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Summary
- Since the May 2014 election of Prime Minister Narendra Modi, India has outperformed other emerging markets in response to a strong reform agenda1.
- Reasons investors should consider India include reforms, GDP growth, fiscal discipline, earnings growth and favorable valuations.
- Investors considering equity allocations to India should keep in mind potential growth in the consumer, infrastructure, and economically sensitive companies, such as small cap companies.
Since the historic election of Indian Prime Minister Narendra Modi last May, India's market has shown few signs of slowing down. In 2014, India was the best-performing emerging market, up more than 29%, and it continues to outperform this year as well.2 We believe the market has responded favorably to the robust agenda of reform under the Modi administration, as many believe his policies will enhance India's economic potential.
There are numerous reasons why investors should consider India now and over the long term. Here, we highlight the five key reasons to invest in India right now.
1. Reforms matter
Those emerging market countries that are actively undertaking reform, which we call the "Fab Five" (India, Indonesia, Mexico, Philippines and China), are expected to revive economic growth. Investors are eager to see reforms carried out as a growth catalyst and have rewarded countries such as India (see Figure 1).
The reforms put forth by the new Indian government under Prime Minister Modi intend to privatize state assets (especially the financials and power sectors), increase foreign direct investment, reduce the fiscal deficit by cutting subsidies, deregulate the labor market, upgrade infrastructure and reform the tax regime. We believe these improvements should unleash investment, increase efficiency, raise productivity and boost growth.
2. Favorable demographics and Gross Domestic Product [GDP] growth
The world's largest democracy, India is home to 1.25 billion people, with more than 65% of the population younger than 35. By 2025, India is projected to be the world's most populous country with almost 1.4 billion people. In addition to its population, India's total labor force will continue to grow relatively quickly, by about 1.5% annually. By 2030, there will be about 174 million net new members of the country's labor force.4
Furthermore, India's GDP is expected to expand more this year, and is forecasted to be 6.3%, compared to 4.3% in emerging and developing economies (see Figure 2).5 By 2016, India's GDP is expected to surpass China's. Today, growth opportunities are very scarce within emerging markets and India is a rare growth opportunity for investors.
3. Fiscal and monetary discipline
The lower price of oil and better fiscal management, including cutting government subsidies, are helping to reduce India's fiscal deficit. India is also focused on managing inflation, which helps the central bank to lower interest rates (see Figure 3). In particular, a strengthening rupee prevents the erosion of return for U.S. investors. Collectively, lower interest rates, lower inflation and lower commodity prices all help to put money in the pockets of consumers and accelerate domestic demand growth.
