India is a rapidly growing economy, which is approaching a turning point very quickly. In fact, we predict that by 2030 it will become the third largest economy in the world, but above all that this path will accelerate in the decades to come, while the importance of the West is shrinking and China is plateauing. Supporting the growth of what is considered the world’s largest democracy has been the development of a workforce which presents the skills needed to meet the needs of an increasingly digitalized world. This is what emerges from the new contribution of Legal & General Investment Management (LGIM) about India and on the reasons that make it an atypical emerging market.
India, big economy
However, these are aspects “that have now become part of a rather widespread and well-known narrative among market players, while we believe that there are also other structural factors that make India a special case among emerging markets and that can make a difference to an investor’s allocation.”
But relatively closed
The progress of India “it seems to go against the image of a relatively closed economy, focused mainly on satisfying the needs of its population. Yet, the percentage of GDP composed of exports and imports is less than 50%, while in countries like the Philippines and Mexico it reaches 75% and 80% respectively”.
At this commercial closure “there is also a certain financial closurewith foreign currencies often absent from local markets. To give some more numbers, international assets and liabilities within portfolios are less than 5%; in China they are 30%. Furthermore, until Indian government bonds were included in JP Morgan’s emerging markets index, they represented just 2% of the major bond indices, while China, Indonesia and Mexico were respectively at11%, 23% and 41%”.
This “historical self-sufficiency” has meant that Indian asset classes have historically been poorly correlated with the global economy, fostering diversification.
An atypical economic structure
One of the main features of the Indian economy is the high share of services in its exports, a fact that has earned it the nickname “the back office of the world”. To give you an idea, services represent 10% of China’s exports; for India they are 45%. Furthermore, unlike the average emerging market, New Delhi is not a major exporter of commodities (3% of GDP versus 15%-20% for Russia and Chile), which makes it poorly correlated not only with the global economy, as seen in the previous paragraph, but also with other EMs.
A relatively stable currency
The “FX” item has always been a very important discriminant for those who invest in local currency and, similarly to other emerging economies, India has also maintained a deficit on a moderate capital account since 2013. However, its attractiveness for foreign direct investment (FDI) has meant that this deficit has been largely financed by the latter, leading to a positive balance of payments.
It should not be forgotten that this nation is the world’s fourth largest holder of foreign exchange, which allows the Reserve Bank of India to limit the volatility of the rupee.
The only real alternative to China
As of today, India is the only economy that can truly challenge China as the driver of global growth, and there are several factors that support this scenario. The first is population: by 2031, India could account for a fifth of the growth in the working-age population. As it moves closer to the East Asian growth model of export-led infrastructure investment, this virtuous circle could allow India to displace China as the engine of global growth.
The second concerns the manufacturing sector in strong growth, whose output is expected to triple over the period 2022-2032, supporting the export of services mentioned above.
In the end, thanks to India Stack – the country’s API solution for identity, data and payments – India can see a steady growth in consumer and business credit creation. This could ultimately translate into an increase in GDP per capita.
According to LGIM, “this substantial macroeconomic strength represents” a strong driver for Indian government bonds (IGB). Furthermore, in addition to being one of the few emerging markets with an investment-grade rating on public debt, as previously mentioned, these securities have been included in one of the major indices on emerging markets, namely the GBI-EM Global Diversified Index by JP Morgan, which from the end of June began to include them with an initial weight of 1%, to then reach 10% in March 2025; on par with China. Furthermore, starting next January, Bloomberg will also add IGB to its index on emerging markets, giving a further boost to the flow of capital towards this country”.
