India’s Economic Rise Demands Investor Attention | ETF Trends

By Angus Shillington, Deputy Portfolio Manager, Emerging Markets Equity

and

John Patrick Lee, CFA, Product Manager

India’s rapid digitization, thriving equity market and demographic trends are creating compelling investment opportunities that we believe investors should be exploring.

India is carving out a unique niche in the global investment landscape and becoming a rising investment destination. Key drivers include:

  • High GDP growth supported by policy tailwinds.
  • Expanding digital sector fueled by increasing smartphone users.
  • Government-led initiatives promoting financial inclusion and fintech.
  • Young, English-proficient workforce.
  • Thriving equity market that has surpassed China’s.

In this blog, we delve into these dynamics, highlighting the emerging trends that make India an investment haven that demands attention.

High GDP Growth Supported by Policy Tailwinds

India is poised to be a financial powerhouse in the coming years, and current trends suggest a promising horizon for investors who are willing to dive into this rapidly expanding market. Here’s why the Indian economy offers a strong growth proposition:

A Roaring Economy: According to the International Monetary Fund (IMF), India is on track to become the third-largest country by GDP within the next five years. Such significant economic growth is not just a reflection of the country’s vast population but is indicative of its robust economic activities, rising consumer base, and the entrepreneurial spirit that thrives within its borders.

Policy Tailwinds in Place: Indian policymakers have laid the groundwork for a conducive business environment. These policy tailwinds, crafted with a forward-looking vision, are instrumental in ensuring that the country sustains prolonged periods of growth. Streamlined regulations, business-friendly reforms, and incentives for both domestic and foreign investors have positioned India as an attractive destination for capital.

A Commitment to Reinvestment: India isn’t just resting on its laurels. There’s a noticeable push across various sectors of the economy to reinvest and rejuvenate. Whether it’s the modernization of its age-old infrastructure, making strides in healthcare access, or addressing the housing needs of its vast population, there’s a palpable momentum.

India Fiscal Policy Priorities Create Positive Feedback Loop

Tax revenues are growing much faster than GDP, and are being invested in areas that promote growth. Tax revenue growth rate is projected to double between 2021 and 2024. Policy spending decisions are highly targeted, leading to infrastructure upgrades, higher employment and higher consumption.

“Transportation” and “Transfer to State” spending is earmarked mostly for new road and rail infrastructure. “Other” category spending growth is declining, and includes inefficient areas like food subsidies, tax administration and other government expenses. We believe that the effects of these policy decisions will lead to an economic growth multiplier, which will be visible for many years to come.

Table showing India’s targeted fiscal spending priorities

* Projected.

** Reflects the average projected growth rate of other categories as of 2024.

Source: VanEck, Bloomberg as of 9/30/2023. Past performance is no guarantee of future results. Not intended as a prediction of future results; projections shown for illustrative purposes only.

India’s Economy is Growing Too Fast to Ignore

Country 2022 GDP (in Billion $)
United States 25,464
China 18,100
Japan 4,233
Germany 4,075
India 3,386
Country Projected 2028 GDP (in Billion $)
United States 32,349
China, People’s Republic of 27,492
India 5,575
Japan 5,344
Germany 5,044

India GDP Rebound has Exceeded Expectations Post-Covid

Line chart comparing GDP of major advanced economies, emerging and developed economies, China and India

Source: IMF as of 7/31/2023. Not intended as a recommendation to buy or sell any securities mentioned herein. Past performance is no guarantee of future results.

Investment Opportunities in India’s Rising Digital Sector

With over 800 million smartphone users and a rapidly expanding population, India presents a fertile ground for digital sector opportunities. This demographic trend is not confined to urban areas, but is also making significant inroads into rural regions, expanding the digital consumer base. The digital revolution in India, fueled by increasing smartphone penetration and internet access, drives growth across various sectors, including e-commerce, digital payments, and online entertainment.

India’s Digital Revolution Drives Growth in Mobile Usage

India's Digital Revolution Drives Growth in Mobile Usage

Source: TRAI, CLSA, World Economic Forums “Future of Consumption in Fast-Growth Consumer Markets: India” as of June 2023.

According to TRAI, India is projected to have over 800 million smartphone users by 2023. This digital transformation is creating a ripple effect across the economy, opening up new avenues for businesses and investors. For instance, the e-commerce market in India is expected to grow exponentially in the coming years. Similarly, the digital payments sector is projected to reach new heights, driven by growth in mobile payments. These trends underscore the vast potential of India’s digital sector, offering a myriad of opportunities for investors. These opportunities encompass both the digital disruptors, in addition to the companies that are facilitating the disruptions (like traditional I.T. consultancy firms).

India’s Government Pushes for Financial Inclusion and Fintech

The Indian government’s initiatives are pivotal in promoting financial inclusion and boosting the fintech sector. The Pradhan Mantri Jan Dhan Yojana (PMJDY), a financial inclusion program, has led to the opening of over 400 million bank accounts as of 2021. Another significant initiative is the Unified Payments Interface (UPI), a real-time payment system that has revolutionized financial transactions in India.

UPI: India’s Public Venmo

UPI: India's Public Venmo

Source: National Payments Corporation of India (NPCI) as of April 2023.

The National Payments Corporation of India (NPCI) reports that UPI transactions crossed 2.3 billion in volume and INR 4.3 trillion in value in January 2021, indicating widespread adoption of digital financial services. These government-led initiatives promote financial inclusion and drive the growth of the fintech sector, creating a conducive environment for investment.

Contextualizing the India Opportunity Set

Here’s a closer look at where India stands amid its emerging market peers.

India is currently the third-largest weighting in the MSCI Emerging Markets (EM) Index, trailing only behind China and Taiwan. This ranking underscores India’s prominence and influence in the global emerging market landscape. India also has a smaller weighted average market cap, is lower yielding and has a 2x P/E.

Relative to the Index, India is overweight energy (primarily due to Reliance Industries), overweight financials, and overweight materials. India is underweight IT (primarily due to Asian companies such as TSMC and Samsung), underweight communication services, and underweight consumer discretionary.

Sector Weight Comparison of MSCI India IMI Index vs MSCI EM IMI Index

Bar chart comparing sector weights

Source: FactSet as of 7/31/2023

Demographic Trends Deliver Competitive Edge to India

India’s demographics make the country well-positioned for unique expansion opportunities, especially compared to China. With a median age of 28 years, India has one of the youngest populations in the world. This young workforce is large and English-proficient, providing a competitive edge over other countries.

India’s Distinct Demographic Advantages vs. China

India's Distinct Demographic Advantages vs. China

Source: worldometers.info, lingoda.com, higherlanguage.com as of June 2023.

According to a recent report, India is the second-largest English-speaking country globally, a significant advantage for businesses looking to expand in the region. In contrast, China’s population is aging, with the median age expected to reach 48 years by 2050. This demographic comparison underscores the potential that India holds as an investment destination. Combining a young, English-proficient workforce and a rapidly growing consumer base makes India an attractive market for both businesses and investors.

India’s Thriving Equity Market Overtakes China’s

India’s equity market has outperformed China’s, and India’s trend of higher earnings growth is expected to continue to outpace China significantly. We believe this long-term outperformance is driven by a combination of factors, including economic reforms, strong corporate earnings growth, and positive investor sentiment. However, a disappointing COVID-19 recovery in China on the back of strict lockdowns in addition to geopolitical tensions may be behind India’s short-term outperformance.

Indian Stocks Outperforming EM, U.S. and China for 20 Years

Indian Stocks Outperforming EM, U.S. and China for 20 Years

Source: Morningstar as of 7/31/2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.

Across multiple benchmark indexes, including both the MSCI India Index and the IISL Nifty 50 Index, India has delivered significant outperformance versus China benchmark indexes, including the CSI 300 and the MSCI China Index. We believe this robust performance of India’s equity market reflects the country’s strong economic fundamentals and investors’ positive outlook toward India’s economic prospects. The expected higher earnings growth further enhances the attractiveness of India’s equity market, making it a compelling investment destination, in our view.

India Earnings Outpacing China

Line chart comparing earnings in India vs. China

Source: Bloomberg as of 6/30/23.

Furthermore, after soaring to extended levels during the COVID-19 pandemic, valuations are finally returning to a more normal range.

Valuations in India Back to Normal

Valuations in India Back to Normal

Source: Bloomberg as of 6/30/2023.

Now Is the Time to Invest in India

India is rapidly transforming into a powerhouse investment hub. Its booming digital sector, combined with a strong equity market, is drawing global attention. Additionally, the government’s committed push for financial inclusion and fintech innovation is further fueling this interest. When compared to China, India’s demographic advantage amplifies its allure. Simply put, we believe India’s strong economic foundations and massive market potential make it an irresistible destination for investments.

For further analysis, download the presentation: Positioning India for the Next Ten Years.

Investing in India with VanEck

VanEck Digital India ETF (DGIN) offers exposure to companies involved in the digitization of the Indian economy.

VanEck Emerging Markets Fund offers access to the structural digital growth story of India for investors seeking technology or growth exposures in emerging markets.

VanEck India Growth Leaders ETF (GLIN) offers exposure to fundamentally sound Indian companies exhibiting attractive growth at a reasonable price.

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IMPORTANT DISCLOSURES

MSCI India Index is designed to measure the performance of the large and mid-cap segments of the Indian market.

IISL Nifty 50 Index measures the performance of the top 50 blue-chip companies on the National Stock Exchange, as per their market capitalization.

CSI 300 Index is comprised of the 300 largest and most liquid stocks in the Chinese A-share market.

MSCI China Index captures large and mid cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs).

S&P BSE Sensex Index is a free-float market-weighted stock market index of the 30 largest, most liquid and financially sound companies listed on the Bombay Stock Exchange.

MSCI Emerging Markets Index: captures large and mid cap representation across 24 Emerging Markets (EM) countries.

MSCI India IMI Index is designed to measure the performance of the large, mid and small cap segments of the Indian market.

MSCI EM IMI Index includes large, mid and small cap companies of emerging markets countries.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

An investment in the VanEck Digital India ETF (DGIN) may be subject to risks which include, but are not limited to, special risk considerations of investing in Indian issuers, equity securities, small- and medium-capitalization companies, communication services sector, information technology sector, emerging market issuers, foreign securities, foreign currency, cash transactions, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified and index- related concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Small- and medium capitalization companies may be subject to elevated risks.

You can lose money by investing in the VanEck Emerging Markets Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks which may include, but are not limited to, risks associated with active management, consumer discretionary sector, direct investments, emerging market issuers, ESG investing strategy, financials sector, foreign currency, foreign securities, industrials sector, information technology sector, market, operational, restricted securities, investing in other funds, small- and medium-capitalization companies, special purpose acquisition companies, special risk considerations of investing in Chinese, Indian, and Latin American issuers, and Stock Connect risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Small- and medium-capitalization companies may be subject to elevated risks. Investments in Chinese issuers may entail additional risks that include, among others, lack of liquidity and price volatility, currency devaluations and exchange rate fluctuations, intervention by the Chinese government, nationalization or expropriation, limitations on the use of brokers, and trade limitations.

An investment in the VanEck India Growth Leaders ETF (GLIN) may be subject to risks which include, but are not limited to, special risk considerations of investing in Indian issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, information technology sector, basic materials sector, health care sector, energy sector, industrials sector, micro-, small- and medium capitalization companies, cash transactions, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and index-related concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Micro-, small- and medium capitalization companies may be subject to elevated risks.

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Originally published 31 October 2023. 

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