an investment opportunity too big to ignore

By Jason Hollands

WHILE in the UK we will have to endure another month of political campaigning until polling day on July 4, India’s general election concludes next week with the results expected on Tuesday. This will bring the largest exercise in democracy on Earth to a close, with 969 million people eligible to vote in a staggered process that began in April.

Whereas UK electors typically tire of a party once it has been in power for a decade, in India prime minister Narendra Modi and his Bharatiya Janata Party-led coalition of three dozen parties are widely expected to extend a 10-year period in office, one of the longest periods of stable government since India gained independence.

Aspects of the BJP’s Hindu nationalist agenda are controversial, but the party is business friendly and under Modi’s tenure the country has undergone meaningful, structural reforms as well as making huge strides in modernising its infrastructure.

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Notable measures have included digital transformation of the welfare system (which included implementing the world’s largest biometric ID system), streamlining the tax system, flushing out money in the black economy, liberalising foreign direct investment rules across a number of sectors (including defence, aviation, and retail), and other measures that have much improved India’s competitiveness.

The re-election of the BJP is firmly baked into market expectations and so the election itself is only likely to jolt markets if the BJP fare far worse than the decisive victory anticipated. But the likely outcome will signal continued stability and the ongoing drive to modernise India and attract foreign investment under the banner of the government’s “Make in India” initiative. Key themes in the BJP manifesto include extending access to welfare, job creation and further infrastructure investment, an example of which are plans to extend the reach of high-speed bullet trains.

For private investors, India is too big an opportunity to ignore. Over the last decade, it has climbed the global rankings from being the 11th largest economy to fifth place. The International Monetary Fund estimates India will see real GDP grow by 6.5% this year, outpacing all other major emerging market and advanced economies. Modi’s pledges include expanding India’s GDP to $5 trillion by 2027, which would make it the world’s third-largest economy. Given his track record of delivery, such ambition should not be dismissed lightly.

India has certainly been a bright spot amid a tough period in recent years for emerging market equities which have been dragged down by the terrible performance of Chinese shares since early 2020. Over the last decade, Indian equities, as measured by the MSCI India Index, have delivered an impressive total return of 221%, far outpacing the wider MSCI Emerging Market Index return of 82%.

The country also stands to benefit from some tailwinds including a shift by western companies to reduce manufacturing supply chain reliance on China. For example, Apple has already pivoted production significantly to India, making 14% of its iPhones there last year.

A long-term economic driver is India’s compelling demographic profile, with a fast growing and young population where the average age is 28 years. This sets it apart from its arch-rival China, which is staring down the barrel at an ageing population and shrinking workforce. India’s youthful population should help drive economic growth for decades.

With a rapidly expanding middle class, the growth of the Indian consumer looks set to be one of the most exciting investment themes globally over the coming decades. A recent report by BMI, part of ratings agency Fitch, forecast India will become the third-largest consumer market by 2027.