India’s post-election growth outlook and investment opportunities

Implication of election results

India is on the path to becoming the world’s third-largest economy by 2027, according to the International Monetary Fund (IMF).¹ What are the implications of the electoral outcome on the country’s economy and stock market? We believe that reforms are entrenched, and India continues to be a long-term structural growth story. 

Long-term equity market outperformance

Over the past three years through April 30, 2024, India’s stock market, as measured by the MSCI India Index, has been performing well in absolute terms and relative to the MSCI Emerging Markets Index and the MSCI All Country World Index (ACWI).² India’s outperformance against its emerging market peers also extends further to nearly 30 years from May 31, 1994, through April 30, 2024.³

The long-term outperformance of India’s stock market mirrors India’s gross domestic product (GDP) growth. India’s share of global GDP has increased from 1.1% in 1993 to close to 3.5% in 30 years.⁴ The rise of India is clearly not a short-term phenomenon, but something that has been building up steadily over a longer time frame.

Key economic trends

Since the Indian stock market has had a strong correlation with economic growth, we see several key trends that should stimulate India’s economy.

• Rising incomes. Rising incomes combined with a young population should drive consumption. We expect India’s wealthy and middle-class populations to expand by 400 million people.⁵ In particular, the number of people in India’s wealthiest class could grow three-fold, and this will mark the creation of a new consumption category, the premium category, which India has not had much of so far. Consequently, we see the consumption of premium products and services continuing along a rapid trajectory.
• Structural reforms. India has long been an interesting market for global brands, but to create more jobs, it has needed to attract investments. In the past 10 years, the government has implemented structural reforms to strengthen the country’s governance and investment frameworks—improving India’s business climate and making it an easier place to do business. Examples include the e-Way Bill system that has reduced logistics costs and unified India as investment destination, the Jan Dhan-Aadhar-Mobile (JAM) or “India Stack” that has enabled better targeting of subsidy programs to the end beneficiaries, cuts to corporate taxes rates that have brought the rates on par with other manufacturing countries, and debt resolution through the creation of the Insolvency and Bankruptcy Code.
• Digital transformation. One of the notable stories of the past decade has been India’s digital transformation. In 2015, the country’s Internet penetration was among the lowest in the world, and that stunted the development of opportunities such as e-commerce. Today, India has among the largest populations online globally. Ultra-low-cost-data tariffs and the widespread adoption of the Unified Payment Interface (UPI) has led to a sharp growth of online shopping of goods and services.
• Manufacturing upgrades. India has not historically been known for manufacturing due to its difficult business environment. In 2022, manufacturing contributed only 13% to GDP compared to China, Vietnam and Bangladesh, where that figure was around 20%–30%.⁶ Structural reforms, infrastructure investments, production-linked incentives and geopolitical factors are changing the outlook for Indian manufacturing. We now see opportunities associated with India’s manufacturing upgrades. For instance, the significant increase in mobile phone production and exports is an early sign of success for the broader production-linked incentives scheme. Thus, we are optimistic about India’s emergence as a global manufacturing hub in the future.
   

Global risks

The global liquidity and interest-rate cycles are in flux. Sharp changes can lead to market corrections. Additionally, the geopolitical environment is volatile, with numerous potential flashpoints. We believe the world is entering uncharted waters on this front.

India’s long-term growth story

Regardless of the elections, we believe a confluence of factors has put India on a strong foundation for long-term growth. The country has seen a combination of policy and political will that we believe would result in continued reforms and a period of macroeconomic stability. The stage has already been set for exports to drive growth and a new class of consumers to emerge.