India Surpasses China as Top Emerging Market for Investment
08-09-2024
07:36 AM
1 min read
What’s in today’s article?
- Why in News?
- Why India Remains Favorite Emerging Markets Growth Story for Investors?
- Challenges
- India overtakes China – key analysis
Why in News?
- India has overtaken China in the MSCI Emerging Markets (EM) Investable Market Index (IMI) for the first time, becoming the largest country by weight. However, China still leads the MSCI Emerging Market Standard Index.
- The MSCI Emerging Markets Investable Market Index (IMI) captures large, mid and small cap representation across 24 Emerging Markets (EM) countries. With 3,355 constituents, the index covers approximately 99% of the free float-adjusted market capitalization in each country.
Image caption: MSCI EM IMI
Why India Remains Favorite Emerging Markets Growth Story for Investors?
- Background
- Over the last decade, India emerged from being a “fragile 5” economy to become the fifth-largest economy of the world.
- This is driven by a continuous focus on development, a range of structural reforms and anti-corruption initiatives.
- India's stock market has surged by 46% over the past three years, outpacing global equities' 20% gain and the -13% decline in emerging market equities. Only the U.S. has performed similarly.
- This strong growth has drawn global attention, prompting some investors to question if they've missed the opportunity.
- With mixed headlines either praising India as the next growth engine or expressing concern over the rapid market rise, it becomes difficult to navigate the competing narratives.
- Over the last decade, India emerged from being a “fragile 5” economy to become the fifth-largest economy of the world.
- What’s driving the Indian market?
- Labor
- India’s labor force underpins exciting prospects for manufacturing growth.
- According to Bloomberg, over 48 million medium-skilled workers, largely in the manufacturing sector, could retire from China and developed economies from 2020-2040.
- On the other hand, India could add over 38 million such workers.
- Capital
- With a surge of infrastructure projects underway and $1.7 trillion expected to be invested by 2030, India is well-positioned to capitalize on these inflows.
- This is especially timely as global manufacturers seek to diversify supply chains due to rising geopolitical tensions, creating a strong growth opportunity for the country.
- Economic growth and fiscal prudence
- The government’s focus on high economic growth with increased spending on infrastructure is helping India maintain a rapid pace of development.
- India’s renewed focus on bringing down the deficits, as evident from Budget statements, also makes it an attractive destination.
- The country’s economic fundamentals, coupled with its rising weight in global indices, make it an attractive destination for long-term investors.
- Political stability
- Political stability has played a significant role in driving India's growth and enhancing investor confidence in recent years.
- Benefited from global investors turning negative towards China
- India, to some extent, benefited from global investors turning negative towards China.
- Labor
Challenges
- Productivity ad reforms
- India's favorable labor and capital conditions support growth, but sustainable progress depends on productivity improvements through reforms.
- Key areas include education and skills training to help workers transition from primary to secondary industries.
- Over 40% of India’s workers are still employed in primary industry, nearly double the share in China.
- Urbanization (36% vs China’s 64%) also needs improvement to rehouse rural workers more efficiently.
- Cutting red tape and offering incentives for manufacturing have attracted business investment and should continue to drive growth.
- Inflation
- Increasing inflationary pressures present a short-term risk.
- This is potentially resulting in tighter monetary policies, higher interest rates, declining asset prices, and currency depreciation in India.
- Geopolitical tensions
- Russia-Ukraine war and instability in the Middle East has created various challenges such as trade disruption, migration etc.
- Global warming and climate change
- It is posing significant risk to agricultural productivity, biodiversity and infrastructure, with implications for investments in India.
India overtakes China – key analysis
- Attention from global investors
- A rising weight in the MSCI EM index signals increased attention from global investors, which is particularly beneficial for India.
- As India overtakes China to become the largest component of the MSCI EM IMI index, it is poised to attract more foreign portfolio flows.
- India is no longer merely a tracking error in global portfolios
- India is no longer merely a tracking error in global portfolios; instead, it has become a major component that cannot be ignored.
- As a result, global funds may need to buy Indian exchange-traded funds (ETFs) or directly invest in Indian stocks.
- More foreign participation in the Indian market
- Analysts expect this increase to result in more foreign participation in the Indian market in the coming months.
- A warning sign
- A rising index weight is typically positive but can signal market exuberance, which sometimes leads to underperformance, as seen with China.
- While India's situation differs, historical patterns suggest caution.
- The increase in India's index weight likely reflects stronger fundamentals, such as a larger free float and rising earnings, both of which are positive indicators.
Q.1. What factors have driven India's rise in the MSCI Emerging Markets Index?
India’s growth is fueled by infrastructure projects, political stability, and its large labor force. A $1.7 trillion investment in infrastructure through 2030 and the shift of global manufacturers to India amid geopolitical tensions have also boosted the market.
Q.2. What are the challenges facing India’s growth as an emerging market leader?
India faces challenges in productivity reforms, urbanization, and inflationary pressures. Over 40% of its workforce remains in primary industries, and inflation poses risks of tighter monetary policies and currency depreciation.