India is expected to have the fastest Gross Domestic Product (GDP) growth rate among emerging market countries over the foreseeable future. In a recent address to fund managers and institutional investors, Finance Minister Arun Jaitley said that many positive indicators, including deficit reduction and low inflation, have made him hopeful that GDP growth would outperform last year’s 7.3 percent. In fact, while the International Monetary Fund (IMF) expects growth in the U.S. to be only 2 to 2.5 percent and in Europe and Japan to be only 1 to 2 percent, they expect growth in India to be more than 7 percent in the next year, as well as to exceed GDP growth in China individually and all of EM in aggregate for the remainder of the decade. Emerging Global Advisors believes the rate of growth should continue to improve as interest rates decline and structural reforms begin to take hold.
One engine of that growth is the rapidly growing middle class in India. Historically, the establishment of the middle class is when consumption levels begin to grow exponentially. The worldwide middle class comprised only 1.8 billion people in 2009, but that number is expected to expand to 3.2 billion by 2020 and to hit 4.9 billion 10 years after that. Those are impressive numbers, and 85 percent of that growth is expected to come from Asian countries, initially led by China but with India hot on its heels.
In 2000, the middle class in India accounted for less than 1 percent of the global middle class. Ten years later that figure had about doubled, but was still less than 2 percent. However, by 2020, India is projected to account for 10 percent of the world’s middle class and then to jump to 12 percent a year later, surpassing the U.S. By 2024, India’s middle class will overtake China’s as the world’s largest with 16 percent of the total global middle class population. This growth is due in part to excellent demographics – a young population that is growing rapidly.
The size and spending by the emerging Asian middle class has moved from immaterial to meaningful in the first decade of the twenty-first century. It is growing rapidly and is projected to be the dominant factor in global consumption by the end of the first quarter of the century, as the importance of more developed market areas of the world, including North America, Europe and Japan, decreases.
This significant growth of the Asian middle class should translate into an increasing share of global consumption. This consumption growth is partly a result of favorable demographics and rising incomes. Lifestyle and behavioral changes are also playing a key role as many in India and other emerging market Asian countries have grown up in times when traditions of austerity and frugality are much less significant than for prior generations.
In addition to long-term demographic trends supporting its growth, there are a number of factors helping the Indian consumer today. The Reserve Bank of India cut interest rates in late September, which should help stimulate the country’s economy and ultimately fuel growth. Supporting these low interest rates are low inflation and low commodity prices, both of which should help put money in the pockets of the consumer, particularly fueling India’s domestic demand sectors.
Additionally, there are positive developments within the Indian economy, including macroeconomic reforms instituted by the government to deregulate fuel and diesel prices, encourage privatization (particularly in the financial and utilities sectors), and rationalize the tax regime. These should help create more favorable conditions for investment and reaccelerate Indian growth.
All of these developments have allowed India to continue outperforming the broad emerging market index. Through October 30, the MSCI India Index outperformed the MSCI Emerging Market Index by 5.5 percent, with a year-to-date loss of 3.7 percent, compared to the MSCI Emerging Market Index loss of 9.2 percent.
India is also benefitting from the lower price of oil and better fiscal management policies, including cuts to government subsidies, both of which are helping to reduce India’s fiscal deficit and create conditions for the central bank to lower interest rates. Anything that helps to strengthen the rupee can prevent the erosion of returns for U.S. investors.
Lastly, estimates for 2016 corporate earnings growth are favorable throughout the emerging markets, with no country looking as promising as India, which is expected to be double the MSCI EM Index’s 11.8 percent. Growth in profit margins is being fueled by the same factors helping the Indian consumer: lower commodity prices, inflation and interest rates.
We believe that, contrary to some opinions, the opportunities for investment in India are far from over. The combination of reforms, interest rate cuts and strong demographics, are just a few of the reasons why investing in India—specifically, the Indian consumer—is still a good idea.
Ed Kerschner is Vice Chairman at Emerging Global Advisors, a leading provider of strategic beta emerging market portfolios.
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 The Times of India, "Indian economy to outpace 7.3% growth of last fiscal: Arun Jaitley," September 21, 2015.
 IMF - World Economic Outlook, October 2015
 The Emerging Middle Class in Developing Countries, Homi Khara, OECD Development Center, January 2010
 OECD, 2010.
 CIA World Fact Book, 2014.
 Bloomberg, MSCI as of October 30, 2015.
 Bloomberg, MSCI, EGA as of October 30, 2015.