Is India a good place to invest? That will be the topic of today’s article.
Many people assume that as a growing economy, India has superior investment opportunities to back home, but is that really the case?
My staff have looked at the positive and negatives of investing in India.
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India is a complex market due to the diversity of regions, differences between rural and urban areas, a large informal market, and complex legal and administrative systems. Those companies that understood all the nuances of doing business in India were able to become successful.
India is the second most populous country after China with a population of 1.16 billion, as of July 2010. The country is inhabited by 16% of the world’s population on 2.5% of the world’s land area. It is the largest democratic country with 29 states and 6 united territories under a single central parliamentary government. Since the adoption of liberalization policies in 1991, India has gradually transformed from a closed economy to an open one, accelerating its growth, and in 2007 became a trillion dollar economic system.
India’s economic growth in fiscal 2010 was 7.4%. India’s economic growth rate over the past few years has remained more or less stable, in the range of 7-9%, and the trend is expected to continue in the near future. This is due to the high consumption of national goods, an increase in demand for services and an ever-growing industry. According to IMF forecasts, India’s GDP growth in 2010-2011 will amount to 9.4%, and in 2011-2012 – 8.4%.
Economic liberalization has helped India, after three decades with a growth rate of 4%, enter the high growth orbit. Today the country has a stable government and an extensive structural base, as well as “soft” infrastructure factors (transparent judicial system, good corporate governance). In this way, India maintains healthy sustainable economic growth.
In this article we will try to answer to the question “is India a good place to invest?”, we will compare it to another economical giant China, and also understand why investors often prefer India, instead of China. But first let’s see what is going on in India.
Foreign direct investment in India
FDI in India Foreign direct investment (FDI) in India is the main source of cash for India’s economic development. Foreign companies are investing directly in fast-growing privately-owned beneficial enterprises to take advantage of India’s lower wages and changing business environment. Economic liberalization began in India after the 1991 economic crisis, and since then, foreign direct investment in India has steadily increased, which subsequently led to the creation of more than one crore (10 million) jobs. On April 17, 2020, India changed its Foreign Direct Investment (FDI) policy to protect Indian companies from “accidental takeovers / acquisitions of Indian companies due to the current COVID-19 pandemic,” according to the Department of Industrial Development and Internal Trade. While the new FDI policy does not restrict markets, it ensures that all FDI is now under the control of the Department of Trade and Industry.
Fresh 2021 news: Foreign investment in India for 9 months of 2020 increased by 40%, to $ 51 billion
Foreign direct investment (FDI) in India rose 40% to $ 51.47 billion between April and December last year. The Indian Ministry of Trade and Industry announced this on March, 2021.
“The inflow of foreign direct investment grew by 40% in the first nine months of the current (2020-2021, ends March 31 – TASS) fiscal year ($ 51.47 billion) compared to the same last year ($ 36.77 billion)”, – said in the message of the department.
FDI growth has been driven by government economic reforms, measures to promote foreign direct investment, and ease of doing business, according to the ministry.
“The inflow of foreign investment is the main engine of economic growth and an important source of non-debt financing for India’s economic development,” the agency said. “The steps taken in this direction over the past six years have borne fruit, as evidenced by the ever-increasing volume of FDI in the country.”
Chinese investments as “rogue”
India’s open door foreign direct investment policy, however, does not apply to FDI from China.
As representatives of the Ministry of Trade and Economy of India told The Economy Times earlier this week, the country’s government is not going to abandon measures to curb the inflow of investments from the PRC any time soon. “Investment proposals from China will be considered only if Chinese FDI is intended for the development of the most important Indian industries, as well as for areas in which domestic producers do not yet have sufficient capacity,” sources in the ministry told the publication.
In 2020, the Indian government introduced new rules for controlling foreign direct investment to reduce China’s share of it. They stipulate the need for mandatory preliminary consideration by Indian government agencies of FDI proposals, even with minimal participation of China in them, despite the fact that previously investment proposals in which Chinese participation amounted to at least 10 to 25% were subject to such consideration. The new approach should prevent the flow of investment from China through third countries. In accordance with it, investments from Hong Kong (Xianggang) are also subject to control, while investments from Taiwan are not included in the category of controlled ones.
India did not consider any of at least 200 investment proposals since April last year. In addition to sectoral departments, the Ministry of Internal Affairs is now involved in their consideration.
According to its representatives, India intends to cancel investment tenders with the participation of foreign states in the future if Chinese investors have real chances of winning. Such a measure, as well as strengthening control over the inflow of direct investment from the PRC, “is aimed at preventing hostile actions in a pandemic,” they explained.
Total Chinese investment in India exceeded $ 8 billion by 2020.
Why the Indian market is interesting for venture investors?
India has huge potential, its GDP, according to the EIU forecast, will add 7.5% annually over the next five years. India’s tech sector is growing rapidly as cheap smartphones, low-cost cellular services and a lack of offline infrastructure create exponential growth opportunities for tech startups.
VC / PE investments in India totaled $ 26 billion in 2018, almost doubling from 2014, according to Bain. Most of the funds with a focus on India have invested in the early stages, but in recent years, investing has gained momentum in the later stages, which also provide an exit from the investment for early investors.
The number of exits has grown steadily in recent years, 2018 was a great year: 265 deals for $ 33 billion, of which almost half is Walmart’s deal to buy Flipkart for $ 16 billion.
There are now over 30 unicorns in India (valued from $ 1 billion). Their employees now understand how to build such companies and are now creating their own startups.
So the potential is there. But there are also limitations, as India is at a different stage of growth. It has a small middle class, different government policies, and companies do not have the same degree of protection from external competition that China has created for its business.
In China, the main verticals of Internet services are provided by local companies – Baidu, Accent, Alibaba, which transferred the Western business model to China and became the dominant players there. In India, the market is more liberal, Silicon Valley companies could enter it and create powerful potential for themselves. The typical Chinese consumer uses the search engine Baidu, while the Indian consumer uses Google.
India’s potential is determined by its excellent workforce: an industry of offshore programming and IT services has been created in this country, there is a good educational base, which produces many high-class engineers. Therefore, in fierce competition, interesting business ideas are born. Quite often, the venture capitalists who supported them try to see if this development can be scaled not in the Indian, but in the American market.
Like other emerging markets, India and China are affected by information noise and market volatility. Another tweet by Donald Trump, the outbreak of the virus, tensions on the border with a troubled neighbor – all this can cause the markets to fall or rise quite strongly.
The intelligent investor should take these noises as part of the normal life of the markets and follow a few simple rules:
- Do not try to speculate on short-term market movements, but invest in the medium term. Venture capital investments meet this requirement well.
- Track fundamental changes in these economies, not just a country hype. The growth of the middle class in India, the motorization of China, digital technologies in traditional commodity distribution chains, the chance to jump over outdated business models and technologies – these topics will develop for many years and do not depend on the mood of politicians or speculators.
- Not trying to find a single diamond, but investing in a wider group of companies. There are many risks in venture investing by definition, and in developing countries there are even more risks. Experience suggests only one solution – risk diversification through the creation of an investment portfolio, best of all, through a fund with a proven manager.
China and India have already become key players in the global economy. It’s time for investors to give them the attention they deserve and not be distracted by momentary moods.
Why India is better for investors than China?
India’s economy is growing more slowly than China’s, but its growth fundamentals are more reliable. However, there are dangers here too.
India and China. Western investors love to compare the two most populous countries in the world, as if their economies differed only in stage and speed of development. Over the first decade of the 21st century, China’s GDP grew by an average of 10.3% per year, and India also showed a very impressive 7.4%.
But investors should stop thinking of India as China 2.0. If China is purely an export story, then the Indian economy thrives on domestic consumption. With concerns about the spread of the European crisis and the slow global economic growth that exporters like China and Brazil are prone to, fund managers are looking more closely at India.
There are currently two dozen mutual funds and exchange-traded funds in India. You can invest in them with the expectation of the country’s long-term economic growth. After a dismal 2011, Indian mutual funds kicked off this year with a strong start.
India’s economic growth may slow, but fund managers see long-term opportunities at the company level. “India has a huge number of client-oriented companies that can benefit from structural growth,” says Sammy Simnegar, head of Fidelity International Investment Fund. Moreover, the state does not own large stakes in almost any of these companies. In China, the opposite is true.
Its demography continues to play a significant role in India. By 2030, it will overtake China in terms of population. At the same time, it is now one of the youngest nations among the emerging market countries. Almost half of the citizens are under 25 years of age.
“Most developed markets are in decline, especially in Japan. China and others have already passed their peak, ”says Prashant Khemka, managing director and chief asset manager at Goldman Sachs India.
India’s growing working-age population offers tremendous opportunities for India, but at the same time poses a great threat to it. Will its economy be able to provide enough jobs? Sharat Shroff, manager of the Indian fund Matthews, which has generated an average of 10.2% a year since its inception in 2005, points to infrastructure investment as a critical step in reaping India’s demographic dividend.
Economists and analysts say the key will be to keep GDP growth at 7% or more. For this, the relocation of villagers to cities is of great importance. “About 30% of India’s population is urban,” notes Khemka. “By some estimates, the movement of labor from agriculture to industry and services could add 1% to GDP growth per year.”
Potential investors in Indian funds should keep in mind that, unlike China, India is a net importer, so it is the health of its economy, not the situation in the world, that will stimulate investment income.
Many fund managers focus on the most popular Indian stocks and international companies that have established significant foreign operations in India. For example, Hugh Simon, manager of the Indian fund Dreyfus, owns shares in companies such as Novartis India, Nestle India, Pfizer Limited and Whirlpool India. His fund has generated about 10.9% of the profit this year. Fidelity’s Simnegar also prefers consumer-sector companies with strong brands.
As with any emerging market, investors in India must be willing to take risks. India, for example, is the fifth largest oil importer in the world. If the surge in oil prices slows down GDP growth, India’s demographic dividend may not be reaped.
What the Indian market promises for a long-term investor?
Services sector. For 10 years, the share of the service sector in the structure of the national economy has grown significantly. It is about the explosive growth of the IT sector. India has managed to become a major exporter of IT services, an important center for technological outsourcing for multinational corporations and a supplier of relevant specialists to the leading countries of the world.
The number of tech startups in the country is about 4,750. The IT sector accounts for a large share of employment in the private sector.
Commercial aviation is another interesting area. India is the fourth largest airline in the world. According to Boeing’s forecast, over the next 20 years, the demand for aircraft in India will reach 1,740 units, and the market volume will be $ 240 billion, or 4.3% of the global volume.
And of course retail. India’s population is about 1.3 billion people, which is the 2nd place after China with 1.4 billion. At the same time, GDP per capita is only $ 2134, which is 139th place in the world. However, this figure is steadily growing, and is this not an opportunity for the development of retail, including e-commerce. In 2014-2015. the market volume doubled, in 2016 it grew by 39%, and in 2017 – by 26.4%. India’s e-commerce market now stands at $ 27 billion.
At the end of fiscal 2017, Amazon doubled its business in India. At the same time, the giant’s revenue generated in the country soared by 105%, to about $ 450 million. The total revenue of Amazon is much higher – about $ 178 billion. However, in this regard, it is still ahead.
The company is actively developing in India. At the beginning of the year, Amazon announced the creation of its own brand in the high-margin beauty field. The Indian online beauty and personal care market will surpass $ 3.5 billion by 2022, up from the current $ 300 million, according to Red-Seer Consulting’s forecast.
Meanwhile, back in 2015, Alibaba also expanded into India, starting with investments in the fintech startup Paytm. The company recently announced a $ 200 million investment in India’s leading online grocery group, BigBasket. And Alibaba’s payments arm has agreed to invest in a food-ordering app called Zomato.
Industry. This segment, with a 29% share in GDP, is certainly inferior to the service sector. The economic reforms of 1991 contributed to market liberalization. As a result, external competition has increased, primarily from China.
In the industrial sector, it is worth noting the refining and chemical industries, which are “responsible” for about 34% of India’s export earnings.
At the same time, the fastest growing segment is the pharmaceutical industry, where an advanced staff of scientists has been formed. Now we are talking about 20% of the turnover of the global pharmaceutical industry, although only 1.4% in monetary terms. The prospects are bright and, possibly, in the future, Indian manufacturers will seriously compete with traditional pharmaceutical companies, including through the production of generics.
Consumption of raw materials. The jewelry industry in India is extremely important in the context of understanding the trend in the precious metals market. In this regard, India is creating serious physical demand. The country is one of the two largest consumers of gold in the world (# 2 after China). There is even a “wedding season” in India, when the demand for the yellow metal is especially high (December-March).
According to the report of the World Gold Council, in the second quarter the demand for gold worldwide fell by 4% y / y to 964 tons, which was mainly due to a decrease in investment demand. At the same time, India’s gold consumption fell by 8% YoY to 148 tons due to high domestic prices and the high base effect of the previous year. The indicator corresponds to the long-term average.
Another point is the consumption of energy, largely for the production of electricity. In this regard, India ranks third after China and the United States (5.3% share).
Mostly (about 85%) demand is met by oil and coal. At the same time, about 25% of oil consumption is provided by internal reserves. As a result, India is an important importer of black gold.
At the end of 2017, India recorded the weakest growth in oil consumption since 2013, + 2.3%. Import of “black gold” amounted to 4.2 million barrels per day. Demand was weakened by government initiatives to demonetize the economy and the introduction of new taxes on goods and services.
Note for an investor
Despite the temporary difficulties, in the long term, the Indian economy can turn out to be a boon for investors. Demographic trends are a key factor. Apparently, the population of the country will grow, and the middle class will slowly develop.
The Chinese model is not fully applicable in this case. However, there is an expanding sales market, as well as an economy that is increasing the consumption of raw materials.
There are two main ways for global investors to invest in the Indian economy:
The first is direct, which consists of buying Indian stocks.
The second way is through ETF securities.
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