India is ready for take-off

MANY will have heard the prediction that India will soon become – or already is – the world’s most populous nation, eclipsing China. But population growth is not the only thing taking off in India.

For instance, a growing middle class means more robust travel demand, and the South Asian nation’s airline business and aviation market is now one of the world’s fastest-growing. Analysts expect related government spending to reach nearly US$12 billion by 2025, with plans to modernise existing facilities as well as build 80 new airports over the coming five years.

This June, Tata-owned Air India – the country’s largest international carrier – confirmed a landmark commercial jet order of 470 Boeing and Airbus passenger airplanes.

When US President Joe Biden hosted India’s Prime Minister Narendra Modi for a rare state visit to Washington that same month, he praised the US$46 billion Boeing order as “historic”, noting it was Boeing’s second-largest aircraft order ever.

The two countries have recently begun partnering more closely on several fronts, including defence manufacturing and technology innovation.

Time to shine

We believe this makes it an opportune time to pay closer attention to India and the exchange-traded funds that can offer investors a low-cost and tax-efficient vehicle for tactical country allocations.

Those seeking broad exposure to the Indian economy should note that its equity market – as measured by the FTSE India RIC Capped Index – returned more than 13 per cent over the second quarter of 2023 as investors shrugged off the market’s weak start to the year.

The benchmark is tilted towards financial sector holdings with a 21 per cent weighting. Information technology and energy make up the next two largest sectors, each having about a 12.5 per cent weighting.

Last year, projections for India’s rapid growth set it apart as a frontrunner, due to its ability to diversify into more complex industries.

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The country’s ranking on the World Intellectual Property Organization’s 2022 Global Innovation Index jumped to 40 from 46, out of 132 economies.

The country is also said to have the third-largest tech startup ecosystem globally with increased levels of financing and investment support, according to India’s Ministry of Science and Technology.

Sustained economic expansion benefited India’s financial sector last quarter. And in July, a US$40 billion financial sector mega-merger between Housing Development Finance Corporation, the country’s largest mortgage lender, and HDFC Bank helped the Indian market rally.

The merged entity, with a market capitalisation of roughly US$150 billion, is said to be the world’s fourth-largest bank.

On the social front, the Indian government has aspirations to overhaul its public education system but has a long way to go.

Current national spending on India’s education system is roughly 4.5 per cent of gross domestic product (GDP), according to World Bank data – falling short of Modi’s promise of 6 per cent of GDP.

The majority of Indian youth still lack basic literacy and maths, despite some slight improvement in enrolment figures.

In some cases, however, corporations may be stepping in to assist with higher education needs, especially in the competitive expansion of the back-office processing and high-tech manufacturing arenas.

Two years ago, Taiwanese universities launched a joint initiative with Indian conglomerate Tata, offering courses in electronics to its workers.

Should India be able to expand its skilled labour workforce, it may lure more manufacturing away from elsewhere in Asia, including China, where minimum wages tend to be higher and workers now demand more.

What’s more, the roll-out of the country’s goods and services tax (GST) and growing digitalisation of the economy are said to be bringing more people into the formal economy.

In May, Modi trumpeted the success of the GST in a tweet: “Great news for the Indian economy. Rising tax collection despite lower tax rates shows the success of how GST has increased integration and compliance.”

Investment opportunities

India began setting a solid foundation for a more digital economy over a decade ago with the launch of its national identification programme, Aadhaar, which uses biometric IDs to establish proof of residence. This has yielded many social benefits and been instrumental in advancing digital financial inclusion.

Of course, job creation remains a challenge, but domestic demand has picked up. Indian consumers will have increasing disposable income, and as income distribution shifts, overall consumption stands to see great increases. Goldman Sachs Research has projected India’s GDP will overtake the euro area’s in 2051 and America’s by 2075.

Besides notable infrastructure buildout, financial sector growth and a vast and diverse population, India’s remarkable progress in the clean energy transition is another appealing consideration for investors.

The World Bank recently approved US$1.5 billion in financing to accelerate the development of India’s low-carbon energy sector.

In addition, the International Energy Agency expects India to surpass Canada and China in the coming years to rank as the world’s third-largest ethanol market, after the United States and Brazil.

The writer is head of global index portfolio management at Franklin Templeton