Article

India’s big ambitions

The G20 spotlight means people are thinking about India as an alternative investment to China.

| 5 min read

Indian Prime Minister Narendra Modi is ambitious for his country. He has remained popular, has presided over substantial economic growth and will enjoy hosting the G20 meeting of heads of state and government from countries accounting for 80% of world output and two-thirds of the world’s population.

Mr Modi’s recent successes include the well-publicised landing of an Indian spaceship on the moon and helping to craft a deal over new members for the BRICs club of developing economies. In his enthusiasm to portray a positive image of his country, Mr Modi has come in for some criticisms of the tidy-up he organised for the visitors.

India does not come with the same problematic governance issues an autocratic China.

For some portfolios which can take the risks, India is emerging as an alternative to investing in China. Those looking for exposure to faster-growing, large emerging-market economies with plenty of scope to build major profitable companies will consider it and its valuation. However, with the Sensex index of Indian shares trading at 24 times the earnings of quoted Indian companies, it is not cheap. But it has for some time commanded a premium in anticipation of superior growth. The current upwards move in inflation should prove temporary but needs watching. Indian growth will be slowed a bit by the general slowdown in advanced economies but mainly relies on the domestic market as a driver.

India does not come with the same problematic governance issues an autocratic China poses to those taking the wider moral issues in investing seriously. Whilst there will be rallies and runs in Chinese shares when growth and sentiment picks up, the performance will remain heavily influenced by the Chinese government, which does not have the interests of Western investors high on its list of priorities.

Chinese shares, as measured by the Shanghai Index, are still way below the levels they reached in 2007, and well below the more recent peak in 2015. Despite many years of solid growth in the economy, Chinese share prices have been more responsive to periods when the authorities allow a build-up of speculation based on credit and have fallen when they deflate that despite the good growth. Today there are the added hazards of trade disputes and a technology war with the West. India sits carefully between the two blocs, seeking the best deals from both the USA and China.

The Indian economy

India’s economy is forecast by its central bank to grow 6.5% this financial year and 6.6% next. Second-quarter 2023 growth was an annualised 7.8%. The economy is now the fifth largest in the world, measured at $3.385 trillion last year. Given the size of the population – at 1.4 billion – it is well placed to make further advances, in due course challenging the economic size of Germany and Japan.

Inflation rose swiftly to 7.44% in July reflecting a surge in food prices. Food is 45% of the consumer price index and was affected by variable rainfall levels around the country and a surge in prices of some home-grown products. The central bank expects inflation to average 5.4% in the current year, just within its target range of 2-6%. It has hiked interest rates from 4% in April 2022 to 6.5% today to signal the need to restrain price rises. India has a fast-growing middle class, rising standards of educational achievement and substantial investment in infrastructure and industry.

There is still plenty of scope to mechanise agriculture more, to create more manufacturing activities in India and to build on established success at operating services for export using modern computing and communications technologies.

Mr Modi is well entrenched as prime minister

Mr Modi retains high personal poll ratings ahead of the April to May 2024 general election. He typically has an approval rating of around 75%. His core Hindu nationalist supporters remain supportive and are keen to rename their country Bharat to distance it more from its past under the Raj.

The alliance of opposition parties calling themselves India as a contrast to the Hindu nationalist position are still behind Modi’s party in the opinion polls. World markets have got used to Mr Modi’s approach to government which is sufficiently pro-investment and business to avoid major tensions. Billed as a reformer he has found it difficult to change quickly given India’s bureaucracy and entrenched interests. He has imposed a new India-wide sales tax to streamline a complex system of state-by-state taxation, has driven through infrastructure improvements, liberalised some sectors for inward investment and increased the use of bank accounts by reforming the cash-based system. Growth has been good and the arrival of India as the world’s fifth-largest economy with more to come has strengthened his and India’s standing in the world.

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India’s big ambitions

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