India made headlines a few years ago when it surpassed China to be the world’s most populous country. With over 1.46 billion people (approximately 1/6 of world’s population), the country’s young demographic and rising middle class provides an attractive macroeconomic backdrop for investors. More recently, India has faced criticism in areas such as its dependence on imported oil and its slower progress in artificial intelligence compared with global peers. However, the long-term growth trajectory of India remains intact and India’s influence on the world economy is poised to grow in the coming years.

According to the International Monetary Fund (IMF) India is forecasted to grow 7.1% in 2026, the fastest growing major economy. China is expected to grow only 4.4%. Looking towards the next 5 years, India’s growth is set to outpace China, the US and more broadly, the aggregate World, Advanced Economies and Emerging Market and Developing Economies.

There are several supportive points:
• India became a clear beneficiary of the “China +1” approach, where companies seek to relocate or diversify supply chains beyond China to minimize single country risk. Many of the relocation or expansion of supply chains has gone to India.
• The country’s favorable demographics which include a large, young English speaking population, lays the foundation driving innovation and global growth.

• India is taking steps to boost foreign capital inflows, including removing interest and long-term capital gain taxes on overseas investors as well as attracting capital through major index inclusion (joined JP Morgan GBI in 2024 and eying the Bloomberg Aggregate Bond Index).
• Government investment in artificial intelligence, infrastructure, industry capex and public spending is supporting growth.
• Changes in the energy mix could help lessen need to import; renewable energy capacity is growing and the country ranks 3rd globally in renewable energy capacity.
• S&P recently upgraded the Indian economy to BBB, the first upgrade the agency issued on the sovereign in 18 years. Signaling confidence in the country, the agency citied resilient growth, robust consumption and sustained fiscal consolidation.

While growth drivers remain solid, there are some key points to consider while investing in the country:
• India’s dependence on imported oil has left it vulnerable to the recent spike in crude price as fallout from the war in Iran.
• Some investors have voiced concerns that India is falling behind in the global AI race, relying heavily on foreign-developed models. There are also concerns that advances in artificial intelligence could disrupt the country’s large outsourcing sector.
• Tensions with Pakistan that could flare up at any moment. It is important to note that both countries have nuclear weapons.
• Potential governance concerns with large, closely held corporations.
• Depreciation of the country’s currency, the rupee. (Depending on how you gain exposure to India, could have a limited impact.)

Historically, valuations can expensive in India. Given the recent headwinds facing the country, is this a good time to invest in a market that is poised to play an increasingly influential role in the global economy for years to come?