The Indian market is a major player among emerging markets. It also boasts the world's largest population, estimated at 1.45 billion. Since emerging from the pandemic, India has delivered consecutive years of robust GDP growth, reaching 9.69% in 2021, the highest rate since 1988. Although the growth rate eased to 8.2% in 2023, it remains impressive.
Many see this growth as a sign of India’s resilience to recover after the pandemic, which was primarily driven by the recovery and growth of many sectors, such as the financial services and real estate sector, along with the robust recovery of the construction sector which has outperformed pre-pandemic levels.
Since the pandemic lows in March 2020, the blue-chip Nifty 50 index has climbed over 200%. Last year, Indian equities soared to record highs.
However, things have turned quickly. A Reuters report on Feb 28 notes that the Nifty 50 index is set for its fifth straight monthly loss — its longest streak since 1996 — making India one of the worst-performing markets this year.
Softer earnings, persistent foreign outflows and uncertainty regarding US tariffs have dragged the Nifty about 15% lower from its September 2024 peak, eroding nearly INR85 trillion ($1.3 trillion) in investor wealth. While Indian equities experienced a sharp correction through this pullback, experts believe it gives them a more “reasonable valuation”.
The Indian market could prove to be bearish in the near term, but some are confident that India remains a mid- to long-term growth story, insists aberdeen’s senior investment director, James Thom.
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“If you apply a sort of medium to the longer-term lens, I still think India is probably the most compelling story in the region. I say that because, notwithstanding the immediate slowdown we're seeing, the core, long-term structural underlying growth drivers remain intact for India,” says Thom in an interview with The Edge Singapore.
India remains one of the largest, fastest-growing markets in the world. Given its aim of working towards a self-sufficient economy, India has great potential in tapping and penetrating its very large domestic market across different sectors.
The theme of self-sufficiency has remained strong since 2020 when Prime Minister Narendra Modi launched the Self-Reliant India mission to promote Indian goods in the global supply chain markets and help the country achieve self-reliance.
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Good economic growth is spurring a rise in consumer spending power. Thom feels there are reasons to be optimistic about future growth from increased domestic demand, given that the domestic market is one of India’s leading growth drivers.
With India today at roughly US$3,000 ($4,009) per capita GDP level, Thom sees a similarity to China. To recap, when China reached this level of per capita GDP, it was an inflection point for the country, where it started to see the rise of the middle class. This then translates to higher consumer consumption of higher-quality goods and services.
Financial services, tech, tourism
With the current trends and economic situation in India, Thom has identified some growth areas. Firstly, the financial services sector has experienced decent growth over the past decade, with assets under management (AUM) growing at a CAGR of 15.18% since 2016 to an estimated US$808.17 billion by the end of FY2025, according to an India Brand Equity Foundation (IBEF) report in November 2024.
The sector stands to capitalise from the huge under-penetration of basic financial products and services, such as mortgages, credit cards, insurance and personal loans, which are seen to enjoy growing demand in tandem with rising income levels.
Growing government investment and infrastructure expenditure in digitalising the economy is also expected to increase accessibility for the average Indian citizen, particularly residents of rural areas.
Take, for instance, Modi's e-Rupi, introduced in August 2021. This system acts as a personal and purpose-specific digital payment solution, helping users make seamless online payments through redeemable vouchers.
“With the e-Rupi, most payments in India are now digital rather than cash-based. From a bank and payments company's perspective, that's fantastic because you're reaping all that data and you can analyse, assess and use that data to tailor products and services to those clients,” Thom says.
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With more than 2,100 fintechs currently operating, India is positioned to become one of the largest digital markets with the rapid expansion of mobile and internet services, which will likely benefit the financial services sector.
Given higher spending by US hyperscalers, India’s information technology (IT) sector is also well poised to sell more software and engineering services.
Secondly, Thom expects a rebound in growth for the IT services sector, given that Trump has introduced supportive economic policies in the near term. This, paired with expected rate cuts, is expected to bring expenditures back, which will drive the IT sector’s growth.
The IT services sector has been performing well, amounting to about 7% of India’s GDP as of 2024. According to the India Brand Equity Foundation (IBEF), IT spending is expected to grow 11.1% to about US$138.6 billion by 2024.
However, while companies and investors are obsessed with riding the artificial intelligence (AI) boom, Indian companies are far from becoming large-scale chip manufacturers or developing their own AI models.
“India, at the moment, has no real tech hardware industry. They are trying to develop a semiconductor industry but it is at a super early stage. They are putting incentives in place to attract capital and partnerships are being formed, we'll see,” Thom notes.
Another beneficiary of rising income is the tourism and hospitality sector. India is rich in culture and holds sacred religious sites of significance for local and foreign pilgrims. State governments of Uttar Pradesh, Uttarakhand and West Bengal, where there are numerous pilgrim hotspots, are investing in infrastructure and hotels to support the growth. “Anything tourism-related is growing very well. We are seeing almost record growth now in the hotel industry with tightness in supply of hotels with really expanding and fast-growing demand, so average room rates and occupancies and RevPAR (revenue per available room) are all increasing,” says Thom.
Volatile small caps, IPO
The post-pandemic stock market boom pushed stock prices through the roof, especially small caps and mid caps, which witnessed much more substantial growth than large and mega-cap companies in India. From the March 2020 pandemic low to the December 2024 peak in the Nifty small-cap 100 index, the index shot up by over 550%.
As of now, the Nifty small-cap index is down almost 26% from then, but Thom maintains that this re-rating of the small-cap is “much needed” given the overvaluations of many Indian stocks. He urged investors to do their due diligence, especially when it comes to small and mid-cap companies, to find the occasional investing opportunity in under-researched and undervalued companies.
Last year, India saw initial public offering (IPO) proceeds of US$19.9 billion, making it second in the world in IPO proceeds behind the US but first globally in IPO volume, according to a Feb 27 report by MoneyControl.
The National Stock Exchange (NSE) facilitated a record 268 companies’ IPOs, the highest in Asia and a global record for a primary market. These included the largest-ever Indian IPO and the second-largest IPO globally of Hyundai Motor India, which raised US$3.3 billion. Recently, Tata Capital, the financial services arm of Tata Group, announced plans to go public and raise about US$2 billion, possibly the largest IPO in India this year.
Thom notes that the IPOs of these mainstay companies help bring better diversity into the market, which, otherwise, had been marked by new economy issues like food delivery and e-commerce, such as Swiggy, which was listed last November. “I think it has brought more growth and dynamism to the market and made it a richer, more interesting market and I hope that kind of continues.”
Not immune to tariff threats
While India’s long-term outlook seems promising, investors should know the risks, such as a weakening rupee. “As a foreign investor, that (weak Rupee) has to be factored into your return calculations,” Thom says. Nonetheless, he notes that the Reserve Bank of India (RBI) has been actively taking steps to “intervene and protect” the country’s currency.
To stimulate economic growth, the Indian government has introduced key reforms in the federal budget for FY2025, prioritising consumption over capital expenditure. A significant measure is to raise the income tax exemption limit to INR1.2 million ($18,528) so that consumers will have more disposable income and a better propensity to spend.
Despite this, the rupee continued to fall in early 2025, reaching a record low of INR87.97 to the US dollar on Feb 10. The rupee is expected to depreciate as India’s growing middle class increases its reliance on imports, making it difficult for the central bank to stabilise the currency.
Thom warns that India will not be immune to the threat of US tariffs. While export-driven sectors will be impacted, inflationary pressures will be felt across the board. “India exports quite a lot of pharmaceutical products to the US, along with quite a lot of electronics and textiles, among other things. So, those would be the sectors that would see the biggest impact in the event that tariffs were imposed,” he adds.
