Is India's Economy on the Rise?

March 8, 2024 Jeffrey Kleintop
India's prospects are bright, but the country faces significant headwinds. Here's what to know as an investor.

For the past 20 years, India's stock market has outperformed both its emerging-market counterparts and the S&P 500® Index.

This momentum largely results from India's continuous growth. Last year, India surpassed China to become the world's most populous country, with 1.4 billion citizens—more than half of whom are under age 30. In addition, S&P Global predicts India will overtake Japan and Germany to become the third-largest economy by 2030.1

Leader of the pack

India's stock market has outperformed both developed and emerging markets over the past two decades.

India's 5-, 10-, and 20-year annualized total returns have outperformed returns in China, emerging markets, and global markets. Except for 20-year annualized returns, the S&P 500 has outperformed India.

Source: Charles Schwab, MSCI, and S&P Global. FactSet data as of 12/31/2023.

Annualized total return is the geometric average amount of money earned by an investment each year over a given time period. Past performance is no guarantee of future results. Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly.

While India's growth story isn't new, it's still very much in flux—and not without risks.

What's going right

Many forces are currently working in India's favor:

  • Supply-chain relocation: The supply-chain issues created by the COVID-19 pandemic exposed the world's disproportionate dependence on China, prompting many companies to diversify into India. For example, Apple ramped up iPhone production in India last year and now produces nearly 7% of its smartphones there.2 As India improves its manufacturing and logistics capabilities—which climbed six places on the World Bank's Logistics Performance Index3 between 2018 and 2023—more companies are likely to follow suit, further attracted by the country's legions of young workers.
  • Government stimulus: To attract more manufacturing to the country, India is easing regulatory burdens, investing in roads and other infrastructure, and offering tax incentives and rebates. Its efforts appear to be working: Gross foreign direct investment reached a record 84.8 billion in 2022, and all investment as a proportion of gross domestic product (GDP) reached a 10-year high of 34% in 2023, according to S&P Global.4
  • Domestic demand: Local services currently account for more than half of India's GDP.5 That makes the country less reliant on exports and less vulnerable to shifts in the global economy—something investors have latched onto as demand for goods has cooled worldwide and manufacturing has entered a downturn.

What could go wrong

Along with its enormous potential, India has some possible pitfalls:

  • Workforce imbalance: Nearly half of India's labor force works in agriculture6—a fact that has restrained the country's output per worker. The sector contributes around 15% to India's GDP versus 19% from manufacturing, which employs only about 27% of the workforce.
  • Workforce participation: India's labor force participation hovers around 40%—much lower than the 65% global average and far less than China's 76%. Weak job creation combined with a growing pool of young workers is a major culprit, but so is a culture that is less supportive of women—especially married women—entering the workforce.7 In fact, India's female labor-force participation rate fell from 31% in 2000 to 24% in 2022.8
  • Expensive stocks: Based on our analysis as of December 2023, Indian stocks were more expensive than their long-term average, perhaps already pricing in the country's potential for growth. (By comparison, Chinese stocks were trading at a discount to their long-term average.) For India's performance advantage to persist, local companies will need to maintain their expected earnings growth—which is entirely possible but hardly a given.

Tread carefully

As things stand, investors interested in India may want to consider gaining exposure through a broad-based emerging-markets index fund rather than a country-specific fund. However, if India can deliver on its demographic dividend and continue to make investment there more attractive, its growing contributions may provide an opportunity for investors.

To research emerging-market index funds, clients can log in to Schwab's ETF Screener or Fund Screener, select Fund Category under Basic, select International Equity, then select Diversified Emerging Mkts.

1Angus Lam, Deepa Kumar, and Hanna Luchnikava-Schorsch, "Outlook for India's Economic Growth and Policy Platforms," spglobal.com, 11/21/2022. 

2Sankalp Phartiyal, "Apple India iPhone Output Soars to $7 Billion in China Shift," bloomberg.com, 04/13/2023.  

3The World Bank's Logistics Performance Index, lpi.worldbank.org. 

4,5Paul Gruenwald, Dharmakirti Joshi, and Rajiv Biswas, "India's Future: The Quest for High and Stable Growth," spglobal.com, 08/03/2023. 

6The World Bank, as of 01/2021. 

7Smriti Sharma, "Why Are So Many Women Absent From India's Workforce?" independent.co.uk, 05/19/2019. 

8Shan Li and Vibhuti Agarwal, "What's Holding Back India's Economic Ambitions?" wsj.com, 08/18/2023.

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