Economic experts are looking toward India to replace China as the next global source of profitable large-scale investment. The country's long-term growth prospects are capturing the interest of Wall Street powerhouses looking for the next big thing.
India is currently the fifth-largest global economy ranked by Gross Domestic Product (GDP). Goldman Sachs now predicts India will overtake the United States by 2075, becoming the world's second-largest economy after China.
Surging population, technological innovations, infrastructure improvements, and increasing productivity are among the main drivers the bank sees as elevating the subcontinental giant to the number two spot.
American companies are already positioning themselves to ride India's wave. Apple is reconfiguring its mega supply chain to increase iPhone manufacturing output in the country, while Amazon is raising its investment footprint to $26 billion by 2030.
India is more than just a big play for corporate America. With its burgeoning public companies, it also offers retail investors a chance to get in on the ground floor of its epic growth story. As India's economy evolves, financial experts are optimistic about the outlook for American investors in this new mega-market.
India has several structural economic advantages that prime it for upward growth. While most developed nations face demographic implosion due to steeply declining birth rates, India boasts a robust, youthful population.
“India's demographic dividend, its booming I.T. sector, and strategic geopolitical relations collectively serve as a springboard for its emerging economy,” says Jorey Bernstein, CEO of Bernstein Investment Consultants. “However, the challenge lies in harnessing this potential in a sustainable and inclusive manner.”
Having a booming population helps, but, according to Goldman Sachs, leveraging these demographics hinges upon India increasing its worker productivity rate and labor force participation. The bank's analysts point out India's labor force participation rate has slipped over the last 15 years. However, if it creates more jobs for women, who remain a largely untapped economic force, its growth could be boosted further.
There are various routes investors can take to gain exposure to India. Some may buy Indian government or corporate bonds or join seed funding rounds for Indian tech startups. For others, adding more investments in India to their Exchange Traded Fund (ETF) portfolio may be the most straightforward approach.
“For investors with an aggressive approach, India is a country to consider,” says Joe Petry, Founder and Financial Planner at Mayfair Financial. “Gaining India exposure is usually best done through a low-cost, highly diversified ETF with India included within the broader emerging market basket of countries. One example of such a fund would be Vanguard's Total International Stock ETF, which has investments outside the U.S., including emerging markets. India represents 4.5% of this fund's investments currently.”
Other India-specific ETFs offer diversified exposure to the country's biggest companies.
The Indian stock market has three indices that ETFs track — the Nifty 50, the 50 largest equities by market capitalization; the MSCI India Index, which includes over 100 mid and large-cap equities; and the FTSE India 30/18 Capped Index, which includes over 200 Indian firms with defined allocation caps.
There are over half a dozen funds that track these three indices. The Franklin FTSE India UCITS ETF is the cheapest, with a total expense ratio of just 0.19%, while the cost ratios of competing BlackRock and Morgan Stanley India funds range from 0.65% to 0.85%.
Owning international market equities can be an effective strategy for building a well-diversified portfolio of strong ETFs. American investors must expect to pay more for emerging market funds when compared to funds that track the U.S. stock market. Nonetheless, for passive investors especially, seeking out the lowest fees possible is a prudent approach when going long in emerging economies. However, these India-focused funds have accumulating distribution policies that won't suit investors seeking to boost their residual income through dividend payouts.
“For U.S. investors, gaining exposure to India's growth story can be a calculated move,” adds Bernstein. “Whether it's through targeted indexes like the MSCI India or via American companies rooted in India's consumer market, the key lies in understanding the dynamic Indian market and adjusting for inherent risks.”
If all goes according to Goldman Sach's prediction, a very different world order will exist by 2075. India's ascent to second place will create a new equilibrium between the world's economic superpowers. Per Goldman Sachs's trajectories, by the mid-2070s, the economies of China, India, and the U.S., will each be valued between $50 and $60 trillion. The arrival of this new multipolar world may radically transform the global investing landscape.
However, with over half a century to go, a lot could derail this scenario.
This is not the first time economists have predicted an Asian giant would rise to overtake the U.S.
In the 1980s, many economists believed Japan would eclipse the U.S. Yet since its housing bubble burst in the early 1990s, the country's growth underwent prolonged stagnation.
Similarly, for the past two decades, economic experts assumed China was on its way to overtaking the U.S. in total GDP size. However, since the pandemic, China's growth has slowed considerably, forcing a reevaluation of this thesis.
Could India's much-anticipated takeoff fizzle out too?
“History warns us of the economic hyperboles,” says Bernstein. “The rise of Japan in the 80s and China over the last decades have taught us that being dubbed the ‘next big thing' doesn't always equate to outpacing the U.S. The question remains whether India can navigate its unique challenges and capitalize on its strengths to buck this trend.”
Only time will tell if India can reach its expected potential as a new global economic engine. With the risks involved, it's not a market most Americans will want to stake their retirement savings plan on. However, India could provide significant upside for patient investors with an investment time horizon to the 2070s. Given its size, India is an emerging market investors will watch closely in the coming years.