India is having a moment. It recently overtook China to become the world\u2019s most populous country, with an estimated 1.43 billion people. The country\u2019s woefully inadequate infrastructure is getting an upgrade. Multilane highways dot the countryside, Mumbai\u2019s airport is about to double in size, and improvements are on the way for the nation\u2019s water and power needs.\u00a0<\/p>\n
On the economic front, India\u2019s once-frail fiscal health and precarious current accounts deficit is much improved, helped by its ability to buy Russian oil on the cheap amid the war in Ukraine. Reforms are chipping away at government bureaucracy and investors and companies are jumping in, especially as they look for alternatives to China. India\u2019s economy is now the world\u2019s fifth largest, up from tenth a decade ago.\u00a0<\/p>\n
\u201cIf I had one place in the world with the highest conviction in growth, India would be it,\u201d says Laura Geritz, manager of the Rondure New World fund.<\/p>\n
The question now is whether India can turn what Prime Minister Narendra Modi describes as \u201cIndia\u2019s decade\u201d into sustainable progress. For all the recent advances on a national level, companies still get bogged down in red tape on a local level. And while the middle class is growing rapidly and digitization has connected vast swaths of the population to banking, millions are left behind in poverty, with progress on the education front stalling in recent decades.<\/p>\n
India is a natural beneficiary of the recent struggles of China, its northern neighbor and rival. Rising U.S.-China tensions and China\u2019s economic slowdown put that nation on track to grow at sluggish 4.5% next year, with some analysts expecting growth of just 3% beyond 2025. As investors and corporate chiefs look for alternatives, India\u2014with 6.3% growth expected next year\u2014is one of the few viable options.\u00a0\u00a0<\/p>\n
This change in fortune has already lifted India\u2019s shares. The MSCI India Index is up 12% in the past year, compared with a 2% gain in the MSCI Emerging Markets Index. But many money managers see India\u2019s run as just beginning.\u00a0<\/p>\n
\u201cAs long as the multinationals keep coming, Wall Street will keep coming,\u201d says Michael Kelly, global head of multi-asset at PineBridge Investments, who thinks India is in the early stages of a secular bull market.<\/p>\n
A parade of global companies announced India-related investments and pacts in June, coinciding with Modi\u2019s visit with U.S. President Joe Biden. The two leaders vowed to deepen their countries\u2019 ties. They signed technology deals to help the U.S. diversify away from China and defense deals aimed at helping wean India from its reliance on Russia for military equipment.<\/p>\n
\n General Electric
\n (ticker: GE) signed an agreement with an Indian aerospace company to make engines for the Indian Air Force\u2019s jet fighters.
\n Micron Technology
\n (MU) announced plans for a new test and assembly facility in India, and
\n Boeing
\n (BA) is investing $100 million to train pilots in India.<\/p>\n
\n Walmart Though India and China had similar per capita incomes in the 1980s, China zoomed ahead as it became the world\u2019s factory by building infrastructure at record pace and clearing the way for businesses. India, says veteran global investor Mark Mobius, head of Mobius Capital Partners, is better understood as the \u201cunited states of India,\u201d with each state having different rules and priorities that contribute to the country\u2019s web of red tape that has made doing business in the country so difficult.<\/p>\n It will take years to fully detangle the Indian bureaucracy, including freeing up more access to the country\u2019s scarce land required for building factories. India also still has nationalist policies, including tariffs on poultry and sugar that hinder free trade. Recent restrictions on freedom of speech and press have raised concerns, with India backsliding in some democratic gauges under Modi. Sweden\u2019s V-Dem Institute describes India as an \u201celectoral autocracy,\u201d in the same camp as Russia and Turkey.<\/p>\n Asked about such concerns on his visit to the U.S., Modi responded: \u201cDemocracy is in our veins.\u201d<\/p>\n \u201cPeople think politics and economics can be divorced,\u201d Arvind Subramanian, former chief economic adviser to India\u2019s government and currently a senior fellow at Brown University, said at a recent Asia Society panel discussion in New York. \u201cIf you centralize power and exercise state power capriciously against some and not others, eventually investors will also get worried.\u201d<\/p>\n Even with those concerns, India looks poised to capitalize on its demographic dividend as home to nearly twice as many people than in all of Europe. As China\u2019s working-age population shrinks, India is on track to see its pool of prospective workers swell to a billion over the next decade. It also boasts a median age of 28, a decade younger than China and the U.S.<\/p>\n \u201cIndia\u2019s population bulge provides an unprecedented chance for economic development,\u201d says Joyce Chang, head of global research at Meanwhile, many of India\u2019s 28 states are vying for multinationals to invest within their borders, often offering land or other incentives in hopes of bringing in new jobs. India in 2017 replaced a complex web of state and federal taxes that had fueled local protectionism and corruption with a single goods and services tax, speeding up commerce and increasing tax revenue.<\/p>\n And there is finally evidence of upgrades to the country\u2019s dilapidated infrastructure. India has doubled its rural road network and number of airports since Modi took office in 2014, and recently touted the completion of 100 kilometers of road in 100 hours in the northern India state of Uttar Pradesh. The country aims to slash logistics costs from 16% of gross domestic product to 9% by the end of 2024. It even has a spacecraft on the way to the moon.<\/p>\n \u201cThat is not the India I knew,\u201d says Rajiv Jain, India has also facilitated the delivery of essential goods and services such as cooking oil and sanitation to a vast part of the population and speedily digitized its economy, giving citizens identity cards and bank accounts. It also has created a platform for private companies to innovate, jump-starting a\u00a0technology boom that has already birthed 120 unicorns\u2014private companies worth more than $1 billion\u2014in the past five years. As a group, the companies are valued at $350 billion.<\/p>\n While China has taken a more interventionist role in the private sector, with harsh crackdowns on tech and other sectors, India is moving toward privatization of several major airports, toll roads, and ports. Such moves help boost government coffers and revitalize assets sold with new investment, Jain says.<\/p>\n Executives of global companies see opportunity in India, but are also clear about the challenges. Although India has rolled out new policies to woo foreign businesses, accessing programs and incentives continues to be a challenge, as is the relative scarcity of suppliers that can support large foreign companies, said Guru Bandekar, Carrier\u2019s global vice president of supply-chain management, at a U.S. Chamber of Commerce session on India in June.<\/p>\n Another challenge: accessing raw materials to make goods. \u201cOften with suppliers in India, we have to bring in products from southeast Asia to transform [them] before we export it out,\u201d Bandekar says, adding that Carrier aims to triple its sourcing from India for its heating and air conditioning business over time.<\/p>\n Walmart is investing in an ecosystem of potential suppliers, says Andrea Albright, executive vice president of sourcing for the retailer. She tells Barron\u2019s<\/em> that the situation has changed markedly in the past 10 to 15 years as many suppliers have embraced technology and automation, increasing the ability to manufacture at speed and increase scale. \u201cWe are just at the beginning and see tremendous potential if India continues to refine capability around exports,\u201d Albright says.<\/p>\n Still, India isn\u2019t about to become the factory of the world. Sunil Asnani, founder and managing partner of First Principles fund, sees India becoming a manufacturing power in areas that may not be as resource needy\u2014such as making televisions, Apple and At least for now, higher-income and urban consumers are on spending sprees, fueling demand for sport-utility vehicles, travel, and real estate as people move from ancestral homes to cities and become more mobile. Lower-income and rural consumers have been more constrained, evidenced in part by tepid sales of two-wheelers, which have yet to recover to prepandemic levels.<\/p>\n There\u2019s a broader problem: education. India has long been a source of highly skilled, English-speaking talent for global companies, as a look at the leadership of U.S. tech giants such as Those who have tried to draw parallels between China\u2019s burgeoning middle class and India\u2019s came up empty in the past, in part because those at the bottom of the income pyramid didn\u2019t have much opportunity, says Ajay Krishnan, manager of the With India\u2019s per capita income about a fifth of China\u2019s and primed to grow, money managers see a longer runway for growth for companies that cater to consumers as India\u2019s standard of living improves.\u00a0<\/strong>\u201cOnce people hit middle income, consumption starts to spike,\u201d says Leon Eidelman, manager of the J.P. Morgan Emerging Markets Equity fund. \u201cIndia is very early in this stage of that growth.\u201d<\/p>\n That longer runway for growth is one reason Indian stocks may not be as pricey as they look, at 19 times next year\u2019s earnings. Jain notes that over the past decade, the MSCI India Index has trounced MSCI China Index in earnings growth\u2014160% to about 30% in local terms, respectively. Indian stocks could take a near-term breather, but their growth prospects make them attractive over the longer term. For the next year, India is expected to see earnings growth of 16% compared with 15% in China, Jain says.<\/p>\n India\u2019s market is dominated by oligopolistic companies boasting strong balance sheets and high returns on equity and assets. That\u2019s a difference from China, where intense competition can quickly change sector leaders .<\/p>\n Given India\u2019s rapid growth, Mobius favors looking at return on capital and return on assets rather than price\/earnings multiples. He also prefers companies that have little to no debt and that generate earnings growth of 10% plus. That turns up opportunities among midsize companies, Mobius says, including software companies positioned for the next phase of India\u2019s growth such as Financials are also a way to tap India\u2019s improving outlook. Jain likes For investors looking for a broad-based way to invest in India, exchange-traded funds such as the $5.8 billion Investors looking to get the best picks of India investing veterans can find actively managed funds such as the all-cap $592 million Peeyush Mittal, portfolio manager of Matthews India, favors smaller companies to benefit from structural shifts in the economy. Holdings include beneficiaries of the push to diversify supply chains away from China, including The Wasatch fund\u2019s 13.7% average annual return over the past decade\u00a0has beaten 99% of its peers, according to Morningstar. Krishnan favors financials including For those looking for a broader-based emerging markets fund, the $13.5 billion India is bound to get more attention. Yet to be seen is whether it will live up to expectations this time.<\/p>\n Write to reshma.kapadia@barrons.com<\/p>\n<\/p><\/div>\n
\n (WMT), looking to expand its long history of sourcing items such as apparel and home goods from India, is targeting $10 billion in annual exports from the country by 2027 that will include toys, bicycles, and even seafood.
\n Amazon.com\u2019s<\/span>
\n (AMZN) Amazon Web Services plans a $13 billion investment by 2030, and
\n Apple
\n (AAPL) has tripled its iPhone production there.<\/p>\nA Web of Red Tape<\/h2>\n
\n J.P. Morgan.<\/span>
\n For India to capitalize on it\u2014and on the opportunity created by companies looking to\u00a0diversify their supply chains beyond China\u2014Chang says it will have to attract stronger foreign direct investment flows, as China did in the 1990s.<\/p>\n
\n GQG Partners
\n \u2019 chairman, who grew up in India. \u201cWill it last forever? I don\u2019t know, but this government has improved the execution by orders of magnitude.\u201d Jain has almost a third of the asset manager\u2019s emerging markets strategy invested in India.<\/p>\n
\n Samsung
\n phones, and washing machines. Such products require less land\u2014an important factor for a country that has more than 17% of the world\u2019s population but just 2% of its land.<\/p>\nA Growing Middle Class<\/h2>\n
\n Microsoft
\n (MSFT) and Google parent
\n Alphabet
\n (GOOGL) illustrates. But Subramanian sees human capital as India\u2019s biggest failure, as education levels for much of the population has stagnated: Half of fifth-graders read at a second-grade level, the same as 25 years ago.<\/p>\n
\n Wasatch Emerging India
\n fund (WAINX). But that could change if India\u2019s manufacturing takes off. \u201cThe next 10 years is going to look like China from 1991, with much more broad-based growth.\u201d<\/p>\nHow to Invest<\/h2>\n
\n Persistent Systems
\n (PSYS.India) and
\n APL Apollo Tubes
\n (APAT.India), which makes tubing used in construction.<\/p>\n
\n HDFC Bank
\n (
\n HDB
\n ), a well-run leading private bank. \u201cA lot has happened in the past 20 years, and still HDFC Bank is cheaper than 10 to 20 years ago because of its earnings growth,\u201d Jain says.\u00a0<\/p>\n
\n iShares MSCI India
\n ETF (INDA) and $1 billion
\n WisdomTree India Earnings
\n ETF (
\n EPI
\n ) offer low-cost exposure.\u00a0<\/p>\n
\n Matthews India
\n fund (MINDX), which averaged 10.9% returns annually over the past decade,\u00a0and\u00a0<\/strong>$512 million Wasatch Emerging India. <\/p>\n
\n Syngene International
\n (SYNG.India) and
\n Neuland Laboratories
\n (NLL.India). Both companies help drugmakers get their products closer to commercialization.\u00a0<\/p>\n
\n Cholamandalam Financial Holdings
\n (CHOLAHLD.India), which started as a commercial vehicle lender and is moving into mortgages,\u00a0and
\n Bajaj Finance
\n (BAF.India). Krishnan also has been favoring companies positioned for India\u2019s manufacturing boom, like
\n CG Power & Industrial Solutions
\n (CGPOWER.India) which sells motors and power equipment.<\/p>\n
\n GQG Partners Emerging Markets Equity
\n (GQGPX) has a third of its holdings in India, more than double its peers. Over the past five years, the fund, run by Jain, has averaged an annual return of 5.4%, beating 91% of its peers.<\/p>\n