Eswar Prasad, Senior Professor of International Trade Policy, Cornell University, argues that India is taking an important role in the global economy – and one that plays to its strengths of political stability, a young and growing labour force and a rising middle class. “It is a landing spot for manufacturers looking for alternatives to China as supply chain bases, and the Modi government has adroitly staked out the country’s independence in pursuing its own economic interests,” says Prasad. “India is now well positioned to take advantage of shifting supply chains that are fragmenting along geopolitical lines, with India seen as an ally of the US and other Western economies.”
A deepening of capital markets
Accompanying the improved macro environment, a number of reforms and developments have strengthened India’s capital markets, which, in turn, have fed into growing prospects for the stock market. Chief among them is the country’s mutual-fund industry, which has taken off thanks to the country’s Systematic Investment Plan (SIP), in which individuals save and invest via monthly deposits.
Assets under management (AUM) in the system hit a record INR68tn at the end of 2024, compared with just INR7tn in March 2013 – an increase that has not only increased liquidity in the markets but also enabled fund managers to take on longer-term investments. “Because the mutual fund manager sees a steady inflow of money, she’s not scared to take longer term calls,” says Tirumalai of UBS. “She knows that the money is coming in, even if there is some temporary blip in global macro or geopolitics.”
Several complementary changes have helped rev India’s economic engines. Demonetisation, the policy of withdrawing large-denomination bank notes from circulation, has reduced the grey economy while boosting deposit flows, as well as flows into asset management. Indeed, seven years on, the policy has resulted in a significant tailwind for the markets, with increased bank deposits generating increased confidence in the banking sector and, by extension, the national economy. “Demonetisation was an inflexion point for the financial system, including banks,” says Vishal Goyal, India Banks Analyst at UBS.
Expansion of the banking sector
A move to oblige government transfers to be paid into a bank account has stripped out the middleman, creating more efficient transfer payments into India’s consumer economy. The results have been sweeping: in 2011, fewer than half of Indian citizens had a bank account; today, and thanks to digital banking, about 90 per cent do – about the same as mobile-phone penetration rates. “Government benefit transfers are going directly into beneficiary bank accounts, driving consumption and savings at the lowest income levels,” says Goyal. “As a greater part of savings started residing in the banking system, and digital investing proliferated, the flow into capital markets has improved significantly over the past six to seven years.”