Key Question: What Should Investors Know About India’s Economic Rise? 

On January 26, many Indians will celebrate the nation’s Republic Day, a day to commemorate the date on which India’s constitution came into force, completing the country’s transition toward becoming an independent republic. In recognition of this event, we offer our thoughts on India’s rise and what may lay ahead.  

Modi’s Bold Declaration

When India celebrated its 75^th year of independence from British rule, Indian Prime Minister Narendra Modi declared that in his "third term [2024 - 2029], India will stand among the top three economies [in the world]. And this is Modi's guarantee."¹ Far from being pure bravado, Modi has proven his abilities, and India’s growth has been positive in the past 10 years. If you check the scoreboard, you will see that when Modi began his first term in 2014, India was the 10^th-largest economy. By the time his second term began in 2019, India vaulted into fifth place, surpassing its former rulers, the United Kingdom. With a general election expected in 2024, Modi’s third term could make his declaration prophetic.

Why is India growing so quickly? One reason is its investable “democracy-loving, capitalist-respecting environment,”² as described by India’s Union Finance Minister Nirmala Sitharaman. Modi’s willingness to engage and form strategic partnerships with Western powers is another factor. Moreover, the country’s favorable working-age demographic trends (more than half of Indians are aged 15–59 years); growing middle class; and immense agricultural, services, and manufacturing industries are key drivers to the economic growth.

A Fast-growing Economy

India overtook China earlier this year to become the world’s most populous country, and its economy is expected to be one of the world’s fastest growing. Population and GDP have a positive correlation: as population increases, GDP generally increases. S&P Global forecasts GDP in India to increase between 6.0% and 7.1% annually in fiscal years 2024 – 2026. In comparison, the world’s third and fourth largest economies, Germany and Japan, are poised to grow 2.7% and 1.0%, respectively. If the forecasts hold, India will surpass both in the years to come.

India’s current account balance has significantly improved, and foreign exchange reserves are the highest among major foreign reserves-holding countries. As a result, there is greater liquidity and greater capital to fund internal projects like infrastructure, an essential foundation for India’s social and economic growth. The government expects infrastructure spending to rise 33% between 2023 and 2024.

Historically, the impact of external shocks on India’s economy has been less severe than on other emerging nations. India is less dependent on the exports of goods and services, and a material portion of GDP is from domestic sources, particularly the services sector. Currently, India is working to boost domestic manufacturing and to reduce imports. At a time when U.S. companies are looking at manufacturing diversification, now is a great opportunity for India to become a viable alternative to Chinese manufacturing. Apple has begun shifting its production from China to India, and Tesla is reportedly in negotiations to begin manufacturing in India, likely by 2026.

Another contributor to India’s prominence is its increasing competitiveness in modern technology. India has made impressive strides digitally to improve governance and effectively manage emergencies. India's strong infrastructure of digital platforms has played a crucial role in facilitating direct benefit transfers and enhancing accessibility to necessities like healthcare, education, and public-sector payments. The country’s growing digital capacity is supporting stronger service delivery.

Challenges

Even with the growth initiatives, there are still challenges. These are important, because historically India has taken great strides forward only to retreat because of poor governance issues and lack of leadership stability. Bluntly, India has a wealth gap problem. For years, inequality has been a challenge for India, but progress is being made. India’s efforts to increase personal wealth have led to a significant reduction in the number of people living in poverty. In the past 20 years, approximately 40% of the population was lifted out of poverty.

Political issues and territorial conflicts are certainly another challenge to India’s development. A pressing issue is the territorial dispute in the Kashmir region involving India, Pakistan, and China, with no immediate end in sight. Meanwhile, India faces geopolitical issues related to the over-centralization of power, leading to inefficiency and corruption in governance. However, Modi pledged to fight both corruption and nepotism, recognizing that better governance leads to better investment.

India’s growing economy demands a growing energy source, and this leads to India being one of the largest CO2 emissions producers in the world. India recognizes the need to address its environmental impact and has built the infrastructure to combat CO2 emissions. India is recognized as having the fastest-growing renewable electricity sector of any major economy. 

Conclusion

The Modi administration is aware of the challenges ahead in solidifying itself as a driver of global economic growth. By implementing structural reforms for economic inequality, labor, and human rights for a better quality of life, there is hope for the future. With the right policies in place and risk-management practices to prevent any future economic crisis, the nation can thrive in a fair and just society.

In general, we avoid recommending outright country bets within international markets and prefer maintaining a more diversified stance when investing overseas. Nevertheless, given the promising prospects ahead for India’s economy, we have chosen to partner with skilled third-party investment managers who possess boots on the ground to identify opportunities and recommend investors consider incorporating such actively managed strategies within their portfolios.