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India: The Emerging Giant with a Promising Economic Future

Introduction to India’s Growth Story

In recent years, India has emerged as one of the most compelling growth stories on the global stage. The country’s improving economic fundamentals, coupled with a series of pro-market reforms initiated by Prime Minister Narendra Modi’s administration, have captured the attention of investors worldwide. This newfound interest in India’s potential is understandable, given the nation’s vast population of 1.4 billion people, a growing working-age demographic, and an expanding middle class. These factors collectively paint a promising picture of a country on the brink of significant economic transformation. However, the Indian stock market has recently experienced a setback, with the BSE 500 index shedding 19% from its peak in September, raising questions about whether this downturn signals a temporary pause or a more concerning shift in India’s long-term investment outlook. To address this, it is essential to delve into the economic backdrop, the reforms implemented by the Modi government, the associated risks, and the implications for the equity market.

The Economic Backdrop: Recent Trends and Government Measures

India’s economy, while still the fastest-growing among major economies, has shown signs of moderation. The quarterly GDP growth dipped to 5.4%, its weakest pace in two years, with the government projecting a further slowdown to 6.4% for the current fiscal year, down from 8.2% in 2023-24. In response to this economic soft patch, the Reserve Bank of India (RBI) recently shifted its monetary stance, cutting the benchmark repo rate from 6.5% to 6.25%, marking the first reduction in nearly five years. This move aims to bolster economic activity. Additionally, the Modi administration has introduced tax breaks for middle-class households to stimulate consumption, showcasing the government’s commitment to employing both monetary and fiscal measures to reignite growth. These steps are part of a broader strategy to address the current downturn and ensure sustained economic development.

Reforms and Progress: A Decade of Transformation

India’s journey toward economic transformation began a decade ago with the election of Prime Minister Narendra Modi. Over the past ten years, Modi’s government has enacted a series of bold reforms that have started to yield positive results. One of the most significant steps was the demonetization policy introduced in 2016, which aimed to curb the underground economy, tackle corruption, and promote digital transactions. This move led to a rapid increase in bank account ownership, rising from less than 50% in 2006 to 96% by 2021. The subsequent improvement in tax compliance has positively impacted the fiscal budget, with direct tax revenues growing by 14% to 18% year-over-year in the fiscal cycle following demonetization. A substantial portion of this new tax revenue has been reinvested in infrastructure, with federal government spending on infrastructure rising from 3 trillion rupees in 2016 to 11.1 trillion in 2025. This increased investment is evident in the expansion of highways, improvements in the railway system, and enhancements to the electrical grid, with the average daily electricity supply in rural areas increasing from 12.5 hours in 2014 to 22.6 hours in 2025.

The Make in India initiative, launched in 2014, has been a cornerstone of Modi’s strategy to transform India into a global manufacturing hub. By encouraging domestic production and attracting foreign investment, the initiative aims to create jobs and boost the manufacturing sector’s contribution to GDP from 15% in 2014 to 25% by 2025. To achieve this, the government has introduced reforms to improve the ease of doing business, such as de-licensing industries and simplifying regulatory processes. These efforts have paid off, with India’s ranking in the World Bank’s Ease of Doing Business index improving from 142 in 2014 to 63 in 2019. While these reforms have laid a strong foundation for growth, there are still challenges that need to be addressed to fully realize India’s potential.

Risks and Challenges: Understanding the Hurdles

Despite the impressive progress, several risks and challenges could hinder India’s growth trajectory. One of the primary concerns is inflation, particularly volatile food and beverage prices, which make up 54.2% of the Consumer Price Index (CPI) basket. These price fluctuations have kept inflation above the central bank’s 4% target level. Additionally, the Indian rupee has weakened significantly against the dollar over the past year, increasing import costs. India’s heavy dependence on imported oil and coal, with 88% of its domestic oil requirements being imported, makes the country vulnerable to energy price shocks. A supply disruption in the energy sector could have devastating effects on the economy, impacting both fiscal balances and inflation.

Another significant challenge is the underperformance of the manufacturing sector, which remains below the government’s target of 25% of GDP. Despite improved logistics and regulatory reforms, manufacturing has remained in the range of 13% to 17% of GDP and accounts for just 3% globally, far behind China’s 27.6% share. The inability to meet the manufacturing target is attributed to gaps in infrastructure and a shortage of skilled workers. Logistics costs in India are high at 14% of GDP, compared to 8% to 10% in developed nations. Furthermore, 70% of India’s workforce lacks formal training, with an average hourly wage of just $1.50, posing a challenge as the country aims to move up the value chain in producing high-tech products like electric vehicles and semiconductors. The government is aware of these issues and has outlined measures in the latest budget to address them.

Tariff uncertainty also looms as a potential risk, particularly with the possibility of the U.S. imposing tariffs on Indian goods. As the U.S. is India’s largest export market, higher tariffs on products such as steel, pharmaceuticals, and electronics could reduce competitiveness, leading to job losses and production cuts. This uncertainty could particularly impact the pharmaceutical and textile sectors, where profit margins and market share are already under pressure from competitors like Vietnam. These challenges underscore the need for continued reform and strategic planning to mitigate risks and sustain growth.

Equity Market Correction: Opportunities and Considerations for Investors

The recent correction in the Indian equity market, with the BSE 500 index dropping 13% in dollar terms in 2025, has raised concerns among investors. While valuations have fallen, they remain relatively high at 19.5 times one year forward earnings compared to other emerging markets. However, the strong historical earnings growth provides some justification for this premium. The current price setback may present an opportunity for long-term investors to gain exposure to India’s growth story at more attractive valuations. There are various avenues for investment, including exchange-traded funds (ETFs) like the iShares MSCI India ETF (INDA), which tracks the MSCI India index, and the iShares MSCI Small-Cap ETF (SMIN), focusing on small and mid-cap stocks. Alternatively, actively managed funds such as the Matthews Asia India Fund (MIPIX) or its ETF equivalent, INDE, offer more targeted investment strategies. These funds have experienced declines of 19% to 24% from their six-month highs, reflecting the current market volatility.

With the Modi government’s continued focus on infrastructure and manufacturing development, the prospects for sustained growth remain robust. The emphasis on higher-value-added products like solar panels and electric vehicles is expected to drive employment, increase average wage levels, and boost consumption, all of which are critical drivers of GDP per capita growth. While further valuation corrections are possible, the fundamental growth story remains intact. For long-term investors, the current downturn may be an opportune time to invest in the Indian market, contributing to and benefiting from the country’s ongoing transformation.

Conclusion: Betting on India’s Future

In conclusion, India’s economic journey over the past decade has been marked by significant reforms and progress, positioning it as an emerging giant in the global economy. The Modi government’s initiatives to modernize the economy, improve infrastructure, and enhance the ease of doing business have laid a strong foundation for growth. While challenges such as inflation, manufacturing underperformance, and tariff uncertainties persist, the government’s awareness and proactive measures to address these issues are promising. The recent correction in the equity market presents an opportunity for investors to participate in India’s long-term growth story. As the country continues on its path of transformation, sustained investment in key sectors is expected to drive higher employment, increased wages, and enhanced consumption, ultimately advancing India’s economic development and raising the standard of living for its vast population. Betting on India’s future, with its immense potential and proactive reforms, appears to be a prudent choice for long-term investors seeking growth and diversification in their portfolios.