India's Investment Future: Global Opportunities And Challenges

India is one of the fastest-growing economies in the world, with a large and deep equity market. It has the largest youth population in the world, providing a highly skilled workforce with a strong work ethic. India's economy is supported by its huge domestic consumption, led by the private sector, with an estimated middle class of 400 million people. The country's economic growth is further underpinned by various structural factors, including its STEM-focused educational system, and the expansion of its digital infrastructure to cater to younger, more urban consumers.

India's equity market is the fifth-largest worldwide and the second-largest among emerging markets. The market capitalisation of Indian equities exceeds 4.3 trillion USD (as of 31 December 2023). The Bombay Stock Exchange (BSE) in Mumbai, the largest Indian exchange, was founded in 1875 and is the oldest in Asia.

The Indian government has implemented numerous initiatives to encourage investment, including developing the country's financial system, improving infrastructure, and relaxing FDI norms. India's FDI policy is reviewed on an ongoing basis to ensure the country remains an attractive and investor-friendly destination. As a result, India's cumulative FDI inflow stood at US$1,013.45 billion between April 2000 and June 2024.

The country's economic growth and favourable investment policies have led to a significant increase in the number of retail investors in the stock market, exceeding 9.5 crore. As of July 30, 2024, the value of retail holdings was Rs. 36 lakh crore (US$360.49 billion).

India is also a major beneficiary of the diversification of global supply chains. Its geographic location and democratic form of government make it an attractive hub for global businesses.

Overall, India offers meaningful pro-growth policy support, unique demographic tailwinds, and superior economic and earnings growth potential, making it an attractive investment destination.

India's equity market is large and deep

The Indian equity market has been on a relentless bull run since the pandemic, with the blue-chip NSE Nifty 50 climbing over 200% since March 2020. This growth has been driven by domestic institutional investors and a surge in retail participation, creating a virtuous cycle of liquidity, sell-side coverage, investor participation, and capital issuance. The market has a strong appetite for good paper, and firms have raised 570.47 billion rupees from public offerings, including IPOs, follow-on offers, and offers for sales.

India's equity market is also supported by its large youth population, which is expected to continue until 2030. The country has the third-largest group of scientists and technicians in the world, and its working-age population will continue to grow, peaking at around 59% in 2041. This provides a strong demographic dividend that contributes to the country's economic growth.

The Indian government has also shown its commitment to developing the country's infrastructure and attracting investments. Initiatives such as the National Infrastructure Pipeline and the National Investment and Infrastructure Fund aim to provide world-class infrastructure and boost the economy. The government has also laid out ambitious plans for goods exports to hit $1 trillion annually by 2030, positioning India as a top alternative for companies looking to diversify their supply chains away from China.

In summary, India's equity market is large and deep, with strong economic growth, a favourable demographic profile, and supportive government initiatives contributing to its attractiveness for investors.

Structural factors underpin economic growth

India's economic growth is underpinned by a range of structural factors, including its large and young population, democratic political system, and strong domestic demand for consumption and investment. Here are 4-6 paragraphs elaborating on these structural factors:

India's large and young population is a key structural advantage for its economy. With more than a sixth of the world's population, India has the second-largest population globally, expected to become the largest by 2035. This demographic dividend provides a vast consumer market and a large workforce, driving economic growth.

The country's democratic political system also plays a crucial role in economic growth. India's federal structure allows for incremental reforms and political opportunism, adapting policies to the diverse needs of its states and union territories. Additionally, the central and state governments have implemented initiatives to improve education, skills, and women's participation in the economy, which are essential for harnessing the potential of its people.

Strong domestic demand for consumption and investment is another structural factor driving India's economic growth. Household consumption accounts for 60% of India's GDP, and the expansion of its aspirational, consumer class boosts economic growth. Moreover, the government's continued emphasis on capital expenditure and infrastructure development further strengthens domestic demand.

The services sector has been a significant contributor to India's economic growth, with strong growth in areas such as information and communication technology and back-office processing tasks. However, the limited role of manufacturing in India's development has been unusual compared to other developing economies. Policies favoring the services sector and burdensome regulations on manufacturing have contributed to this shift.

To sustain high growth in the coming decades, India will need to address constraints on investment and infrastructure. Simplifying complex land regulations, improving the business climate, and attracting private and foreign capital are crucial steps to support investment. Additionally, developing infrastructure in transport, energy, and communications is vital for India's economic prospects.

India's economic growth is also influenced by technological and environmental disruptions. Technological advances in automation and digital connectivity are changing the way labour markets and businesses operate, offering both opportunities and challenges. While automation can increase productivity and global competitiveness, it may also lead to job displacement and irregular forms of work, impacting social security and income distribution.

A STEM-focused educational system

India has recognised the importance of STEM education in preparing its students for the future. STEM (Science, Technology, Engineering, and Mathematics) education has been incorporated into the regular school curriculum, beginning with the primary grades. This is in line with global trends, as STEM education is considered an imperative part of competency-based curricula.

The Indian government has taken steps to improve STEM education in the country, such as through the Atal Innovation Mission, which fosters curiosity, creativity, and design thinking in young minds. As of August 2021, over 8700 Atal Tinkering Labs have been set up across the country, with 60% of these in government schools.

However, there are still challenges to be addressed, including gender disparities and infrastructure issues. Despite these challenges, India is committed to making STEM education accessible to all. Here are some ways in which India can further develop a STEM-focused educational system:

• Addressing gender disparities: According to a survey, only 57% of girls wanted to pursue a career in STEM fields, compared to 85% of boys. This indicates a need to encourage more girls to consider STEM careers and provide role models in these fields.
• Improving infrastructure: High-quality STEM education requires dedicated spaces, facilities, trained teachers, and an integrated curriculum. India needs to invest in these areas to ensure that all students have access to quality STEM education.
• Integrating technology: Adopting new technologies and moving beyond traditional teaching methods can enhance STEM education. Online schools and digital resources can provide interactive and engaging learning experiences.
• Encouraging hands-on learning: STEM education should emphasise hands-on, practical learning that encourages students to apply their knowledge to real-world problems. Project-based learning is an important technique for effective STEM implementation.
• Developing critical thinking and creativity: STEM instruction should aim to develop critical thinking, problem-solving, and creative skills in students. This can be achieved through collaborative projects and hands-on experiments.
• Promoting team spirit: Group collaborative STEM activities can foster a sense of team spirit and collaboration among students, preparing them for the modern workforce.

India's equity markets represent a diverse universe of stocks

The wide range of stocks available on Indian exchanges offers investors a broad selection of sectors and industries to choose from. These include automotive, internet, insurance, transportation services, and power, among others. This variety of investment options provides investors with numerous opportunities to find companies that align with their interests and investment strategies.

The large number of listed companies also fosters a highly competitive environment, encouraging businesses to focus on specific niches and remain cost-conscious. As a result, investors can identify winners even during challenging market conditions. For instance, despite a slowdown in the automotive sector, companies like Maruti Suzuki (passenger cars) and Eicher Motors (two-wheelers) have performed well.

The diversity of India's equity markets is expected to increase further as sectors with limited presence on the bourses, such as internet, insurance, transportation services, and power, continue to develop. This evolving landscape provides investors with emerging opportunities and the potential for strong returns.

In addition to the breadth of investment choices, India's equity markets also offer depth in terms of investment vehicles. Investors can choose from various options, including mutual funds, exchange-traded funds (ETFs), American depositary receipts (ADRs), and global depositary receipts (GDRs). These vehicles provide flexibility and enable investors to tailor their portfolios according to their risk appetite and financial goals.

The diversity and breadth of India's equity markets make them attractive to both domestic and foreign investors. The resilience of these markets, bolstered by a wide range of companies across sectors, has contributed to India's position as one of the fastest-growing economies in the world.

Foreign investors are increasingly attracted to India

Economic Growth and Demographics

India's economy is growing rapidly, with an estimated GDP growth of 8.2% in 2023-24. The country has the world's largest youth population, which is expected to increase by 25.7% between 2011 and 2036. By 2030, India is projected to have the largest adolescent and youth population and will continue to be one of the youngest countries globally. This growing population presents a vast consumer base for manufactured goods and services, making it attractive to foreign investors.

Infrastructure and Competitiveness

The Indian government has committed to providing world-class infrastructure through initiatives like the National Infrastructure Pipeline (NIP), which aims to attract investments and is crucial for achieving the target of becoming a $5 trillion economy by FY 2025. The country has also risen in the rankings on the Global Competitiveness Index and the World Bank's Logistics Performance Index, reflecting its improving global competitiveness.

Business Environment and Investment Opportunities

India has implemented significant economic reforms to enhance its business environment, including liberalizing restrictions on foreign investment and updating bankruptcy and labour laws. The country offers investment-friendly policies and has attracted leading multinational organizations. The services sector, computer software and hardware, trading, telecommunications, and the automobile industry are among the top sectors receiving the highest FDI equity inflow.

Government Initiatives and Policies

The Indian government has introduced various schemes and policies, such as the "Make in India" campaign, to promote a favourable investment climate. It has also taken steps to simplify FDI regulations and speed up the approval process. The implementation of the Goods and Services Tax (GST) has improved transparency, and Special Economic Zones (SEZs) provide dedicated spaces with tax incentives.

Global Influence and Innovation

India is expected to become one of the largest manufacturing hubs in the world by 2030, along with China. The country has improved its global innovation ranking and is committed to fostering growth and innovation, particularly in the space sector, by opening it up to private players and enhancing FDI inflows.

In summary, India's strong economic growth, favourable demographics, improving infrastructure, competitive business environment, and government initiatives make it an increasingly attractive destination for foreign investors seeking opportunities in a dynamic and rapidly expanding market.

Frequently asked questions