The “Make in India” campaign launched in 2015 and encourages firms to manufacture and assemble products in the country. The Production-Linked Incentives (PLI) scheme offers cash incentives to firms in a range of industries, such as pharmaceuticals, automobiles, textiles and electronics. Under the scheme, qualifying companies receive cash incentives if they are able to boost their sales above the base year, every year, over a period of five years.
Key takeaways
- India’s GDP is expected to grow at a rate of 6.1% over the next five years, making it the world's third-largest economy by 2027.
- Manufacturing and exports are key to the next wave of economic growth in India.
- Sectors such as electronic manufacturing, power and infrastructure are set to gain from India’s push to become a top beneficiary of supply chain relocation.
Can India’s bull market run continue?
Indian equity markets scaled new all-time highs this year and apart from a period of volatility around the time of the general election, its stocks have consistently outperformed Emerging Market (EM) peers.
Since the low of the pandemic in March 2020, the blue-chip NSE Nifty 50 has climbed over 200%, with the total market cap of India’s stock market now around $5 trillion, as investors have grown increasingly positive on India’s long-term economic growth potential.
While stocks have continued to rise, recent trading has been volatile and data points in the last couple of months have given investors pause, following lackluster first quarter (Q1) earnings and slowing GDP growth, which cooled to a 15-month low.
“I am more cautiously optimistic on a near-term basis. An extreme heatwave followed by flooding has impacted demand, while earnings and growth in the last quarter have not met expectations. This is different from the situation we’ve had for the last three years. The market has been a bit range-bound rather than continuing with the same bullish trend we have been used to from 2021 onward,” said Rajiv Batra, Head of Asia Pacific (ex-Japan/China) Equity Strategy at J.P. Morgan.
Strong returns in India have been primarily driven by domestic institutional investors and a surge in retail participation. Rising investor interest in India is starting to form a virtuous cycle of liquidity, sell-side coverage, investor participation and capital issuance.
But India is still a largely under-allocated market for major EM portfolio managers relative to other EM countries, and benchmarks and foreign investment have slowed in recent months. Average portfolio inflows (around $1.7 billion) in May–June roughly halved from their Q1 2024 pace, according to J.P. Morgan Research data.
“I am more cautiously optimistic on a near-term basis. An extreme heatwave followed by flooding has impacted demand, while earnings and growth in the last quarter have not met expectations. This is different from the situation we’ve had for the last three years.”
Rajiv Batra
Head of Asia Pacific (ex-Japan/China) Equity Strategy, J.P. Morgan
Since the start of this year, strong debt inflows to EM Asia have been narrowly based in Korea and India, with the latter benefitting from its recent inclusion in the J.P. Morgan GBI-EM bond index, while other countries in the region saw either tepid inflows or outright outflows. But this trend has started to turn. As well as debt flows, after receiving strong equity inflows worth $6.5 billion over June–July, India recorded outflows worth $0.5 billion through August.
“We don’t expect to see a material surge for the next couple of months or so in the equity market, despite the market almost touching the 25,000 mark. State elections are approaching and have become incrementally important, even from a foreign investor perspective. Investors tend to hold off on trading and stay on the sidelines until after the elections,” Batra said.
India’s economic growth is a long-term theme
India has become one of the fastest growing economies in the world, with real GDP set to grow by 6.5% in 2024, according to J.P. Morgan Economics Research. Based on International Monetary Fund (IMF) data, the nation will clock a growth rate of 6.1% over the next five years, making it the world’s third-largest economy by 2027 after the U.S. and China. It is expected to double its current annual GDP of $3.5 trillion to $7 trillion by 2030.
India 2024–25 real GDP growth is the highest in EM
India’s real GDP growth for 2024–2025 is the highest among EM.
Short term, the shock effect of demand fluctuations and abnormal weather will likely dent the earnings outlook, but India’s long-term growth thesis remains unchanged, with the economy’s compelling structural factors and growth profile capturing investor interest.
The country’s list of positive, long-term economic drivers is long: the demographic dividend with increasing urbanization and rising wealth, a healthy ecosystem of effective regulatory processes, a strong infrastructure push by the government, a manufacturing sector gaining traction under supply chain diversification, sustainable and pro-industry policies and growing renewable energy capacity.
The so-called demographic dividend is expected to persist until at least 2055–56 and to peak around 2041, when the share of the working-age population (20–59 years) is expected to reach 59%. The middle class is the fastest-growing social segment, rising at 6.3% per annum since 1995 and representing around a third of the population.
India working age group (15–64) will continue to expand until 2050s
India’s working age population will continue to grow, peaking at around 59% in 2041.
India’s share of the MSCI EM Index has also grown steadily to an all-time high of 20.5% and will continue to increase its weight within EM, according to J.P. Morgan forecasts.
With the nation’s list of economic strengths and a government looking to unlock potential, the stage is set for a possible multi-year bull run, but the country’s export expansion targets — that will need to be backed by a strong manufacturing growth push — will be key.
India’s rising role in the global supply chain
The government has laid out ambitious plans for goods exports to hit $1 trillion annually by 2030, as the country hopes to become a top alternative for companies looking to diversify their supply chains away from China. Overall exports reached $778.2 billion for the 2024 fiscal year, data from the Ministry of Commerce showed.
Manufacturing in India still accounts for less than 20% of the economy — a figure that has remained relatively flat in the last decade compared with the growth seen in other sectors.
“A lot of India’s manufacturing capital expenditure (capex) has led to import substitution rather than export growth. India’s imports as a percentage of GDP have come down quite substantially because industries are being localized and goods are being produced in India, but this manufacturing growth needs to translate into a larger part of the global export share,” Batra said.
India’s manufacturing share of GDP is expanding after years of investment
India’s manufacturing share of GDP is set to reach 25% by the end of 2025.
“On the services side — in IT, commerce, accounting, biotech — India is there, but the manufacturing side is what’s needed to push GDP higher to 2030 and beyond that, to 2047, in order to reach the Prime Minister’s Viksit Bharat (developed nation status) goal,” Batra added.
But green shoots are starting to emerge for India’s manufacturing and export industry. As global businesses are increasingly looking to diversify supply chain risk, India is expected to gain from firms reducing their reliance on China, according to J.P. Morgan Research. The country’s labor cost advantages are a strong selling point compared with the rising costs in China. Plus, exports have emerged as the largest contributor to India’s GDP post-COVID, as government incentives are starting to pay off.
India is targeting supply chain growth in a few key areas:
Policymakers have made unprecedented investments in modern infrastructure, launching the National Infrastructure Pipeline (NIP) and PLI schemes over the past nine years. India plans to spend $1.4 trillion on infrastructure through NIP in the next five years and Indian railways have also witnessed a massive capacity expansion through line doubling, electrification and the Vande Bharat Express, India’s first indigenous semi-high-speed service. The metro rail projects have reached 21 cities. In the aviation sector, 75 new airports have been built and operationalized in the past 10 years. A further 111 waterways have been declared as National Waterways.
The government is also focusing on clean energy transition so India can reduce reliance on imports and achieve net zero by 2070. India currently has a renewable energy capacity of 197.20 GW with an estimated investment of $360 billion needed to achieve the government’s target of increasing installed renewables capacity to 500 GW by 2030.
“Structural reforms are changing the way business is conducted in India and the resulting efficiency gains are set to be significant, driving permanent productivity increases. A strong infrastructure push, pro-industry policies and government spending are all helping to position India as a global manufacturing hub for the long term,” said Batra.
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