India is the superpower of the future. And that makes it the world’s most promising emerging market. However, it does not receive as much attention by investors as we would expect. In this post, we will analyze the reasons why we should invest in India.
- Top 7 Reasons to invest in India
- How to invest in India
When we think of economic superpowers, the first country that comes to mind is the United States of America. A few moments later, we think of China. And our third thought is about the rivalry between those two nations and who will dominate the 21st century.
However, the 21st century will probably be the century of India, especially in the second half. According to the United Nations, India is projected to overtake China as the world’s most populous country as early as 2024. And by mid-century its economy is likely to be the largest in the world.
Currently, India’s economy is the sixth largest in the world, poised to surpass that of the United Kingdom:
In terms of development, India remains mostly a third world country, much poorer than China. And, perhaps fortunately, with a much weaker government. India’s demographics, however, are much better, as we will see in greater detail later.
Before jumping into the reasons why we should invest in India, let us first go through some important facts about this Asian country:
Top 7 Reasons to invest in India
Next, let us visit 7 reasons to invest in India.
1) Size of the Indian economy
As we have discussed before, as of 2020 India has the sixth largest economy in the world, if we measure it by nominal GDP. However, if we adjust the size of its economy to the price level in other countries, the Indian economy would be the third largest, only behind China and the United States, and represent almost 7% of the global economy.
And, in case this was not enough, India is expected to be the largest economic power in the second half of the 21st century.
But if we take a look at investors’ portfolios, India is barely represented. India’s weight in the MSCI All Country World Index, composed of virtually every country in the world, is less than 1%. And even in the MSCI Emerging Markets Index, composed exclusively of emerging market countries, India accounts for only about 10% of it.
This indicates two major problems for most investors. First, investors are barely taking advantage of the diversification benefits that investing in the Indian economy can offer from a macroeconomic perspective. Second, and even more important, they are set to miss out on the opportunity to invest in the superpower of the future when it still has a long way to go.
2) Economic growth
One of the most important variables for long-term stock market returns is economic growth. It is logical: if the pie (the size of the economy) grows, those who are invested in it will see their slice of the cake grow too.
India enjoys one of the highest rates of growth in the world. In fact, between 1961 and 2019, the Indian economy has averaged an economic growth rate of 5.2% annually. And we should go back to 1979 to find the last year in which the country experienced a recession.
If we look exclusively at the growth experienced since the beginning of the 21st century, we will find an impressive average rate of economic growth at 6.6%. The country’s development and incredible demographics are likely to keep growth rates at high levels for several decades.
While China is currently the most populated country in the world, that will change by 2024 when India takes over.
And leaving aside how many people live in each country, the truth is that Chinese demographics are very negative long term, as it is experiencing the same issues seen in Japan and Europe: very low birth rates and a rapidly ageing population. This means the pool of workers, consumers and investors in China is set to decrease.
In fact, it is said that, when it comes to demographics, China is only 20 years behind Japan and 10 behind Europe.
By contrast, India has one of the best demographics on the planet. 50% of its population is under 25 years old. And 65% under 35. The median age in India was 29 years in 2020. To put it into perspective, it was 37 in China and 48 in Japan.
And while it is true that there are other emerging countries with a very young population, something that stands out in India is that its birth rate is stabilizing just above 2 per woman. This is the replacement figure that indicates stability in population size in the future. By contrast, most other countries with very young populations still have very high birth rates which is a hindrance to economic growth.
4) Technological sector
An interesting feature about the Indian economy is its emphasis on economic sectors that are likely to be instrumental in the future. Thus, India has emerged as a technological power. Many multinationals, including many Indian companies, offer IT services to the entire world from India. This has been possible thanks to the high education level of its workforce and the presence of the English language in the country.
In addition, due to the gigantic size of the economy, many start-ups have been founded over the past few decades in India, and some of them are set to dominate what will soon be the world’s largest consumer market.
When it comes to its industrial sector, it represents 25% of the economy. The Indian government has set out its ambition to increase this in the future, convinced that the country will be able to attract a lot of production facilities. In its favor are its educated population and the fact that labor costs in India are much lower than in China.
5) Privileged geographical location
India is China’s neighbor, which might become the world’s largest economy in the next few years, overtaking the United States. It also has very close ties with the Middle East and Russia, from which it acquires most of its energy needs.
And while the Indian government has opposed some aspects of the Belt and Road Initiative, a project with which China wants to economically unite Asia, Europe, and the Middle East, the truth is that Indian seaports would massively benefit from it.
This means that India offers geographical advantages that will help it attract industrial production and supply chains that can satisfy all these regions.
By contrast, many other emerging countries, notably those on the African continent, do not enjoy such a favorable geographical enclave.
6) Infrastructure development
Although we are talking about a country of almost 1.4 billion people, India is not a large country in terms of area. Consequently, population density is very high. This presents some challenges, but it also makes the task of connecting the country’s most important cities easier.
The most effective way to accomplish this objective is by developing the rail network. The Indian government has announced that it will invest 700 billion dollars between 2021 and 2030 in its development. This will involve the creation of new connections, the full electrification of the network, and the introduction of high-speed trains.
At the same time, a massive improvement of the road network is expected, an area where India is lagging. This presents an incredible opportunity for the country’s car fleet to increase. And with it the potential to grow its own automobile industry.
To put it into perspective, there are 648 vehicles per 1,000 inhabitants in Spain. In the United Kingdom, there are 471 vehicles per 1,000 inhabitants. In China, the world’s largest car market, this figure stands at 196. And in India, there are currently a mere 41 per 1,000 inhabitants.
The development of the country’s infrastructure will allow for greater economic integration between its regions, which will make it easier and more attractive to attract foreign investment. After all, one of the fundamental requirements for the development of a country’s industrial sector is a good transportation system.
7) Stable legal and fiscal framework
When it comes to investing in emerging markets, one of the aspects that must be considered is the political and legal risks involved. In other words, it is in our best interest to put our money in places where laws are clear, stable, and predictable. And that is true for things like property rights, taxes, and regulations.
In this regard, investing in India poses less legal and political risks than most other emerging markets in the world. There are several reasons for this.
First, India was a British colony for a long time. And British influence is still present in many laws and institutions. For example, India was the first Asian country to have a stock market.
Secondly, India is a democracy. While it is not a perfect system, it does guarantee that political power is distributed among different governments (central, regional, and local) and that politicians change over time. Thanks to that, investing in India does not expose us to the risk of a dictator taking over the country and overhauling the entire legal framework.
And third, India’s leaders are aware of the country’s potential and the importance of attracting investment. It is for this reason that efforts are being made in order to create a more favorable framework that will encourage foreign companies and individuals to come and invest.
How to invest in India
We have already discussed the reasons why we should invest in India. Now let us talk about how to do it. This can be done in one of two ways: by investing directly in shares of Indian companies or through passive vehicles such as ETFs:
The Indian stock market is very broad and diverse, just like the country itself. However, you should keep in mind that finding information on small Indian companies is no easy task. Because of that, you can either focus on the larger ones or be willing to do more research work than the average investor.
If you choose to invest directly in large Indian companies, some of the most important ones are the following: Reliance Industries (oil and gas), HDFC Bank (finance), Infosys (technology) and Tata (industrial conglomerate).
ETF or Index Funds
Without a doubt, the easiest way to invest in India is through an ETF or index fund. Although it is possible to do it by choosing an emerging markets ETF or fund, remember than India only represents about 10% of that. And that is not much.
For this very reason, the best option would be to choose an ETF that invests exclusively in India. To that end, you can look for ETFs tracking one of the following indices: the S&P BSE Sensex, the Nifty 50, or the MSCI India.
The S&P BSE Sensex is published by Standard & Poor’s and the Bombay Stock Exchange and includes 30 of the largest listed companies.
The Nifty 50 is an index managed by the Indian Stock Exchange. It is made up of 50 of the largest companies in India.
Lastly, the MSCI India index includes all Indian companies that are part of the global MSCI Emerging Markets index.
India is one of the countries with the greatest potential in the world. It is true that it will take a long time for the country to reach the level of prosperity enjoyed by developed countries today. But therein precisely lies the opportunity. Investing in India will allow us to benefit from that economic growth.
Remember that investing in emerging countries usually carries a higher level of risk than investing in developed countries. This is because they tend to be more vulnerable to economic shocks and may suffer currency devaluations.
However, if we invest for the long run, we should not worry about fluctuations that may occur in the short and medium term. The important thing is where our portfolio will be in 10, 15 or 20 years.
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And if you want to learn it all about stock market indices in India, check out this post:
Top 7 Stock Market Indices in India