India's Economy: Invest Or Avoid?

India is one of the world's fastest-growing economies, with a large and technically skilled labour force and a thriving environment for both domestic and foreign investment. However, the country also faces several economic issues, including rising debt levels and a weak currency. So, should you invest in India's economy?

India's large and technically skilled labour force

The country's large labour force is expected to continue growing, with around a million young Indians joining the workforce every month. This driving force of growth will continue for the coming decades, and India will soon be home to the largest workforce in the world. This so-called 'demographic dividend' is not only beneficial for India but can also help other nations whose economies are struggling due to skill shortages.

The availability of a skilled labour force is crucial for India's ambitious plans to transform its economy. The country is diversifying from an agro-based economy to a manufacturing and service-based one, and this transition highly depends on the availability of jobs and the quality of the labour force. To address the increasing demand for skilled labour, the government has made skill development a priority sector. The recently launched National Skill Development Mission aims to train approximately 400 million people across the country by 2022.

The World Bank has also approved a $250 million Skill India Mission Operation (SIMO) to support the country's vision. The SIMO program will focus on creating high-quality training packages based on market-relevant skills, specifically targeting new labour market entrants and improving the quality of existing skills programs.

The depreciating rupee

The Indian rupee has been depreciating against the US dollar, creating a panic in the investor community. The depreciation is causing uncertainty among investors, who are concerned about their investments and are seeking ways to protect them from further damage. The Indian government has taken steps to curb the decline, but so far, none of these measures have been successful, and the rupee continues to depreciate.

Reasons for the Depreciation

The depreciation of the Indian rupee is due to a combination of factors, including:

• India's economy is not performing as well as other countries, leading to investors moving their money elsewhere.
• India is facing challenges with inflation, making it difficult for the government to control its currency.
• The country's growing current account deficit, which measures how much of its income is spent on importing rather than earning from exports, has put pressure on the rupee.
• A global economic slowdown has weakened demand for Indian exports and increased competition from countries that manufacture similar products at lower costs.
• Inflation in India is reducing the purchasing power of the rupee, meaning people have to spend more money on the same amount of goods and services.
• India's economy is slowing down, leading to a decline in demand for products and services, resulting in fewer jobs and less money in circulation.
• Foreign investment in India has decreased over time as investors no longer believe that Indian stocks will provide a good return on investment.

Impact on the Economy

The depreciation of the rupee is expected to have both positive and negative effects on the Indian economy:

• A weaker rupee should, in theory, boost India's exports. However, in an environment of uncertainty and weak global demand, this may not translate into higher exports.
• It poses the risk of imported inflation and may make it challenging for the central bank to maintain interest rates at a record low.
• India relies heavily on imports for its domestic oil requirements and is one of the top importers of edible oils. A weaker rupee will further escalate imported edible oil prices and lead to higher food inflation.
• The depreciation of the rupee has led to an increase in foreign investment in India as investing abroad becomes more expensive in terms of Indian currency.
• Earnings from abroad will also become cheaper when converted back into Indian currency, benefiting those with earnings from abroad.
• The depreciation of the rupee may not significantly impact long-term investment portfolios. However, investments in foreign funds could benefit if the foreign stocks in those funds perform well.

Impact on Investments

The depreciation of the rupee can affect investments in the following ways:

• A depreciating rupee means the value of investments in other currencies will decrease.
• Investors may have to pay more dollars or euros for an investment previously worth less, making it challenging to recoup losses from exchange rate fluctuations.
• Investments in debt instruments, such as bonds and debentures, will become more expensive for investors as these are issued in dollars but bought by investors in rupees.
• Mutual funds that invest primarily in debt instruments or other financial products denominated in dollars may not see much growth over time due to the depreciation of the rupee.
• There could be an increase in interest payments on borrowed money from banks or financial institutions as they charge interest based on the amount owed.

Taking Advantage of the Depreciating Rupee

Despite the challenges posed by the depreciating rupee, there are opportunities for investors to take advantage of the situation:

• The depreciation has led to an increase in foreign investment in India, making it more attractive for investors to invest abroad.
• Foreign earnings will become cheaper when converted back into Indian currency, benefiting those with earnings from abroad.
• Investments will increase in value over time as the purchasing power of the rupee increases.
• Selling property can be advantageous, especially if one plans to move abroad, as a weak rupee can help recoup losses by allowing sales at higher prices.
• Investing now will pay off later as prices are expected to increase when the currency recovers its strength.

India's stock market

Overview

Current Performance and Outlook

In October 2024, the Indian stock market experienced sectoral volatility, with a mix of underperforming and top-performing industries. The Electricals sector was the standout performer, posting a substantial gain of 19.54%, driven by increased infrastructure and construction activity, as well as the transition to sustainable energy and smart grid technologies. On the other hand, sectors such as Industrial Gases, Retailing, Diamond & Jewelry, Oil & Gas, and FMCG underperformed, facing declines due to factors such as demand constraints, rising input costs, cautious consumer sentiment, and global price volatility.

Key Sectors for Investment

Based on current dynamics and trends, the following sectors appear promising for investment:

• Electricals and Renewable Energy: This sector is expected to benefit from India's commitment to renewable energy and sustainable infrastructure, with strong government support and private investments.
• Infrastructure and Construction: Infrastructure development is a key part of India's growth strategy, and sustained government spending is likely to boost companies in construction, engineering, and related industries.
• Banking and Financial Services: The banking sector has been strong post-pandemic, with improved net interest margins and better asset quality. With India's expanding economy, banking and NBFCs are well-positioned to benefit from increased credit demand.
• Automobile and Auto Ancillaries: The auto sector has shown positive movement, and the gradual shift towards electric vehicles (EVs) supports long-term growth. Government initiatives and consumer adoption of EVs add further momentum.
• IT and Software Services (Cautionary): While the IT sector has been a robust performer historically, it has recently lagged due to investor caution. Short-term performance may be volatile, but the long-term trend of digital transformation remains intact.

India's economic growth

Strong Investment Environment

India's investment landscape offers a thriving environment for both domestic and foreign investors. The country's vast domestic consumption, driven by a growing middle class, has been a significant contributor to its economic growth. The emergence of a large and skilled youth population provides a competent and highly skilled workforce for businesses.

Government Initiatives

The Indian government has implemented numerous initiatives to boost investment, such as improving infrastructure, easing FDI norms, and developing the financial system. The National Infrastructure Pipeline, for example, aims to attract investments and provide world-class infrastructure. The government has also launched the National Monetization Pipeline, providing a comprehensive view of investment opportunities in infrastructure.

Robust Stock Market Performance

India's stock market has been a prominent part of the global conversation on economic growth. The market capitalization of India's stock market reached the $5 trillion mark in May, placing it among the top five national markets globally. The country's registered investors topped 160 million at the beginning of 2024, outpacing the number of American stock owners.

Rising Global Competitiveness

India has been steadily climbing in global rankings, reflecting its increasing competitiveness. It ranked 39th on the Global Competitiveness Index 2024 and jumped six places to 38th in the World Bank's Logistics Performance Index 2023. These improvements enhance India's attractiveness for investors.

Strong Economic Fundamentals

India's economy is the fifth-largest in the world, and it is growing faster than any of the G20 economies. The International Monetary Fund projected a real gross domestic product growth rate of 6.8% for India in 2024, making it the fastest-growing nation in the G20.

Focus on Innovation and Technology

India has made significant strides in the tech sector, ranking fourth globally in tech venture capital investments. The country has a large number of scale-up companies, and its startups secured substantial venture capital investments. India's private equity and venture capital investment environment is scaling new heights, with increases in deal size, activity, and fundraising.

Progressive Policies

The Indian government has implemented policies to simplify the ease of doing business, improve the business environment, and support domestic manufacturing. The introduction of the Goods and Services Tax, for example, has integrated various indirect taxes, creating a common national market.

In summary, India's economic growth is driven by a combination of factors, including its large and skilled population, strong domestic consumption, government initiatives, a robust stock market, progressive policies, and increasing global competitiveness. These factors make India an attractive investment destination, particularly for those seeking exposure to emerging markets.

The impact of India's population

India's population is expected to rise from 1.21 billion in 2011 to 1.52 billion by 2036, an increase of 25.7% in 25 years. This will have a significant impact on the country's economy, which is already one of the fastest-growing in the world.

A large population can be a double-edged sword for economic growth. On the one hand, it provides a large labour force, which can be a productive asset if there are sufficient resources to support it. On the other hand, if resources are not available in sufficient quantities, a large population can become an obstacle to faster economic growth.

In the case of India, the impact of its growing population is expected to be positive overall. India already has the largest youth population in the world, and this is projected to remain the case until 2030. This provides the country with a highly skilled workforce that can contribute to economic growth. Additionally, India's population growth is associated with increasing demand across all sectors, including industry, hydropower, and chemical plants. This demand is fuelling development and economic growth.

However, there are also challenges associated with India's population growth. One of the main challenges is the pressure on natural resources, particularly food. With a larger population, there are more mouths to feed, which can lead to lower per capita income and increased food insecurity. This is exacerbated by the fact that a significant portion of India's agricultural output is lost due to spoilage, as a result of inadequate food storage and distribution infrastructure.

Another challenge is the strain on social services. As the population grows, there is increased demand for services such as education, healthcare, and housing. If these services are not adequately provided, it can lead to overcrowding, poverty, and unemployment.

Furthermore, India's population growth is contributing to environmental issues such as rising CO2 emissions, global warming, and pollution. These issues can have negative economic impacts, particularly in the long run.

Overall, while India's growing population is expected to have a positive impact on the country's economy, it is important to address the challenges associated with it. This includes improving infrastructure, increasing investment in social services, and implementing measures to protect the environment. By doing so, India can ensure that its population growth continues to fuel economic development in a sustainable manner.

Frequently asked questions