More Reforms Could Usher in Next Phase of India Growth

India’s economy is already growing at a rapid pace. It’s widely expected Prime Minister Narendra Modi, who came to power with a reform-minded agenda, will win a third term in upcoming national elections. Should he win another five-year term, economic and financial reforms will likely remain centerpieces of the Modi agenda.

That could be constructive for India equities and ETFs such as the WisdomTree India Earnings Fund (EPI). The country has been implementing broad reforms for three decades. Modi picked up that mantle when he took office about 10 years ago. During that decade, India’s GDP growth has averaged 5.6%. But over the past three years, the country has posted the strongest GDP growth in the world.

That period included implementation of a spate of Modi-driven reforms. Those resulted in tangible benefits for India equities. During the three years ending April 24, EPI surged 61.2%. During that time frame, the MSCI Emerging Markets Index lost 19.1%.

Modi Seeking Domestic Diversification

When it comes to India’s economy, outsiders typically look at Bangalore as the country’s epicenter of tech activity and Mumbai as the financial hub. However, the country has 28 states. Many of those are just starting to tap into their economic potential. They could be aided in that quest by further government reforms.

Should those goals be realized, the $2.95 billion EPI could benefit. That’s because the ETF allocates 22.53% of its roster to financial services firms. And those companies are likely to participate in India’s economic diversification efforts. Likewise, EPI also has significant leverage to India’s infrastructure theme. And that’s meaningful as Modi seeks to boost economic activity in some of the country’s more rural states.

“There are signs that this is happening. In February Tata Electronics said it would invest $3bn in a chip plant in Assam, creating 27,000 jobs in the remote state. In May, what will be India’s biggest vaccine plant will open in Odisha, a middling state on the rise,” reported The Economist.

Reform Efforts Key

Reform efforts are essential to India’s economic growth story, which says those plans are also crucial to the country’s financial markets, including the stocks residing in EPI. While some market observers believe the country will eventually eclipse the U.S. and China in GDP terms, the concern is that, without reforms, per-capita wealth in India will still trail those two countries. Reforms could help.

“It will need everything from increasing competitiveness in labour-intensive sectors like textiles to growing prowess in high-tech sectors that blend services and manufacturing. That will require a deeper single market to boost domestic business, more innovation to export at the global frontier, and a stronger state that delivers on basic services to ensure India’s copious young talent is unleashed,” according to The Economist.

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