By Alexis Roach, senior vice president, emerging market sovereign analyst, and the Emerging Markets Debt team at Payden & Rygel
As the world’s fifth-largest economy and most populous democracy, India is increasingly important for global investors and policymakers.
Since 2000, GDP growth has averaged 6.2% in the context of a unique development model. Unlike many fast-growing emerging market (EM) economies, which relied on manufacturing as their engines of development (China, Japan, South Korea, etc.), India’s service sector is its growth engine. Equally impressive, in the last decade, India maintained its healthy growth rates in a context of relative macro stability.
Since 2000, India’s economy has been one of the fastest growing in the world. The country moved from the world’s 13th-largest economy in 2000 to the fifth largest in 2023 (in nominal terms). In purchasing power terms, the best approximation of transaction volume in the economy, India is the third-largest economy globally. In 2000, India’s economy contributed a modest 4% to global GDP growth. By 2023, its growth accounted for 18% of global growth.
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One factor that works in India’s favour is a growing diversification of global supply chains. In what is known as the “China Plus One” strategy, businesses are increasingly moving away from an overreliance on China. As companies seek to diversify their supply chains, the question is how much India stands to benefit vis-à-vis its emerging market peers.
A constellation of an improving investment environment, better infrastructure, a growing high-skilled workforce, and government subsidies have set the stage for India’s high-end manufacturing to increase its competitiveness. There have been some successes, with companies such as Apple and Samsung establishing phone factories in India, as well as progress in attracting “green-sector” manufacturing, such as electric vehicles and solar power.
ESG considerations
The environmental, social, and governance backdrop can present both risks and opportunities. On environmental policy, India has moved quickly to adopt renewable power, with capacity doubling in the last five years; non-fossil fuel generation capacity now accounts for 44% of the total. Public health, energy self-sufficiency and import cost considerations motivated the government’s green energy development policy, which has presented investment opportunities. On social indicators, extreme poverty and infant mortality have shown steady declines in recent decades; notwithstanding, progress is uneven.
From a governance perspective, Prime Minister Modi remains popular in the context of solid growth and innovations like digitalisation, which have positively impacted the lives of many. However, there are concerns on two fronts: a) Prime Minister Modi’s concentration of power, and b) the BJP’s Hindu-centric stance and their handling of Muslim rights. These issues present potential political risks for investors.
Opportunities in Indian fixed income
The economic backdrop in India makes for a compelling investment opportunity. India’s stockmarket has attracted international attention as one of the top-returning markets over the past 10 years. However, we focus on an up-and-coming corner of the Indian market — public fixed income.
An essential part of the story for fixed income investors is India’s stable, investment-grade credit rating. India achieved investment grade status from Moody’s in 2004 (Baa3), S&P in 2007 (BBB-) and Fitch in 2006 (BBB-). The ratings have hardly changed over this time, though S&P moved to a positive outlook in May 2024.
Foreign investors can access both sovereign and corporate debt markets in India. One interesting market characteristic is that India does not issue foreign currency-denominated sovereign bonds; of the 15 largest developing countries, India is the only one with this distinction.
Instead, the local currency debt market is large and liquid because the Indian government has funded itself in rupees for decades. India has also not sought out foreign capital for government financing; foreign holdings of Indian government bonds are low at about 2.5% of debt outstanding (June 2024).
There have been new developments, in particular JP Morgan’s decision to add India’s government bonds to its mainstream EM local bond index, the GBI-EM Global Diversified. Indian bonds began phasing into the index in June 2024 and will increase to the maximum 10% index weight by April 2025.
Positive prospects
India provides interesting opportunities from several angles, ranging from the economic to the geopolitical. We are comfortable with the macroeconomic framework and see government policy supporting the private sector in the medium term. In turn, growth should remain strong in the next several years. It is noteworthy that the question is not whether growth will slow, but how much growth could accelerate if everything comes together, including a continuation of the reform agenda.
On the geopolitical front, India’s increasing importance is already evident in company decisions to diversify supply chains to hedge against potential China risk, as well as deeper strategic partnerships with countries like Saudi Arabia and the UAE. Given the trends in place, it is easy to imagine that India’s prominence on the global stage will continue to rise.