Why India warrants a separate allocation

India is now the fastest-growing country in the world. Importantly, the growth is forecast by the International Monetary Fund (IMF) to continue, even while other countries, such as China, slow. These strong growth projections are driven and supported by compelling political, economic and grass-roots changes that are underway in India.

The fundamentals

According to the IMF, global growth is projected to slow to 3.1 per cent in 2016 before recovering to 3.4 per cent in 2017.

For Asia specifically, the overall near-term outlook is projected to remain solid, helped by a stronger global economy and broadly accommodative policies and financial conditions.

India remains a regional and global dynamo, with its economy projected to grow at 7.6 per cent in both the 2017 fiscal year (ending March 2017) and 2018 fiscal year (ending March 2018) as illustrated in the chart below.

While the forecast gross domestic product (GDP) growth levels present a strong case for investment by Australian investors now and in the future, there are many other compelling reasons why India presents a strong case for inclusion as a separate allocation in investors’ portfolios.

Prime Minister Narendra Modi was elected on a platform of significant economic reform in 2014, forming the first majority-led government in over 30 years.

Since taking office, Modi has led a substantial and transforming reform agenda in areas such as infrastructure, taxation, deregulation of certain industries, increasing transparency and improving governance and labour markets. The current pace of policy reforms has been unmatched in the past two decades and is contributing to the rebound in confidence.

These political decisions are increasing the opportunity for economic growth. The list of reforms is lengthy. Some of the essential progressive reforms introduced this year alone include the goods and services tax, expected to increase GDP by 1 per cent; Skill India, vocational skills training to 400 million people by 2022; and 30 million toilets installed in schools, improving opportunity for girls’ education.

Underlying factors and grass-roots changes are also providing the ongoing foundations for strong baseline growth.

While most developing countries rely on exports to fuel growth, in India growth is internally-driven.

Additionally, there is a large, growing and increasingly educated workforce, with the world’s largest population under 30 by percentage and number, and currently, through the Smart Cities urbanisation program, there are 100 new cities being built.

These factors alone mean India is decoupled from the global economy

Mahesh Patil, co-chief investment officer at one of Jaipur AM’s asset manager partners, Birla Sun Life, summarises the opportunity: “India is amongst the few countries with a compelling structural growth story, which can benefit from the virtuous cycle of favourable demographics.

“We believe the Indian economy is at an inflection point given the government’s structural reform agenda.”

Investing in the opportunity

Until recently, Australian investors wanting to separately allocate part of their international investments to India have had limited fund opportunities available.

Most investors’ exposure to India has typically come via an allocation to the country within international or emerging markets equity funds. This of course leaves the discretion of asset allocation decisions to the fund manager and on average the country allocation has been about 0.4 per cent, equivalent to the MSCI weighting.

Studies on the correlation between India and world markets show minimal overlap, leading to the conclusion separately allocating to India drives better risk-return outcomes for international investments.

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