India’s Economic Growth: Challenges and Prospects

Despite political uncertainties following the elections in India, the vibrant democracy, strategic political reforms, and the rapidly growing market tell a compelling story of resilience and potential, says Dina Ting, Head of Global Index Portfolio Management at Franklin Templeton.

Recently, India surpassed China as the most populous country in the world, thanks to its younger population. The Purchasing Managers’ Indexes (PMI) for manufacturing and services have long indicated expansion, as India continues to attract investments from foreign tech giants.

India has made significant strides in aviation and its diplomatic leadership, particularly as the host of last year’s G20 summit. The country has also been praised for its military modernization efforts and reducing its reliance on Russian defense equipment. By 2026, approximately $534 billion is expected to be invested in new infrastructure, a figure that matches the inflation-adjusted value of all infrastructure projects over the past 11 years, according to Bloomberg Economics. Additionally, India signed a new trade agreement with the European Free Trade Association (EFTA) earlier this year, aimed at reducing tariffs. In return, foreign direct investments of $100 billion were pledged. The EFTA agreement is estimated to create a million new jobs in India over the next 15 years.

Political Reforms as the Foundation for Growth

Few would dispute that India is benefiting from China’s economic slowdown. Especially after the excitement surrounding Prime Minister Narendra Modi’s defeat in the parliamentary election subsided, it became clear that India’s vibrant democracy is unique. Instead of fracturing, the multi-party opposition united during the election to challenge the BJP (Bharatiya Janata Party). Although the new coalition government is inexperienced and could be unstable, all parties likely share the common goal of advancing India’s economy. The power-sharing structure bodes well for the consensus-building process in the country.

We remain optimistic that the political reforms already implemented provide a solid foundation for export growth and the rise of a new consumer class in India. Moreover, sectors such as energy and defense tend to be less sensitive to partisan issues. India also continues to be a reliable partner for electronics and chip manufacturers.

India’s Stock Market on Par with Hong Kong’s

Recently, the Indian stock market recovered a nearly 6 percent loss in the S&P CNX Nifty Index (“Nifty 50”) in just three trading days, a record pace for the recent past (Bloomberg, June 11, 2024). This recovery is a clear sign of the unwavering confidence of domestic retail investors. Additionally, consumer price inflation decreased from 4.83 percent in April to 4.75 percent in May. According to new government figures, this was partly due to lower fuel prices, although food prices remained high (Indian Ministry of Statistics and Programme Implementation, June 11, 2024).

In January of this year, after an excellent performance in 2023, the Indian stock market, with a market capitalization of $4.3 trillion, surpassed the Hong Kong stock market ($4.29 trillion, Morningstar, January 23, 2024). The Nifty 100 Index recorded a gain of 12.7 percent from the beginning of the year to June 20, while the FTSE Emerging Index advanced 9.3 percent during the same period (returns in USD, Bloomberg, June 21, 2024).