Over the past two decades, India’s main stock benchmark, the Nifty 50, has consistently outperformed, delivering double-digit returns compared to the MSCI Emerging Markets Index’s single-digit gains over the same period.
This outperformance, while remarkable, has elevated equity valuations, making a selective approach more important than ever. However, the foundational drivers that fuel India’s growth are real, offering long-term opportunities for investors.
A decade of rapid economic growth
India’s economic growth under Prime Minister Narendra Modi has been remarkable.
Since Modi assumed office in 2014, India has experienced significant improvements in GDP per capita, rising by 40 per cent from US$5,000 to over US$7,000 in just eight years.
This momentum continues, with the IMF recently revising India’s 2024–25 growth forecast upwards to 7 per cent, fuelled by rising private consumption and strong domestic demand.
India’s achievements go beyond numbers. The country’s economy is now the fifth largest in the world, surpassing the UK, and is poised to overtake Japan and Germany in the near future.
Such growth is supported by a reform agenda focused on modernising infrastructure and streamlining regulations.
Through the National Infrastructure Plan, India aims to inject US$1.4 trillion into sectors like energy, transport and urban development by 2025, propelling further expansion.
Economic reforms fuelling growth
The progress India has made extends beyond just its GDP. Regulatory reforms, including streamlined tax laws, better governance, and a reduction in bureaucratic red tape, have encouraged foreign direct investment (FDI).
These changes, combined with incentives for businesses, have transformed India into an increasingly attractive destination for investors. The country has reformed its financial systems, reducing government involvement in state banks, and nurturing dynamic private sector banks, which are better suited to meeting the credit demands of a growing economy.
India’s real estate market has also undergone significant improvements. Once plagued by fraud and poor regulation, the market has seen transformative reforms, especially through the introduction of the Real Estate Regulatory Authority (RERA) Act in 2016.
RERA has created a more transparent property market, boosting investor and buyer confidence, while supporting broader economic stability.
India’s equity market: Opportunities and risks
The positive macro and micro trends driving India’s economy are reflected in its dynamic equity markets.
India’s weight in the MSCI Emerging Markets Index has reached an all-time high, with the combined market capitalisation of companies listed on the National Stock Exchange and Bombay Stock Exchange increasing by US$1 trillion in under three years.
Additionally, major Indian companies such as Reliance Industries, ICICI Bank, and Infosys are now among the top constituents in the index.
However, this growth isn’t without its challenges.
While inflation remains stable and economic growth continues, increased market volatility is expected in the short term.
Political uncertainties could also impact the reform momentum, as recent tax changes introduced by the coalition government are aimed at curbing market exuberance while attracting more foreign investment.
Investors must navigate these risks with caution, especially as elevated valuations increase the likelihood of corrections.
Selectivity is key for investors
With India’s stock market reaching new heights, active management and careful stock selection are more important than ever. India’s large and diverse market, with over 850 liquid stocks, provides ample opportunities, but it also requires thorough bottom-up research.
Identifying companies well-positioned to benefit from long-term structural trends will be crucial for capturing growth while managing risks.
India’s promise as a growing economic powerhouse offers a compelling narrative for investors.
Its mix of reform-driven growth, digital innovation, and demographic advantages paints a promising picture of the future.
However, success in this market hinges on selectivity and a clear understanding of the risks at play. For those willing to take a long-term view and navigate the complexities, India remains one of the most exciting and nuanced investment destinations in the emerging market landscape.
Archie Hart, portfolio manager, Ninety One
