Is India's Economy on the Rise?

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.

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.

Investors should consider carefully information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Past performance is no guarantee of future results.

Investing involves risk, including loss of principal.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Performance may be affected by risks associated with non-diversification, including investments in specific countries or sectors. Additional risks may also include, but are not limited to, investments in foreign securities, especially emerging markets, real estate investment trusts (REITs), fixed income and small capitalization securities. Each individual investor should consider these risks carefully before investing in a particular security or strategy.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

Supporting documentation for any claims or statistical information is available upon request.

Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. For more information on indexes, please see schwab.com/indexdefinitions.

The MSCI India Index is designed to measure the performance of the large and mid cap segments of the Indian market covering approximately 85% of the Indian equity universe.

The MSCI China Index covers about 85% of this China equity universe and is designed to capture large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs).

The MSCI Emerging Markets Index is a free float-adjusted market-capitalization weighted index that measures the performance of the large- and mid-cap equity market across 27 emerging markets countries.

MSCI All Country World Index (ACWI): A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

---

A message from Advisor Perspectives and VettaFi: Gain expert insights into the resurgence of equity markets and how they're shaping investment strategies for the next year. Join us at the Equity Symposium on March 13th at 11 am ET. Click here to register.

© Charles Schwab

More Large Cap Growth Topics >