Why India is a ‘Bright Spot’ for Investing

February 28, 2024 Mutual Fund

In a world grappling with slowing economic growth, rising inflation, and geopolitical tensions, India stands out as a beacon of hope, attracting the attention of existing and new investors worldwide.

With a large and growing market, a youthful workforce, and a steadfast policy emphasis on education reforms, upskilling, manufacturing, tech-enabled governance, infrastructure development, and enhanced regional connectivity, the country offers significant opportunities for both greenfield investors starting from scratch and businesses engaging in market expansion, pursue mergers and acquisition, and diversify their supply chain.

On the other hand, Japan has lost its position as the world’s largest economy to Germany, as it unexpectedly slipped into a recession after shrinking for a second quarter due to sluggish domestic demand. This occurred after Prime Minister Rishi Sunak’s assertion that he is expanding the economy ahead of a general election was undermined by the United Kingdom (UK), which also entered a recession at the end of 2023 due to its diminishing GDP performance and high inflation.

Given that, the world’s largest democracy still shines as a ‘bright spot’ on the global map despite geopolitical conflicts and economic headwinds. India retains its position as the fastest-growing nation in the world. The International Monetary Fund (IMF) said in its latest World Economic Outlook update that the economic growth in India is projected to remain strong at 6.5% in 2024 and 2025.

[Read: India’s Mutual Fund Growth Story: 2023 Trajectory and Future Outlook]

In 2024, healthcare and insurance, fintech, electric cars and vehicles, IT and services, real estate and infrastructure, fast-moving consumer goods (FMCG), R&D, tech innovation, and artificial intelligence (AI) are among the key industries in India that are attracting foreign investors.

All of these sectors have been on a hot streak in 2023, as foreign direct investment (FDI) policies have relaxed in recent years, and production-linked incentive (PLI) schemes have promoted industry-wise capacity building.

Investor interest in India’s digital economy is expected to persist as technologically driven solutions are explored to revolutionise government, company operations, and the lives of individuals. In 2014, the digital economy made up about 4-4.5% of the GDP; presently, it accounts for 11%. By 2026, the government expects the digital economy to account for nearly 20% of India’s GDP.

According to the Associated Chambers of Commerce & Industry of India, strong consumer demand will help India retain its spot as the fastest-growing economy in 2024 despite global headwinds. The chamber highlighted that consumer demand would likely drive investment in construction, hospitality, and infrastructure, including railways and aviation.

[Read: Do General Elections Matter for the Indian Equity Markets]

The looming general elections, expected to be scheduled between April and May 2024, alongside various state elections leading up to them, will influence the economic objectives of the central government, led by Prime Minister Narendra Modi’s BJP Party. These elections will influence federal spending plans and announcements pertaining to job creation and infrastructure development.

The Modi Era: Reforms and Transformation

Under Prime Minister Narendra Modi’s leadership, the past decade has witnessed transformative economic reforms.

• Goods and Services Tax (GST): The implementation of a nationwide GST in 2017 streamlined indirect taxes, reduced complexities in the system, and aimed to broaden the tax base.
• Insolvency and Bankruptcy Code (IBC):  The IBC created a framework for resolving corporate insolvencies, improving credit recovery and the business environment.
• Infrastructure Development:  Significant focus on infrastructure, including roads, bridges, railways, and ports, aimed at boosting connectivity and economic activity.
• Ease of Doing Business:  Various initiatives to simplify regulations and procedures to reduce bureaucratic hurdles for businesses.
• Financial Inclusion:  Programs like the Pradhan Mantri Jan Dhan Yojana aimed to widen access to banking services for underbanked sections of society.
• Direct Benefit Transfers (DBT):  Increased use of DBT for subsidies and welfare schemes to reduce leakages and improve the efficiency of government spending.
• Manufacturing Focus:  The ‘Make in India’ campaign sought to promote India’s manufacturing sector and attract investment.
• Labor Reforms:  Changes in labour laws, aiming to create flexibility for businesses while maintaining worker protections.

India experienced relatively sustained GDP growth even before the pandemic, though growth rates have slowed in recent years. India attracted increasing levels of Foreign Direct Investment (FDI) in various sectors during Modi’s tenure. While inflation remains a concern, it has generally been better contained compared to previous inflationary periods. India has built substantial forex reserves, providing a buffer against external economic shocks.

The NDA government has focused on improving the ease of doing business, streamlining bureaucratic processes, investing in infrastructure, and implementing landmark policies like the Goods and Services Tax (GST). These reforms have boosted investor confidence, propelling India into higher economic growth.

[Read: Key Investment Risks to Watch Out for in 2024]

Macroeconomic Resilience

India continues to impress on an array of economic and market fronts. The country is a bright spot amid broader uncertainty and investment fog. Its solid growth momentum is expected to pick up even further over the next 12 months, with strong expansion in output and new orders set to augment already surging foreign inflows.

India exhibits strong macroeconomic fundamentals, making it a compelling investment destination. During a time of global economic uncertainty, India’s economy has shown remarkable resilience.

• GDP Growth:  India boasts impressive GDP growth projections. The International Monetary Fund (IMF), World Bank, and the Reserve Bank of India (RBI) all project India as one of the fastest-growing major economies for the coming years.

  The RBI Survey of Professional Forecasters conducted in January 2024 provides a median forecast of real GDP growth of 6.5% in 2024-25, revised upward from 6.3% in November 2023. Whereas IMF expects India's GDP to grow by 6.7% in FY 2024-25 a 20 basis points upgrade and the World Bank keeps India's GDP growth projection estimate unchanged at 6.4%.

  (Source: RBI MPC Meeting, February – 2024)  

  Graph: Real GDP Growth Projections of Top 10 Economies in the World

  (Source: IMF-WEO-Jan 2024)

• Inflation: While inflation remains a concern, India has managed it relatively better than many developed nations. The RBI has taken proactive steps to tame inflation within a targeted range. India's retail inflation, which is measured by the consumer price index (CPI), eased to 5.10% in January 2024 from 5.69% in December 2023.

• Foreign Exchange Reserves:  India enjoys comfortable foreign exchange reserves, creating a buffer against external vulnerabilities. The Reserve Bank of India actively manages forex reserves, buying or selling foreign currency to stabilise the rupee, which affects reserve levels.

Investor Enthusiasm: FPI and Domestic Participation

Both foreign portfolio investors (FPIs) and domestic investors have demonstrated substantial faith in the Indian capital markets. Key indicators are:

• Net Inflows:  FPIs have been consistently increasing their investments in Indian equities, showing confidence in the long-term growth prospects. The net FPI inflows on a YTD basis is Rs 1,77,656.11 crore into Indian equities.

• SIP Flows:  Systematic Investment Plans (SIPs), the backbone of retail investment in India, have seen robust growth, revealing increasing retail participation in the markets. In 2023, the overall net SIP inflows were Rs 85,871 crore.

  Data as of February 27, 2024
  (Source: AMFI, data collated by PersonalFN)

• MF Folios and Demat Accounts:  The rising number of mutual fund folios and Demat accounts reflects widespread financial inclusion and deepening of India's capital markets. The total number of accounts (or folios as per mutual fund parlance) as of January 31, 2024, stood at 16.96 crore.

  As per the data from CDSL and NSDL, the total number of new demat accounts opened in December 2023 reached a historic high of 42 lakhs. With this, the number of demat accounts in India now stands at 13.93 crore.

[Read: Are Developed Market Funds Offering Worthwhile Opportunities to Indian Investors?]

Improved Investment Climate

A series of pro-business initiatives have significantly enhanced India’s investment climate. The government’s emphasis on initiatives like ‘Make in India’ has bolstered the manufacturing sector. The financial sector is another important pillar of India’s economic growth and stability. For example, domestic banks’ asset quality has improved, with a decline in non-performing loans contributing to robust balance sheets.

Steps to reduce red tape and simplify compliance have created a friendlier environment for businesses. India’s ranking in the World Bank’s Ease of Doing Business index has steadily improved over recent years.

India’s encouraging market dynamics came together in early September 2023, when the valuation of the country’s stock market hit an all-time high of USD 3.8 trillion. These trends, amongst several other reasons, present a strong argument for investors to think about increasing their allocations to Indian equities within a global portfolio.

Strategising at Market Highs

While India’s growth story is compelling, the stock markets have witnessed a substantial run-up, raising concerns of being at a high. Here are strategies to consider in such a scenario:

• Long-term Focus:  Focus on long-term investment horizons. Market highs or lows should not derail plans built around solid fundamentals.
• Don’t Panic: Construct a robust investment strategy and avoid liquidating your asset in panic mode following the herd mentality. Stay put and analyse the market dynamics to make informed decisions.

[Read: Choose Predictable Investing When Adding Mutual Funds to Your Portfolio]

• Rupee-Cost Averaging:  Utilise rupee cost averaging by investing through SIPs to mitigate the impact of market volatility.
• Quality Over Speculation:  Emphasise investing in companies with strong earnings potential, healthy balance sheets, and robust management.
• Diversification:  Maintain a well-diversified portfolio across various asset classes and sectors to manage risks.

In conclusion

India’s ascent as a global economic powerhouse is undeniable. Thanks to structural reforms, robust macroeconomic fundamentals, and increasing investor participation, India presents a strong case for long-term investment. While navigating market highs requires caution, a disciplined approach, a long-term perspective, and a focus on qualitative and quantitative parameters will serve investors well in this remarkable era of growth.

This article first appeared on PersonalFN here