Don’t lose faith in the India growth story

Still, a fascinating article by David Simpson, who was appointed chairman of Aberdeen New India Investment Trust in April, should give pause for thought. He makes a compelling case for long-term exposure to India, urging investors to look through the stock market volatility of recent times.

Earlier this month, Prime Minister Narendra Modi celebrated a string of successes for his Bharatiya Janata Party in state elections – a remarkable comeback since the BJP lost its parliamentary election in India’s 2024 general election.

Business-friendly Modi faces tough challenges, but recent tax reforms, new commitments on investment in digital and physical infrastructure, and a trade deal with the US all represent positive progress. India’s dependence on oil imports has left it vulnerable to the global impact of the US’s war with Iran, but Modi is now presiding over a massive investment in solar and wind energy capacity.

For now, economists expect Indian growth to be sluggish by recent standards – but still ahead of China. The International Monetary Fund predicts GDP growth of 6.5% in both 2026 and 2027 in India, compared to 4.4% and 4.0% respectively from the Chinese economy.

The comparison is important because two years ago, the consensus was that if the previous 25 years had belonged to China in economic terms, the next 25 years would be India’s. Two years on, both countries have their problems – not least in the global context – but India is ahead. So far, a prediction from Goldman Sachs, that India would consistently grow more quickly than China in the years to 2050, is proving accurate. 

The investment bank also suggested, by the way, India would overtake the US as the world’s second biggest economy by that date.

One basic part of the story is India’s demographic dividend. More than half the Indian population is below the age of 30, compared to only 35% in China, and China’s over-60s population is twice the size of India’s.

From an investment perspective, India potentially has the edge over China in several areas. The digitalisation of its manufacturing sector is proving transformative following significant investment in capacity and skills, including incentives from the Indian Government. That has paid off with companies worldwide looking to reduce dependence on China in their supply chains; companies such as Apple, for example, have already switched some production from China to India.

Consumer-facing companies, meanwhile, are benefitting from the fact their market just keeps getting bigger. China’s middle-class population is still larger than India’s, but India is closing the gap. That will drive huge demand in many areas – particularly if the Modi government’s recent income tax reform supports disposable income at a time when costs are rising.

There will undoubtedly be bumps along the way for the Indian stock market, though recent volatility has helped assuage some of the worries about over-valuations of leading Indian companies. Indeed, many of these businesses have continued to post strong operational results.

None of which is to suggest investors make a headlong rush into India, but it seems sensible to have some exposure to such a significant part of the global economy. In which case, investment trusts offer a useful route into the country, with four different funds offering concentrated exposure: India Capital Growth Fund, Ashoka India Equity, JP Morgan India Growth & Income and Aberdeen New India, alongside a larger group of funds with broad Asia Pacific holdings.

The structure of investment trusts enables managers to take a long-term view, unencumbered by concerns about short-term fluctuations in investor demand, which is especially important in a market such as India. Investment trusts are also well placed to navigate structural problems such as illiquidity.

In short, India is worth another look. Investment fashions are fickle, but the long-term potential of a country with 1.4 billion people (and counting), and some of the world’s most innovative companies, continues to shine through.