It is not so long ago that India was considered economically vulnerable and was heavily reliant on foreign investment to fund its growth. While the 2008 Global Financial Crisis (GFC) affected India less than some economies because at the time it was not as integrated into the global financial system, it still led to a reduction in external investment into the country.
Then, in 2013 the US central bank suggested it would begin reducing the money it had been pumping into the US economy to support it post the GFC (known as the quantitative easing programme). This led to a sharp increase in US interest rates, causing many investors to move their money out of emerging markets such as India.
At that time, India spent more on imports than it earned from exports and this deficit made the country dependent on foreign investment. When foreign investors pulled their money out, India’s currency, the rupee, dropped to its lowest value ever. Imported goods such as oil and electronics then became much more expensive, which in turn fuelled inflation.
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Fast forward to today, and the situation is substantially different. India’s stock market has more than tripled since its Covid-19 pandemic lows, even outperforming the US tech-heavy Nasdaq. Meanwhile, the rupee remains one of the most stable currencies among emerging markets.
So, what changed? The real transformation from a country dependent on the world economy for its future to the resilient India of today began with key reforms introduced by the prime minister Narendra Modi’s government.
These included: 1. Banking sector improvement: The introduction of the Insolvency and Bankruptcy Code in 2016 allowed banks to deal with bad debts more efficiently. It put in place measures to empower creditors and prioritised improving businesses rather than liquidation. This helped to strengthen the financial sector.
2. Tax overhaul: The Goods and Services Tax replaced a complex web of state and central taxes, simplifying trade within India and making the cost of goods and services more competitive.
3. Fiscal discipline: The government reduced its fiscal deficit − meaning it worked on spending less than it earned from taxes and other revenues − in the years before the pandemic. This gave it more financial room to address the economic challenges brought by Covid-19.
In addition, the Indian government has driven digitalisation of the economy through the Digital India initiative, which has revolutionised sectors including finance, healthcare, and education. The rapid adoption of digital technologies has created a vibrant start-up ecosystem, attracting venture capital and private equity investments. This digital transformation positions India as a global hub for technology and innovation.
This, combined with India’s careful spending and economic reforms have improved its appeal to foreign investors. Recently, it was included in global bond indices, which has brought billions of dollars in passive investments into the country. This inflow has strengthened the rupee and stabilised the bond market. It also reflects growing global confidence in India’s economic policies.
India’s reliance on foreign capital has decreased significantly. Thanks to the country’s large working-age population, there is a robust domestic savings market. Many Indians are now investing in the stock market through Systematic Investment Plans (SIPs), which allow individuals to regularly invest small amounts in mutual funds. SIPs have become a stable source of funding for the market, accounting for nearly half of domestic inflows.
This domestic investment has transformed the market. In the past, international investment largely determined stock market performance. Today, domestic investors dominate, providing a more stable and resilient market. For instance, even during the pandemic-induced market crash in 2020, the number of SIP accounts grew every month.
Overall, India’s stock market is now far less affected by global economic shifts, geopolitical tensions, or foreign investor sentiment – which is good news for stability.
In conclusion, India’s impressive economic growth, demographic advantage, commitment to reforms, and resilience in overcoming economic challenges make it a compelling long-term investment destination. The country’s dynamic market, coupled with a stable political environment, also position India as a more attractive option compared to its emerging market peers. While risks remain, such as political or economic instability common to emerging markets, India’s resilience and reforms provide a solid foundation for future growth.
Ewan Thompson is a fund manager on the Liontrust Global Equities team
