Why are Foreign Institutional Investors Bullish on India Despite Global Gloominess (2024)

Slated to be the world’s fastest-growing major economy in FY23, India’s rich demographic dividend coupled with its manufacturing push make it the most attractive emerging market economy to invest in.

Despite severe headwinds that included the Ukraine crisis, rising crude oil prices, and an increasingly hawkish US Federal Reserve, India’s economy expanded by 13.5% in the April-June 2022 quarter as compared to the same period last year. Other than bucking the trend with these double-digit GDP growth numbers, India also emerged as the favorite investment destination for foreign institutional investors (FIIs) who poured ₹56,521 crores into Indian equities in August 2022 alone. Let us look at some reasons why India is shining bright, even amidst mounting risks of a global recession jeopardizing economies across the globe.

Stronger growth fundamentals than peers

For a country that is only behind China in terms of its citizen population, India has the benefit of a rich demographic dividend that is slated to power consumption for at least the next decade. With more than half of the country’s population being in the working-age group, India remains an ideal destination for multinational companies to set up bases and make use of the various business-friendly measures taken by the ruling dispensation. This is reflected in the increasing investments being made by foreign companies and investment arms, with FY2021-22 witnessing India’s highest-ever annual Foreign Direct Investment (FDI) inflow at $83.57 billion. Add to this the rise of the Indian middle class, an increasing appetite for luxury goods, and unabated consumer spending despite searing inflation; and you have the perfect ingredients for a spell of high single-digit GDP expansion for the foreseeable future.

Key indicators hitting all-time highs

Apart from direct indicators like GDP, FDI inflows, and even FII investments, other macro parameters such as an all-time high credit card spending, manufacturing, and services purchasing managers’ index (PMI) coming in at an 8-month high and strong auto sales point to an economy that is booming across all demographics. Even more cyclical sectors like real estate have come out of a multi-year trough to clock record home sales in both urban and rural hinterlands of the country. In terms of digital adoption too, India is leading the world on the back of ever-increasing digital payments facilitated by United Payment Interface (UPI) and is also home to more than 100 million crypto investors. This signifies not only the increasing proclivity of young Indians to try out new technologies and services, but also hints at the selling opportunity available for a whole host of MNCs who have so far shied away from the fifth-largest economy in the world.

India to benefit from China-plus-one strategy

If there was one country to benefit immensely from China’s fallout with developing nations post the COVID-19 pandemic, it has to be India. Apart from the great opportunity, this has presented to the local manufacturing sector, Indian firms, products, and services are now gaining consumer preference across international markets, improving the country’s export potential. For a country that has always been a net importer, this tectonic shift could help India balance its trade deficits and allocate even more capital toward developing the country’s infrastructure. In fact, both domestic and international firms are doubling down on their investments in India, with many setting up Research and Development (R&D) units to capitalize on the immense talent pool native to the country. If the government’s push is met with equal enthusiasm from industrialists and entrepreneurs going ahead, India could even dethrone China and establish itself as the world’s manufacturing base in the near future.

With the IMF’s growth forecasts corroborating India’s brighter prospects in an otherwise gloomy macro environment, FIIs will probably continue to infuse more capital into India’s sunshine sectors going forward. As the country progresses towards becoming the third largest economy by 2027, only behind the USA and China, it can be surmised that other investor classes will probably join the bandwagon sooner rather than later.