As the nation develops, India becomes an ever more appealing destination for investors. The International Monetary Fund (IMF) projects India to become one of the fastest growing economies globally by 2023, the country’s Ministry of Finance forecasting its highest real GDP growth since its independence. Below are some of the key drivers of this growth, as well as an introduction to how you can invest in India.
Reasons for potential growth
- Contrary to the likes of the UK or Japan, India has one of the world’s youngest populations. The United Nations suggests this will continue to be the case until 2030 with the CIA reporting over 85% of the population are below 55 years old
- Within this large workforce are the third-largest group of scientists and technicians globally
- Combine this with the World Bank estimates that by 2030 the urbanisation of India’s population will have increased by 11% and the country’s potential for medium- and long-term returns on investment becomes clearer.
- Further, infrastructural improvements in different sectors such as energy, roads, urban development and railways as part of the National Infrastructure Pipeline present opportunities for increased efficiency both in business and in the day-to-day lives of Indian citizens.
- Indian international business has been streamlined in the last several years, leading to a rise from the 142nd ranked country in the World Bank’s ‘Ease of Doing Business Rankings’ in 2014 to 63rd by 2019.
- Similarly, India has jumped from 81st in the 2015 Global Innovation Index up to 48th by 2020, increasing its ranking year on year. These measures highlight the rapid competitive gains the Indian economy is making every twelve months.
- Lastly, the University of Strathclyde and Lloyd’s Register Maritime project India and China to be the largest manufacturing hubs in the world by 2030, shifting the centre of global maritime trade from the Pacific to the Indian Ocean region.
A brief guide to Indian investment
Evidently, then, based on these projections for 2030 and beyond, there may never have been a better time to invest in India. But how can you invest in India and which method is best for you?
The Indian Stock Market
Investment in Indian stocks comes primarily in two forms, foreign direct investment (FDI) and foreign portfolio investment (FPI). The principal difference is that FDI includes some element of control over the firm’s management decisions, whereas FPI exists altogether more passively, simply awarding a share of firm profits.
India has two competing stock markets: the more populous Bombay Stock Exchange (BSE) and the slightly smaller National Stock Exchange (NSE). Despite this, the NSE has a greater trade volume, creating a more liquid market which appeals to day traders and short-term investors. The competition between the markets ensures lower costs as well as greater efficiency and innovation.
Invest in India’s Stock Market
Some of the more common methods for investing in India include:
- Global depository receipts (GDRs)
- India-focused mutual funds
- Exchange-traded funds (ETFs) / exchange-traded notes (ETNs)
GDRs are the receipts under which Indian companies list themselves on the London Stock Exchange. This is likely the most accessible way to acquire a holding in Indian firms. Alternatively, the Indian markets can be approached directly with international trading accounts, though be aware of any commission or costs associated with exchanging currencies.
Mutual funds are constituted by the finances of many separate investors. These funds are managed by professionals who seek to build portfolios of various financial instruments capable of generating consistent returns for their investors. The fund then pays out profits proportionate to each investor’s contribution to the fund. Investors may seek mutual funds focused on Indian financial instruments to gain access to diversified investments in the country under professional management.
Distinct from mutual funds, ETFs function similarly to stocks in that they can be freely traded during the day. They act as diversified investments packaged together around an underlying asset or index. ETNs are similar in this way, but function more similarly to bonds. They are unsecured debt securities issued by financial institutions, eventually paying out the return of the index it tracks at maturity. In the meantime, they can be bought and sold by investors.
ETFs may be purchased through brokers or wealth management companies, with a number of relevant options tracking various Indian indexes. ETNs are altogether rarer, with Barclays Bank liquidating their iPath MSCI India Index ETNs in September 2020 and no clear substitutes appearing by the time of writing.
Restrictions on investment
Despite these options, there are certain restrictions in place on foreign investment into India which should be acknowledged by would-be investors. Some of these include:
- Limitations on the percentage of capital that can be invested from those resident outside India, which vary according to sector
- Entry conditions for some investments such as lock-in periods or minimum capitalisation
- Complying with state or local laws if applicable
- Prohibition of foreign investment in a number of sectors including, but not limited to: real estate, tobacco, lottery businesses, gambling and transferable development rights
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