India’s technology sector and demographics combine with political developments to write a persuasive market story.
With incumbent Narendra Modi poised for a third term as India’s marathon election season draws to a close, the country’s potential as an investment market is once more coming into focus.
Analysts agree that demographics have played the major role in India’s rise. Around 969 million people are expected to vote in the election, out of a total population of 1.4 billion. This is nearly the combined population of the EU, the US, Japan and the UK. Last year, India surpassed the UK as the world’s fifth-largest economy and is poised to overtake Japan and Germany by 2027.
“India’s favourable demographics are a powerful draw for global investors who like compelling growth stories and will continue to attract investors’ attention in the foreseeable future,” says Homin Lee, senior macro strategist at Lombard Odier, a Swiss private bank managing more than $200bn in assets. “What is interesting about India, in comparison to other emerging markets, is its improving prospect for sustained high growth, thanks to a combination of steady reforms and strategic flexibility.”
One such reform has been the production-linked incentive scheme for large-scale electronics manufacturing and IT hardware. This has been key to India becoming a competitive destination for electronics manufacturing, attracting global contract manufacturers such as Foxconn and Pegatron to set up shop in India. Investors say this scheme has boosted manufacturing capabilities, allowing India to stand out in the reshaped global supply chain, and reduced import needs.
“Many of the impediments to investment-driven growth have been removed thanks to the government’s multi-year efforts to reform the country’s banking system and shift fiscal resources towards infrastructure capex,” says Mr Lee. “These developments increase the chances that India’s human capital development, urbanisation and manufacturing capacity building all accelerate in the decades to come.”
Mr Modi’s government has invested heavily in infrastructure. According to the Indian Ministry of Housing and Urban Affairs, in 2014, only 248km of metro rail was operational in India. Fast-forward nine years, and 895km of metro lines are operational in 20 different cities today. In addition, a new 508km high-speed rail line between Mumbai and Ahmedabad is being built, connecting two major cities.
Tech advancements
India is also no stranger to digital transformation. Mr Modi’s drive for digital governance has started to improve the lives of some of the country’s most disadvantaged individuals. “India has been remarkably successful in building vibrant mobile payment and e-commerce ecosystems, despite its infrastructure challenges,” says Mr Lee. He believes this will be an “important source” for the country’s growing middle class in years to come.
In 2010, a digital ID programme known as Aadhaar was launched, with more than a billion people registering for the programme by February 2024. The country went one step further in 2016, launching the Unified Payments Interface, enabling real-time payments using QR codes, mobile numbers and virtual IDs. According to ACI Worldwide Real-Time Payments and Global Data, consumers are increasingly shifting from cash to mobile-based real-time payments, and the share of real-time payments of total payments volume is forecasted to rise to 67.1 per cent in 2027.
“The country needs to deepen its manufacturing base as quickly as possible, and its recent progress in electronics exports and onshoring of product assembly factories is encouraging,” says Mr Lee.
He adds that the “decoupling” between the US and China will also provide “strategic opportunities” for the country’s pharmaceutical industries, but that when it comes to the development of artificial intelligence, the country lacks sufficient infrastructure to compete with leaders such as the US and China.
Political stability
The election is essentially between the BJP party, headed by Mr Modi, and the Indian National Development Inclusive Alliance — led by the main opposition party, the Congress Party. However, the alliance has been struggling to stay united, riven by internal strife concerning seat-sharing. The lack of any credible opposition and Mr Modi’s unifying factor in his own party have pleased markets.
“From an emerging market perspective, we rarely tend to see incumbent governments win a third term,” says Rashi Talwar Bhatia, portfolio manager for India equity at Ashmore, which manages almost $60bn in pooled funds, segregated accounts and structured products. “This is probably the first time we see a strong third term for an incumbent.”
Mr Modi, she says, has surrounded himself with “educated, learned, smart people” on the economic front and nobody will want to “mess this up”.
In addition, the Goods and Services Tax (GST) has been “beautifully ingrained” in the system, thanks to the work of the BJP, she adds. The GST is an indirect, transaction-based taxation regime, and has been in effect since 2017. This has led to some of the “largest tax collections,” allowing the government to finance various projects.
“Policy continuity and the third term … gets the animal spirits going in the private sector,” Ms Bhatia says. She believes this will allow them to work in unison with the government, facilitating infrastructure building and tech developments. “That’s the part of the India story which is different this time.”
Mr Modi has also strengthened links internationally. An economic trade agreement signed with the European Free Trade Association, comprising Norway, Switzerland, Iceland and Liechtenstein, is expected to attract $100bn of foreign direct investment into India.
Sovereign wealth funds (SWFs) are increasingly attracted to rapidly developing growth markets, such as India and Latin America, says Lakshmi Narayanan, chairman of the Sovereign Wealth Fund Institute. “India’s commitment to renewable energy and the modernisation of its infrastructure present attractive prospects for SWFs looking to invest in energy generation and distribution,” he says, with data on total direct investments made by SWFs in India over the past three years indicating increased activity.
Some imperfections
Investors must also be aware of the challenges this country presents.
“Investing in India is still pretty difficult compared to other markets,” says Dina Ting, senior vice president and head of Global Index Portfolio Management at Franklin Templeton. Opening a local investment account takes a minimum of six months, she explains, while pointing out that the rupee is “not a freely tradable currency”. Despite this, she commends the “progress” of India’s hosting of the G20 summit.
India’s essential long-term risks also lie in its high vulnerability to climate change. “A large portion of the country’s domestic food supply for its 1.4 billion people relies on the annual monsoon’s rainfall,” says Lombard Odier’s Mr Lee. He believes the weather will likely become even “more volatile” in coming decades and “threaten” the country’s economic stability, as it lacks infrastructure to “shield its people and industries from such shocks”.
In a world where tensions are rising between major powers, and India is leading the charge to become an economic powerhouse, storms from the natural world can be as important as the changing political climate.
