Why is this significant?
India has officially surpassed China in the MSCI Emerging Markets (EM) Investable Market Index (IMI) for the first time, becoming
the country with the highest representation in the index. However, China still retains the lead in the MSCI Emerging Market
Standard Index.
The MSCI Emerging Markets Investable Market Index (IMI) tracks large, mid, and small-cap stocks across 24 emerging markets,
accounting for around 99% of the free float-adjusted market capitalization in each country with a total of 3,355 components.
Why India Is a Preferred Choice for Investors in Emerging Markets?
Context
India has transformed significantly over the past decade, rising from being part of the so-called “fragile five” economies to
becoming the world’s fifth-largest economy.
This transformation can be attributed to:
- Continuous focus on development,
- Structural reforms,
- Anti-corruption measures.
India’s stock market has grown by 46% in the past three years, outperforming the 20% global equities rise and standing in stark
contrast to the -13% decline in broader emerging markets. The only country with comparable performance is the United States.
With global attention now on India, some investors worry if they’ve missed the opportunity. However, with contrasting
views—some seeing India as a future growth engine while others express concern over the rapid market surge—it can be
challenging to find clarity in these mixed narratives.
What’s Fueling India’s Market Expansion?
Labor Advantage
India’s labor force offers significant potential for growth in the manufacturing sector. Over the next two decades, approximately
48 million medium-skilled workers are expected to retire from China and other developed nations, while India is projected to add
over 38 million such workers.
Capital Investments
India is witnessing a surge in infrastructure projects, with $1.7 trillion expected to be invested by 2030. This comes at a time when
global manufacturers are diversifying supply chains due to geopolitical tensions, providing India with an advantageous position for
growth.
Economic Growth and Fiscal Discipline
The government’s focus on high economic growth, accompanied by increased infrastructure spending, is propelling India
forward. Efforts to reduce deficits, as highlighted in the country’s budget statements, are further solidifying its attractiveness to
investors. India’s strong economic fundamentals and rising importance in global indices make it a key destination for long-term
investments.
Political Stability
India’s political stability has bolstered investor confidence in recent years, supporting the nation’s economic progress.
Shift in Global Investment Focus
India has benefitted from the growing global skepticism towards China, which has redirected some investor interest toward the
Indian market.
Obstacles on India’s Path to Growth
Productivity and Reforms
While India’s labor and capital conditions favor growth, long-term progress hinges on productivity improvements through
reforms. Key areas include education and skills training, as 40% of India’s workforce is still employed in primary industries, nearly
double the rate of China. Additionally, India’s urbanization rate (36%) lags behind China (64%), highlighting the need for
enhanced urban planning.
Regulatory Challenges
Efforts to streamline bureaucracy and provide incentives for manufacturing have spurred business investment, but ongoing
reforms will be necessary to sustain this momentum.
Inflation Concerns
Rising inflation poses a short-term risk, potentially leading to stricter monetary policies, increased interest rates, and a
depreciation of the Indian currency.
Geopolitical Tensions
Conflicts such as the Russia-Ukraine war and instability in the Middle East have created trade disruptions and other challenges
for India.
Climate Change
Global warming presents long-term risks to India’s agricultural productivity, biodiversity, and infrastructure, which could affect
future investment prospects.
Analysis: India Surpasses China
Growing Global Attention
India’s increased representation in the MSCI EM index signals growing interest from global investors. As India overtakes China to
become the largest component in the MSCI EM IMI index, it is likely to attract significant foreign investment flows.
India’s Growing Role in Global Portfolios
India is no longer a minor component of global portfolios. Its rise means that global funds may need to increase their holdings in
Indian stocks or exchange-traded funds (ETFs) to reflect this shift.
Potential for Increased Foreign Participation
The rising weight of India in the MSCI index points to a likely increase in foreign investment in the coming months.
Cautionary Note
While a rising index weight often signals strong market fundamentals, it may also indicate market exuberance. In some cases,
this can lead to future underperformance, as witnessed in China. Although India’s situation is different, caution is warranted as
history has shown similar patterns.
India’s rising index weight is backed by positive fundamentals, such as a larger free float and increasing corporate earnings, both
of which are favorable indicators. However, investors should remain mindful of potential risks moving forward.