Adopting a goods and services tax (GST), replacing a myriad of local taxes, has simplified India's tax system and made it easier to trade between Indian states.
Barriers to trade between states have been slowly but surely removed, as have some relating to foreign ownership of companies in different sectors. Put together, these reforms have contributed to the creation of an environment that is more conducive to doing business and a more stable economy, with lower inflation levels, even at times of intense demand. Despite strong growth levels in 2023 and 2024, inflation in India has fallen to 5%- 6% and is currently running at 5.2%.
While reforms still need much work, the progress achieved thus far is undeniable. According to the World Bank's “Doing Business” report, India moved from 142nd place in 2014 to 62nd place in 2019 (the report was discontinued after that). The country has become the fastest-growing of the world’s large economies, and the Indian consumer is rising. As foreign investors looked for alternatives to China in the Emerging Market sphere, India emerged as an investor favourite. However, valuations quickly stretched, making Bombay and Delhi far more expensive than comparable markets with similar profiles, such as Jakarta.
The Indian stock market's elevated price level has long reduced its appeal. However, several factors have contributed to adopting a more favourable approach toward the Indian market.
India’s internal market looks promising
As barriers pressure World trade and globalisation take a backseat to narrow national interests, the importance of a dynamic domestic market becomes greater. Given its demographic profile and improving labour force training, India's internal market looks promising. It currently represents some 55% of GDP and looks set to grow further.
India is not a significant exporter
Its trade balance and current account are traditionally slightly negative. As such, the country has far less to lose from the threat to global trade than most other EMs. India has adopted a position of neutrality in World Affairs It is now one of the rare powers to do business with the West while continuing to benefit from the advantages of cheap Russian energy. That pragmatic approach is paying off regarding the country’s standing and capacity to attract investment.
Steps are being taken to attract investment to India and to turn it into an industrial and service powerhouse
At a time when production costs in China are increasing, and industries in the Western World are looking to diversify away from the Chinese-dominated supply chain, India is attempting to emerge as a valid alternative. While investment in India has almost doubled over the past decade, much of it has been targeted at servicing India’s domestic market. Easier constraints on investors are slowly changing that. While the Chinese production ecosystem is complex to emulate anywhere else on the planet, India offers many advantages – including much lower wages – that should make it a player in the supply chains of many industries.
Attracting these jobs (even low-paying ones) will drive India’s people away from subsistence farming and increase income. At the beginning of this decade, the share of Indians in agriculture was still more than 50%.
One of India’s most significant sources of forex is the remittances sent home by Indians working abroad
Remittances have almost doubled over the past decade as demand for Indian workers increases. India is the world’s largest recipient of remittances. According to the World Bank, remittances are estimated to have reached 129 billion USD in 2024. Their role is to support not just households but also their investment, which is vital. In context, FDI in India for the first semester of the 2024-2025 fiscal year was just 42.1 billion USD. After a long period of gains, Indian stocks have gone through a correction period By late January, they had been trading 10% below their September 2024 peaks. That provides an interesting opportunity to enter that market.
Not everything became suddenly perfect
The reform of the Indian market has some way to go. The foreign ownership of companies in the insurance sector is one of the standout points of the latest budget, but many others remain open.
The middle class is experiencing self-doubt as wage growth has weakened and food inflation remains high. Tax cuts on personal income are being announced to support households and keep the economy humming.
Delhi’s room for further fiscal or budgetary measures is constrained by the country’s large public debt (some 82% of GDP, which is relatively high for an Emerging market) and the need to finance it.
The central bank looks like a better place to come to the rescue. Worried about the falling rupee and the fear it may fuel inflation further, it has kept its primary repo rate stable, at 6.5%, since February 2023. But with inflation now seemingly under control, at 5.2% in February, it has some room to cut rates soon. However, much will depend on how markets perceive interest rate differentials vis-a-vis the USA and, hence, on the path ahead for the Federal Reserve’s monetary policy.
Last but not least, despite pulling back from the early Autumn highs, India’s stock markets still trade at a premium compared to others. But this well-diversified market does seem promising, poised to grow further as India’s economy continues to expand into new sectors and new technologies bring access to new products and services to hundreds of millions of consumers.
To sum up, while India still has much work to do, it offers a window of opportunity to gain exposure to a promising, fast-growing market. We’re therefore including it in our portfolio.
