The burgeoning potential of India’s vibrant economy is palpable from the moment you set foot in the country, with its young workforce noticeable as soon as you land.

On my latest visit to the country in September, what became immediately apparent was infrastructure improvements to ease congestion – an encouraging sign of government progress.

Construction to develop other transport links are also in the pipeline, including Mumbai Metro Line 3 connecting Cuffe Parade to Aarey district and a bullet train from Mumbai to Ahmedabad.

At an estimated cost of $13.6 billion and completion date of 2027, the bullet train will cut travelling time between the cities to just two hours, from over six hours previously. It underlines India’s growth potential.

But while congestion has improved, it’s from a low base. India has ground to cover to drive efficiency and keep its GDP growth outlook on track, which most economists estimate at 6-6.5% per year.

But the government is in action mode, with INR3.7 trillion ($45 billion) in public spending for the first five months of the current financial year already INR2.52 trillion higher than the same period last year.

Feedback on the ground

My discussions with companies on the ground underlined the resilience of both the domestic jobs market and India’s broader economy. Company leaders aren’t anticipating any imminent reduction in interest rates, with the Reserve Bank of India (RBI) having held steady at 6.5% since February and retained a tight stance on liquidity to shift inflation of 6.8% down towards its 4% target.

With recent data showing investment up 8% year-on-year in the second quarter, we see room for a pick-up in private investment, with companies’ capital spending still allocated to sectors with the highest growth potential. This places less demand on the government to drive growth, allowing it to focus on fiscal consolidation and, in turn, lowering its funding requirements from the bond market.

Renewable energy is one area where we see an increase in investment. Sprawling conglomerate Reliance Industries – best known for its oil refinery business – has pledged to deploy capital into new energy over the long term to develop this segment of its business.

Reliance is also investing heavily in the rollout of 5G over the next 12 months to tap into India’s high adoption of smart phones. A recent survey by Ericsson estimated that 31 million users were likely to upgrade to 5G phones by the end of this year.

Separately, fellow conglomerate Tata group – one of the country’s largest employers – is looking for new office space to meet growing demand for its IT consultancy services.

Indeed, the nation’s services exports are holding up despite the global slowdown in demand for goods. India’s services balance for the second quarter of 2023 was over $4 billion higher year-on-year and has been useful to offset weakness in goods exports.

Most businesses welcome RBI’s efforts to suppress foreign exchange volatility since it allows them to plan and hedge with greater certainty, although the small pick-up from rupee deposits currently on offer at around 6.5% isn’t attractive enough to encourage immediate repatriation of export earnings when US dollar equivalents are above 5%.

While exporters must convert these to local currency within 90 days, most are in no hurry until they see higher local deposit rates from here, which would slow RBI’s pace of FX accumulation.

Importantly, the recent decision to include Indian government bonds (IGBs) in the JP Morgan GBI Emerging Markets Global Diversified Index from June next year is a hot topic after much speculation over recent years. Now the onus is on other index providers to do the same.

Both onshore and offshore stakeholders in India welcome this development since it promises to expand the bond market’s investor base, adding a positive tilt to the demand-supply dynamics for Indian fixed income.

Initially, the index provider estimated that inclusion would result in $25 billion in inflows (10% of the $250 billion tracking the index), although we anticipate higher flows since a third of the $250 billion comes from customised indices that exclude China in the investible universe. This points to a sizeable pool of active managers more likely to have overweight positions in India.

While there are fears about the potential for large foreign outflows in a risk-off environment, ultimately expected inflows would still be less than 5% of the RBI’s $600 billion war chest of FX reserves.

Adding to this favourable backdrop, a recent rule change to allow banks to hold more high-quality bonds in their hold-to-maturity portfolios should provide another source of support for government debt. Together with index inclusion, it creates a positive demand picture for Indian bonds.

Reasons to be bullish

Domestic investors are known for a bullish outlook on India. But the reasons are starting to stack up given favourable demographics, its status as a global IT services hub and the fact it is a beneficiary of the China+1 strategy where companies seeking to diversify are looking to invest in India. Central bank action means rupee volatility is also among the lowest of all Asian currencies.

Few investors that I spoke to are talking about the tail-risk scenario raised by JP Morgan chairman Jamie Dimon recently that US interest rates could hit 7%, which would likely have a major impact on emerging markets, including India.

Perhaps that’s because there’s an expectation that income growth in a vibrant population of 1.4 billion people could counterbalance any external global shocks. If improvements in infrastructure are anything to go by, India may finally be living up to its much-vaunted promise.