India is poised to become the world’s third largest economy by 2027, surpassing Japan and Germany.¹ For Investors, this means signs of a potential opportunity. India, with expected GDP growth of at least 6% over the next five years, is separating itself from both the broader emerging market cohort and from slower-growing developed markets.² In this paper, we look at the near-term benefits to investors and structural investment appeal of India, weigh potential risks, and discuss ways investors may access India’s growth potential via ETFs.

Structural support

The US$3.4T Indian economy has a lot going for it.³ India is benefitting from mega forces in the form of (1) favourable youthful demographics and (2) rewiring global supply chains amid a fragmenting world. India also stands out amidst a tepid global growth backdrop: its economy is expected to grow by $400 billion per year for the next few years.⁴

Favourable Demographics

India overtook China as the most populous nation in 2023.⁵ But not only does it have a large population, it has a young one, too. Approximately 65% of its population is below the age of 35, and half is below the age of 25.⁶

A youthful population can be advantageous for a country's economic growth and innovation as it typically represents a larger workforce with the potential for higher productivity and increased consumer demand. This demographic pattern in India stands in contrast to developed markets (DM), including the U.S. Even among emerging markets (EM), labour growth is turning downward.⁷

India has the fastest GDP growth in the world

Source: IMF World Economic Outlook, Jan. 2024. Forward-looking estimates may not come to pass.

Geopolitical fragmentation

Rising geopolitical tensions around the world have ushered in a new era of competing economic blocs. As a result, countries that are able to partner across east and west could expand their influence. India is a clear beneficiary of U.S. friendshoring trend, as firms have increasingly moved supply chains there.

India’s government introduced production-linked incentives to encourage manufacturers to establish operations there. This initiative drew $6.5 billion in investment in 2022 and has been one cause of a surge of investment in tech, energy and infrastructure.⁸ Additionally, the removal of certain tariffs in 2023 between India and the U.S. has further incentivized bilateral trade and investment, fostering closer economic ties between the two nations.⁹

Investors are getting more granular

Indian equities have been in demand as investors reconsider their EM allocations. Investors added $4.4 billion into U.S.-listed India focused ETFs in 2023.¹⁰ A combination of earnings growth and quality has helped India double its share of the MSCI Emerging Markets ex-China Index over the past six years.¹¹

2023 flows into India ETFs exceeded total flows into all other EM country ETFs

Source: BlackRock, Morningstar as of12/31/2023. Showing 2023 calendar year flows into India ETFs based on all U.S.-listed ETFs in the India Equity Morningstar Category; EM Country ETFs flows data is based on a list of U.S.-listed international. single country emerging market ETFs (ex-India) from BlackRock Global Intelligence data. EM countries include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

Examining earnings & elections

While Indian stocks tend to trade at higher valuation levels versus broader EM, they are justified by a strong expansion in earnings.¹² Forward earnings are an estimate of a company's earnings for upcoming periods.

Earnings estimates also predict a market with potentially prolonged and stable earnings growth. Analysts expect Indian equities to post 13.8% earnings growth in the next 12 months and 14.4% in the next 18 months.¹³ Longer-term estimates call for 14.5% year-over-year earnings growth by the end of 2026.¹⁴

Over the past two decades, India’s main stock benchmark, the Nifty 50, has offered 15.0% annualized returns in USD terms, more than double the 6.8% offered by the MSCI EM Index.¹⁵

Like at least 64 other countries (plus the European Union), India has a major domestic election taking place in 2024.¹⁶ Their election takes place over six weeks and began on April 19th.¹⁷ As a result, there is a heightened focus on its macroeconomic environment and fiscal policies. Delving into historical trends may offer valuable insights. Examining market performance from 1999 to 2019 reveals a noteworthy pattern in election years: the Nifty 50 has historically tended to exhibit a positive trend six months preceding and following federal elections.¹⁸

Indian stocks tend to rise six months before & after federal elections, based on past data

Source: National Stock Exchange of India, BSE as of Dec. 31, 2023. Based on market performance during all federal elections in 1999 through 2019. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Conclusion

Investors seeking exposure to India have a variety of avenues beyond broad EM investments. For instance, some may opt to tilt their allocations towards EM markets outside of China, thereby increasing their exposure to India. Notably, indexes such as the MSCI EM ex China Index allocate 23.8% to India, relative to the broader MSCI EM Index's 17.7% India exposure.¹⁹ Moreover, for those seeking more precise exposure, iShares provides direct access to Indian equities through country- specific ETFs. It is worth noting that accessing Indian stocks directly can be challenging for some investors due to regulatory complexities and market entry barriers, making the availability of these ETFs all the more valuable. In conclusion, as global markets continue to evolve, investors have an array of options to access India's economy, from regional EM investments to targeted country- specific ETFs, enabling them to navigate regulatory complexities and market barriers while seeking potential opportunities for growth.

Funds to consider