Is India still a good investment?

When Prime Minister Narendra Modi assumed office in India a decade ago, he inherited an economy with sluggish growth and waning investor confidence. The banking sector was particularly strained, following a series of high-profile bankruptcies that left several billionaires unable to repay their debts, severely limiting the banks' lending capabilities.

Fast forward to 2024 and India’s fortunes have transformed with the country now outpacing other major economies, such as the UK. In FY24, which ran to 31st March, India’s economy grew by 8.2%¹ driven by business-friendly reforms introduced by the government.

Its gross domestic product (GDP) is predicted to more than double to $7.5 trillion by 2031. In addition, India’s stock market capitalisation is expected to grow by 11% to $10 trillion in the next decade². Its stock market has significantly outperformed China and the wider emerging markets sector.

There are many reasons to be positive about India as there are several factors that could contribute to its future economic growth, but there are also some risks to take note of.

According to some analysts, India is likely to overtake Japan and Germany to become the third largest economy in 2027² . This will line up with Modi’s ‘Viksit Bharat’ vision, which is a key policy by the government to make India a completely developed nation by 2047.

This means it needs more investment in infrastructure to reduce transport and logistic costs and make it more competitive. This should contribute to sustainable growth and improves living standards.  The government raised spending on infrastructure to 3.4% of GDP (up from 3.2%)  and is launching large-scale projects focusing on building a world class transport network, such as the UDAN initiative, and increasing digital connections through the Smart Cities mission, as well as updating urban infrastructure including the expansion of the metro network. This, along with attracting more labour-intensive manufacturing, should help to generate jobs as unemployment has now reached 9.1%³.

A key pillar of Modi’s ‘Viksit Bharat’ vision is on harnessing technology to make the country more efficient and improve transparency in governance. Using technology, through platforms like Direct Benefit Transfer, the government has streamlined the distribution of subsidies and welfare benefits ensuring assistance reaches the intended beneficiaries.  Such schemes have saved three trillion rupees from falling into the wrong hands.

There are also plans to make India greener and cleaner. Globally, Prime Minister Modi has supported sustainable development principle and endorsed the international Solar Alliance.  India has ambitions to install 500 giga watts of non-fossil energy capacity by 2030, which means it could get half of its power from renewable energy by 2030⁴. It wants to reduce carbon emissions by one billion tons from 2021 to 2030 and reach net zero emissions by 2070.⁵

If Modi’s vision proves successful it’s likely to boost foreign direct investment in India and turn it into a trusted global manufacturing hub. 

India has some of the most attractive demographics in the world with a more developed economy than other ‘young nations’. Its population consists of 1.4 billion people versus Indonesia (274 million), Brazil (214 million) and Thailand (72 million).

These favourable demographics are likely to last until 2050 thanks to its young population with an average age of 28. It means it has a steady supply of workers entering the market in the long term to support growth.

Comparatively, China’s population is ageing faster than India’s with about 300 million people, currently aged 50 to 60, set to leave its workforce in a few years⁶. China’s problems are exacerbated by fewer young people entering the workforce as unemployment reaches 20.8% for 16–24-year-olds.⁷

The country’s middle class has been a significant driver of economic growth and consumption and makes investing in India compelling. It currently represents 31% of the population and is projected to reach 38% by 2031 and 60% by 2047⁸. That’s around 400 million more people entering the middle class – more than the whole population of the US.

Middle classes typically have more disposable income which they can spend on consumer goods – cars, electronic devices, eating out and holidays as well as financial products such as life assurance. With its top two income brackets expected to grow five times and 2.4 times respectively over the next decade, it could turn the country into a global consumption powerhouse.

India has demonstrated that it can play both sides of the east-west divide. While it has worked with China and Russia it continues to be a preferred partner of western nations, who see it as a counterweight to China. Corporations also see India as a viable alternative to China with Apple, for instance, expanding its production of its iPhone components in the country.

While there was some volatility in the lead up to its 2024 General Election, the political situation remains stable even after Modi’s Bharatiya Janata Party (BJP) lost its parliamentary majority in June. There’s a general consensus that Minister of Finance and Minister of Corporate Affairs, Nirmala Sitharaman, has delivered a responsible budget, which pledges to reduce the country’s deficit, while maintaining infrastructure spending.

The government has also introduced schemes to boost jobs. Many of these ideas been copied from opposition parties, which indicates a willingness to learn lessons from this year’s elections and co-operate with its coalition partners.

As India gears up to become the third largest economy, investors are grappling with whether the price is right for buying into its growth story. With India’s stock market trading at record highs, it leaves little margin for error and finding undervalued opportunities can be a challenge.

Much of the country’s growth is driven by its expanding middle class. However, there’s a risk of the country falling into the ‘middle income trap’, which means it could struggle to transition to high-income status, particularly if its GDP per capita starts to stagnate.

While India has adeptly navigated the geopolitical landscape, there is always a risk of missteps that could escalate tensions with the US or China and discourage investment in India.

Prime Minister Modi has done much to address India’s problems, but there are still concerns over corruption as well as corporate governance, lack of shareholder awareness and rural poverty to name but a few. If these issues persist, it could reduce FDI investment in India.

Overall, India should be able to sustain higher levels of growth as it benefits from preferential relations with the west, demographic tailwinds and government policies targeting long term growth which should attract international investment.

There may be hesitancy around the high valuations of its stock market but if all its positive trends continue they will offer compelling reasons to invest in India. This may be something you could consider but it’s important to seek advice to ensure that this is right for your portfolio, your circumstances, and that you understand the risks involved.

1. Economic Survey 2024 – industries grow by 9.5%, fueling economic growth to 8.2%; Business Insider India, July 2024
2. India is set to become 3^rd-largest stock market by next decade: Morgan Stanley; The Economic Times, November 2022
3. Unemployment rate in India (2008 to 2024): Current rate, historical trends and more; Forbesindia.com, July 2024
4. Government of India Press Information Bureau; December 2022
5. COP26: India PM Narendra Modi pledges net zero by 2070; BBC.co.uk; November 2021
6. China’s ageing population: A demographic crisis is unfolding for Xi; BBC.co.uk, April 2024
7. China’s youth left behind as jobs crisis mounts, FT.com, July 2023
8. How the middle class will play the hero in India's rise as world power; The Economic Times, July 2023