(Image: AP)
Rapid economic growth, substantial investment in infrastructure, an expanding manufacturing sector, a flood of inflows into the stock market from domestic investors and booming IPOs. This is not a wish list for Andy Burnham’s government but the reality today for India, offering investors attractive opportunities through its domestic economy.
India is the world’s fastest growing major economy. In the three months to the end of June, the economy grew 7.8%, which was significantly above expectations, and corporate earnings growth rebounded to 20%.
The IMF has forecast that the country will be a $6 trillion economy in the next five years, making it the third largest in the world. The Indian government is even more ambitious, believing the country will celebrate its 100 years of independence in 2047 as a $30 trillion economy.
There are a number of drivers of the domestic Indian economy. First is spending on infrastructure. The government has trebled infrastructure investment and there is a pipeline of $1.2 trillion over the next five years, with $50 billion for Mumbai alone. Second, the private sector is driving the manufacturing sector. India has traditionally been a services-oriented economy, with manufacturing’s share accounting for 13% or 14%. The government wants this share of the economy to increase to at least 25% over the next decade and is supplying incentives to consumer electronics, clean energy, semi-conductors, electric vehicle supply chains and defence companies to help achieve this. India has the population to provide the required labour, with eight to 10 million people joining the workforce every year.
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Favourable demographics will continue to expand consumption as well. By 2030-31, it is estimated there will be 169 million rich people and 715 million in the middle class. In addition, there is easy access to capital through public markets and private sources, strong corporate balance sheets, and the government fiscal deficit has fallen from 9.2% in 2021 to 4.4% in 2026.
While the economy is performing strongly, the India stock market has been more varied, however. While the main MSCI India index was down -3.7% over one year to 25 September 2026, the small and mid caps have delivered good positive returns in aggregate. An index of small companies (NIFTY Small Cap 100) returned +9.7% and an index of mid cap companies (NIFTY Midcap 100) was up +5.8% over the same time period. In contrast, an index of 50 of the largest companies (Nifty 50) was down -7.0%.
There are a number of reasons for this divergence in performance. Small and mid caps have benefited from their earnings outperforming larger companies. Another driver has been flows from investors which has negatively impacted larger companies and been positive for small and mid caps. Foreign investors have taken almost $45 billion out of the Indian stock market over the past 18 months, which has mainly affected large caps. This has led to foreign institutional owners of the stock market being at a decade low.
What has driven these outflows? As a result of the previous strong performance and liquidity of the Indian stock market, it has been acting as the funding market for foreign investors to play the emerging markets AI trade.
The capital outflows have contributed to the Indian currency being one of the worst performers this year. A month ago, however, the Indian government created a deposit scheme for non-resident Indians. This raised capital so quickly – totalling $140 billion – that the government shut the scheme ahead of schedule. This has brought back confidence and the currency has been one of the better performers over the past couple of months.
In contrast, domestic investors are showing confidence in India, especially in small and mid cap stocks. Over the past five years, there have been $300 billion of domestic inflows with monthly investments of $3.5 billion going into funds. These are predominantly from retail investors, with around 100 million regular investors into the stock market. This has helped create a vibrant market, including for IPOs (initial public offerings), with more than 100 of them coming to the main market from the start of 2026 to the end of September. Over 90% of these IPOs are small and mid cap companies; and over the past three years most of the IPOs have been manufacturing businesses.
As India offers a structural growth story (with expectations of 10% to 11% nominal GDP growth for the next few years), broad based earnings momentum and a strong domestic economy, we are confident about the return of foreign investors and the longer-term outlook for the stock market.
Gaurav Narain is principal adviser of the India Capital Growth Fund managed by Liontrust