Investing in India: The Rise of a New Asset Class

India has been one of the best performing markets in the world over the past 25 years. During this period, the MSCI India Index has delivered a 9.70% CAGR versus 7.70% for the S&P 500 Index, amounting to 200 basis points of excess returns per year. India’s average annual excess returns against other global and emerging markets indexes are even higher. Just as importantly, this outsized return was achieved with less risk: India’s beta against the MSCI EM Index is only ~0.5.

To put this outperformance into perspective, an investment of $10,000 in the MSCI India Index 25 years ago is now worth roughly $101,198 versus the S&P 500 at about $63,876 and the MSCI EM Index at roughly $43,206. We believe India will continue to outperform for the next several years due to a multitude of factors we explore in this piece.

India has outperformed the global/EM indexes over most time periods

Source: Morningstar Direct and FactSet PA
The performance data quoted represents past performance. Past performance is no guarantee of future results. Current performance may be lower or higher than the performance data quoted.

India benefits from a unique blend of economic, social, and geopolitical forces that we believe makes it a standout investment destination and warrants capital allocators to view the country as a rising new asset class.

India is the world’s largest English-speaking democracy and most populous country, with an estimated 1.45 billion people.¹ It is also the fastest growing large economy in the world, with a GDP of ~$4 trillion expanding 6% to 8% per year in real terms and 10% to 12% in nominal terms. Similar to the U.S., over 60% of India’s economy is driven by domestic consumption, making it less dependent on exports and relatively insulated from global downturns.

India also has attractive demographics. The median age is 28, compared with 38 in the U.S. and 39 in China. Looking at age distribution from a different angle, individuals under the age of 25 account for more than 40% of India’s population, while those aged 65 and older comprise only 7%.² We expect such demographic tailwinds to support higher economic growth for at least the next two to three decades. Furthermore, India’s current GDP per capita is only ~$2,700. These levels are similar to where China was in 2007, suggesting a multi-decadal runway of growth ahead.

The country also benefits from a rising middle class. There are 300 million-plus Indians in the middle class -- almost the entire population of the U.S. – and this number is expanding. A strong middle class provides a stable consumer base, a source of entrepreneurship, a skilled and educated workforce, and increased civic engagement demanding better governance and infrastructure, all of which can help support a robust, stable, and expanding economy.

While the demographic dividend plays an important role in India’s growth trajectory, we believe productivity-enhancing economic reforms together with geopolitical tailwinds are the most important structural growth drivers kickstarting a virtuous investment cycle in the country.

Productivity-enhancing economic reforms

• Goods and Services Tax (GST)
• Corporate tax cuts
• Production Linked Incentive (PLI) scheme
• Demonetization
• Bankruptcy code
• Real Estate (Regulation and Development) Act (RERA)
• Power infrastructure reforms

When Narendra Modi was elected as India’s prime minister in 2014, he embarked on a sweeping set of economic reforms aimed at modernizing the country’s economy with the ultimate goal of a “Developed India.” At the time of Modi’s election, growth was sluggish, and a series of high-profile corruption cases had led to a loss of investor confidence in the Indian economy. Over the ensuing decade, the Modi government implemented significant productivity- enhancing economic reforms that positioned the country squarely on the path toward the prime minister’s ultimate goal. In the 10 years from 2014 to 2024, India’s per capita GDP rose by over 70% from US$1,560 to ~US$2,700, broadly reflecting the accelerating economic development in India.

Each element of Modi’s reform agenda plays a different role in driving India’s growth. One of the most transformative has been the Goods and Services Tax (GST), which simplified the tax code by merging several local and state levies into a single GST tax. This reform levels the playing field for organized, tax-paying entities (e.g. corporations) and unorganized, non-tax-paying businesses (e.g. suppliers or vendors), accelerating the formalization of the economy.

Before GST, a transaction between an organized and unorganized player was typically conducted in cash, for which there was no tax audit. With the implementation of GST, the organized entity now collects a GST tax from its customer. To receive a tax credit/offset, the company is required to submit an official bill of materials from its vendors. This forces non-tax-paying vendors to digitize and formalize, thus becoming part of the taxed economy, or lose market share and go out of business. As a result of the GST reform, over six million small and medium-sized businesses have entered the formal economy, leading to higher tax collections. Over the past five or so years, GST tax collections have almost doubled, which the government has reallocated toward productivity-enhancing infrastructure spend such as railways, roads, airports, etc.

Another important economic reform is the Production Linked Incentive (PLI) scheme, which provides attractive tax subsidies for corporations to establish greenfield manufacturing and expand brownfield operations in the country. The program, launched in 2020, offers 4% to 6% of incremental sales as a financial subsidy to entities that commit to domestic manufacturing in industries such as electronics manufacturing, defense, textiles, healthcare, and semiconductors.

Given such favorable incentives, India has become a top destination for global corporations seeking to diversify supply chains ex-China, creating a virtuous investment cycle in the country.

Other reforms include 1) the reduction of corporate tax rates from 35% to 25%; 2) the Real Estate Act, designed to improve corporate governance in an industry that had been rife with issues of delays in project delivery, lack of transparency, and fraud; and 3) power infrastructure reforms to address high financial losses, improve access and availability of electricity, and increase the use of renewable energy.

Geopolitical tailwinds

India has been a key beneficiary of tectonic shifts in the geopolitical landscape, especially in the aftermath of the Ukraine war and amid rising tensions between the U.S. and China. India’s status as the world’s largest English-speaking democracy and its strengthening economic and military ties with Europe and the U.S. have made it a natural ally and strategic partner to counterbalance China. As businesses in the U.S. and Europe seek to reduce dependency on China, India is becoming a top destination for supply chain diversification.

Apple Inc. is an example of how geopolitical forces are driving businesses to India. Apple has historically sourced almost all of its iPhones from suppliers in China. However, the U.S.-China trade war that intensified over the past few years has prompted Apple to push its suppliers to relocate their supply chains outside of China. To incentivize the move of iPhone production to India, the Indian government offered subsidies under the PLI scheme to Foxconn, Apple’s main supplier. As a result, the percentage of iPhones produced in India has grown significantly, from about 2% three years ago to 7% in 2023 and an estimated 14% in 2024. While the shift to Indian manufacturing has not been without its challenges, Apple expects to produce ~25% of its iPhones in the country in the foreseeable future. We are seeing this pattern repeated with other global companies, which stand to benefit not just from an export perspective but also from a strong local demand perspective.

India is on its way to becoming one of the world’s most digitally advanced countries, driven by government-sponsored and private sector initiatives, including the “India Stack,” the Unified Payments Interface (UPI), and accelerating smartphone penetration. The democratization of high-speed mobile broadband data led by companies such as Reliance Jio and Bharti Airtel are kickstarting a digital revolution in the country. Mobile data rates in India are among the lowest in the world, with monthly average revenue per user (ARPU) at just $2 to $3. Access to cheap data plans is empowering the more than 700 million Indians with smartphones, who are increasingly ordering food, buying goods, and making payments online. In our view, India’s digital ecosystem is in early innings of its growth trajectory and is likely 10 to 15 years behind China, with promising investment opportunities along the way.

The “India Stack” or “JAM Trinity” is a trio of technologies the government has deployed to overhaul and modernize the country’s digital infrastructure to drive financial inclusion. The initial element of the stack, “Jan Dhan,” provided millions of previously unbanked citizens with access to banking services by offering a basic bank account for savings, lines of credit, receipt of remittances, and other personal finance needs. In addition, every adult citizen received an Aadhaar number, a biometrics ID that associates individuals with their bank account. Finally, with India now the world’s second-largest mobile phone market, the government has emphasized mobile connectivity as a key element and designed the country’s digital landscape around smartphones rather than laptops and desktops. This technology stack forms the bedrock on which India has built its digital-first future.

JAM enabled the rise of UPI, a government-sponsored digital payments infrastructure that has made India the world’s largest source of digital payment transactions. UPI allows customers to pay enrolled merchants simply by scanning a QR code without incurring the fees charged by credit card vendors. The introduction of UPI has accelerated the penetration of cashless payments. Over the past five to six years, digital payments via UPI have increased more than 25- fold, from 5% of GDP to 85% today.

UPI has many benefits. It reduces fraud and eliminates the inconveniences of a cash-centric society. Previously, Indian vendors had to make multiple cash deposits at banks throughout the month. With UPI, they now know exactly how much they are being paid and can trace all transactions easily.

UPI is also creating a multiplier effect, with all data from digital payments now mapped and made available to banks. By leveraging the data, banks can underwrite loans to small shopkeepers for the first time in India’s history, effectively reducing the cost of borrowing from informal channels from as high as 50% to 100% to 20% to 25%.

Finally, the data collection enabled by UPI is empowering small businesses to expand, hire more people, and, in turn, process more transactions.

Together, these technology initiatives are also helping reduce corruption. In the past, the Indian government relied on local officials to distribute cash subsidies to those in need, which often resulted in leakage. With the introduction of Aadhaar and UPI, government subsidies are now directly transferred to individuals’ bank accounts, effectively eliminating opportunities for welfare leakage at the local level. The Indian government now delivers about $35 billion annually of capital subsidies directly and efficiently to citizens in need, boosting consumption and economic growth.

Digitization
Consumer Lending
Financialization of Savings
Global Security
Formalization of Economy

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

Digitization

As discussed, we believe India is on its way to becoming one of the world’s most digitized countries. In addition to telecom giants Reliance Jio and Bharti Airtel, which provided the bedrock foundation of digitization in India, other players, including cloud network providers and e-commerce, food delivery, and fintech businesses are starting to leverage the opportunities opened by digitization.

Tata Communications (TCOM) and Zomato are two examples of our investments within the digitization theme. TCOM is the world’s leading sub-sea fiber network operator, carrying about 25% of global internet routes. Under the leadership of Indian conglomerate Tata Group, the company has transformed from a voice services provider to a data enterprise solutions vendor with a key focus on small and mid-sized clients. Given its status and scale, we believe TCOM is well positioned to benefit from increasing demand for data enterprise services in India and across the world.

Zomato is India’s leading online food delivery platform, with approximately 55% market share. In our view, India’s food delivery business is still in its infancy and should continue to scale thanks to a growing middle class, rising disposable income, higher smartphone penetration, and shifts in consumer preferences driven by a technology- savvy, younger population. The industry has become a duopoly between Zomato and Swiggy, which bodes well for the profitability and scale of both companies. Zomato is also a dominant player in India’s high-growth quick commerce industry that is disrupting incumbent e-commerce giants such as Amazon and Flipkart.

Consumer lending

Indian households have historically carried very low debt. However, we believe the appetite for credit is changing, with growing demand for consumer credit and related services driven by a rising middle class with higher disposable income. We see opportunities for well- managed private sector financial institutions, such as Bajaj Finance and ICICI Bank, to take share from legacy public sector banks that dominate the industry but are unable to offer reliable customer service and are typically mismanaged and struggle with capital constraints and asset quality issues.

Bajaj provides housing loans, consumer durables financing, and small- to medium-sized enterprise credit. With the help of its powerful data analytics platform, we believe Bajaj is transforming into India’s largest omnichannel/digital player by creating an ecosystem of apps offering credit, insurance, brokerage services, and wealth management products. ICICI Bank is India’s second largest private sector bank. In our view, its significant investments in technology place it as a leader in digital banking, which should drive market share expansion and improve efficiency.

Financialization of savings

Indian households have a long tradition of saving a significant portion of earnings for future security. Historically, the bulk of these savings has been invested in physical assets such as real estate, gold, and jewelry. With improving financial literacy in the country, we are now seeing a structural shift of household savings into financial products and services, including equities, mutual funds, and life insurance and related savings products. Equity ownership in India is still very low, similar to the U.S. in the 1980s, which leads us to believe the financial savings story in India is just beginning, creating a multi-year growth opportunity.

We see SBI Life Insurance (SBIL), India’s largest private sector insurer; and 360 One, India’s leading wealth management firm, as two businesses that should benefit from this structural shift. SBIL’s ability to leverage India’s largest bank branch network through its parent entity – State Bank of India -- is a key advantage in selling its products. 360 One is well positioned to profit from the emerging high-net-worth and ultra-high-net-worth classes in India.

Global security

As discussed above, global companies are increasingly looking to diversify their supply chains ex-China. With the government actively encouraging local manufacturing through attractive tax incentives such as PLI, India is increasingly positioned as the next major manufacturing hub, and we are starting to see instances where companies are looking to capitalize on this opportunity.

Dixon Technologies, a contract manufacturer of consumer products, including mobile phones, televisions, washing machines, and LED bulbs, stands to be a key beneficiary of the government’s PLI programs in these industries. Kaynes Technology, a supplier of electronic components for electric vehicles, railways, medical devices, and defense, is also poised to benefit from the government’s push for import substitution. Kaynes’ recent entry into outsourced semiconductor assembly and testing and smart electricity meters should open additional growth opportunities for the company.

Formalization of the economy

Economic reforms such as GST are driving formalization of the economy and accelerated market share gains for large, organized players. In addition, a structural shift in consumer preferences toward better quality and branded products, especially in the aftermath of the pandemic, creates market opportunities for consumer-oriented businesses. Trent, the leading direct-to-consumer fast fashion brand in India; Tata Consumer Products, a consumer goods company with leadership in branded tea and salt; and Titan Company, India’s largest branded jewelry retailer, are three companies we believe enjoy significant growth prospects tied to this shift.

Investor confidence in India’s growth story, especially after Modi’s reelection for a third five-year term starting in June 2024, has driven a re-rating of stock valuations compared to other EM countries. Nevertheless, we see plenty of long-term upside for bottom-up investing in India, and we believe the recent correction in Indian equities create an attractive entry point for long-term investors. We would argue that the unparalleled visibility and durability of earnings growth in India support these valuations, as evidenced by India’s outperformance over the past two-plus decades. In addition, investors may be overlooking other key factors discussed in the piece, such as digitization, geopolitical tailwinds, and growing domestic investment in equities, all of which should boost earnings growth and provide a corresponding lift to equity prices.

In our view, India is also a market with significant asset mispricing. For example, a couple years ago, Trent had a seemingly rich P/E ratio of almost 90x. At the time, sell-side analysts were basing their models on the assumption of 50 to 60 annual store additions under its fast-growing Zudio franchise, which had about 350 stores. Our discussions with local industry experts and competitors convinced us that Trent would expand the franchise at a much faster rate to reach 1,000-plus stores over the ensuing four to five years, indicating a material mispricing, in our view. Trent has since expanded its Zudio footprint to close to 600 stores over just the past two years and its stock price has nearly quadrupled.

Conclusion

We are excited about the multi-decadal growth opportunity that lies ahead for Indian equities. Despite being one of the best performing markets in the world over the past 25 years, India’s value creation journey is still in early innings, in our view. As productivity-enhancing economic reforms are kickstarting a virtuous investment cycle in  the country, we expect double-digit earnings growth and stock price appreciation to sustain over the long term. In recent years, India’s growth potential has attracted market attention, and inflows into India-dedicated strategies have increased. In fact, AUM of India- dedicated strategies (domiciled in the U.S.) is currently larger than that of MSCI Asia ex-Japan strategies. Yet, from a global perspective, we submit that most allocators are still underinvested in India.

Of course, there are always risks. In addition to an unexpected result in 2029 when Modi is up for reelection, potential risks include geopolitics, climate change, and oil and gas prices, among others. However, we are confident that India’s reform-driven multi-year opportunities will continue to play out over the long term regardless of any short-term setbacks.

We also believe an active approach is the best way to capture India’s growth opportunity. The country’s economic reforms are driving consolidation and market share gains for the best-managed, most efficient companies, which is reflected in the outsized earnings growth for these businesses. In addition, we routinely encounter asset mispricing in this market, especially in small- and mid-cap stocks where there is limited sell-side coverage. Finally, numerous attractive publicly traded companies are not included in the MSCI India Index, leaving them under the radar. We believe an active manager can navigate the complexities and risks specific to India while doing the in-depth, on-the-ground research needed to find and invest in the most promising opportunities. A passive investment vehicle, in contrast, must own the entire index regardless of quality and without the ability to size an investment according to its prospective returns, which makes it suboptimal to active investing,   in our view. We are excited about the significant growth potential of India and believe it will become a dedicated asset class over time.