India: The Unmissable Investment Story of the Decade

 India: The Unmissable Investment Story of the Decade

By R. Kannan

The global capital allocation landscape is shifting, and the destination of choice is now unequivocally clear: India. For Foreign Portfolio Investors (FPIs), the hesitation of the past must yield to the urgency of the present. This is not merely a cyclical upturn; it is a structural, generational transformation rooted in solid economic reforms, a vibrant demographic dividend, and an unmatched commitment to digital and financial stability.

Key Drivers for Increased FPI Investment in India

Robust and Fastest Growing Major Economy

India is cemented as the world's fastest-growing major economy, a status supported by both quantitative data and structural economic policies. The current consensus GDP growth projection for the current fiscal year (FY 2026) hovers around 7.0% to 7.3% by leading financial institutions and the Reserve Bank of India (RBI), significantly outpacing the projected growth rates for the US, China, and the Euro Area.

Key Growth Components:

• Investment Cycle Resurgence: A critical driver is the revival of the capital expenditure cycle. Government capital expenditure has been sustained at elevated levels (rising by over 30% year-on-year in recent budgets), crowding in private sector investment. This focus on infrastructure (roads, ports, digital backbone) creates long-term productive capacity, often exhibiting a multiplier effect of over 2.5 times on economic output.
• Broad-Based Momentum: The growth is not sector-specific but is observed across manufacturing (supported by the PLI scheme), construction, and high-value services. The Purchasing Managers' Index (PMI) for both manufacturing and services consistently registers well above the expansionary threshold of 50, indicating sustained business optimism and order books.
• Inflation Management: While growth is strong, the RBI has demonstrated a commitment to monetary policy stability, aiming to keep headline inflation within the target band of 2%–6%. Stable inflation provides a predictable environment for FPIs to calculate real returns.

This confluence of sustained high growth, robust capital formation, and macro-stability solidifies India's position as the primary engine of global economic expansion for the foreseeable future.

Demographic Dividend and Mammoth Domestic Demand

India’s demographic profile is arguably its single greatest structural advantage. With a population that recently surpassed all others, the country possesses a vast, young, and increasingly aspirational consumer base.

Core Drivers of Domestic Demand:

• Median Age Advantage: India’s median age is approximately 28 years, substantially lower than China (39 years) and the US (38 years). This ensures a large and growing workforce for decades to come, translating to higher savings and investment potential in the long run.
• Consumption Share: Private Final Consumption Expenditure (PFCE) consistently accounts for over 55% of India’s GDP, acting as a powerful counter-cyclical force. Even during global economic downturns, this massive internal consumption base provides resilience, as evidenced by its rapid rebound post-pandemic.
• Rise of the Middle Class: The number of households earning between $10,000 and $35,000 annually (the emerging middle class) is projected to double over the next decade. This demographic shift drives demand for premium goods, services, housing, and financial products, opening up significant non-linear growth avenues for FPIs invested in consumer-facing sectors.
• Urbanization Momentum: The rate of urbanization is accelerating, concentrating economic activity and boosting productivity. Urban areas often have higher per capita consumption and higher adoption rates for organised retail and digital services.

This combination of scale, youth, and rising disposable income provides a unique, insulated growth runway unmatched by ageing economies.

Strengthening Financial Stability

The transformation of India's financial sector from a major systemic risk to a global strength is a testament to effective structural reforms. This stability underpins the entire economy and reduces the risk premium for FPIs.

Banking Sector Health:

• Decline in Stress Assets: The dramatic reduction in the Gross Non-Performing Assets (GNPA) ratio for Scheduled Commercial Banks (SCBs) from a peak of nearly 11.5% in FY 2018 to approximately 2.3% by March 2025 is a major structural victory. This has been achieved through stringent asset quality reviews, the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016, and aggressive provisioning.
• IBC as a Game Changer: The IBC has fundamentally changed creditor-debtor relationships, accelerating the resolution process and improving recovery rates, thereby instilling greater lending discipline.
• Profitability and Capital Buffers: The record aggregate net profit of over ₹4.01 lakh crore achieved by SCBs in FY 2025 demonstrates that banks are now profitable, generating internal capital, and not reliant on government bailouts. Furthermore, a Capital to Risk-Weighted Assets Ratio (CRAR) consistently above 17.0% ensures strong capital adequacy, allowing banks to meet the growing credit demand for the economy.

Corporate Balance Sheets:

• Deleveraging: Indian corporates, particularly in sectors like metals, cement, and power, have spent the last few years deleveraging. The aggregate debt-to-equity ratio has significantly improved, making them less vulnerable to interest rate shocks and more capable of undertaking new capital expenditure, which is crucial for manufacturing growth.
• Rising Credit Growth: Strong double-digit credit growth in recent years indicates robust demand from both the retail and industrial sectors, confirming the banks’ health and the economy's investment appetite.

Digital Transformation and Consumption

India's success in building and deploying its Digital Public Infrastructure (DPI), collectively known as the "India Stack," is a paradigm shift that is driving unprecedented productivity and formalization.

The UPI Revolution:

• Scale of Transactions: The Unified Payments Interface (UPI) processes over 15 billion transactions monthly, a volume that far exceeds the combined digital payments of many developed nations. The monthly value of these transactions is staggering, crossing ₹25 lakh crore in recent months.
• Cost-Effectiveness: UPI offers real-time, interoperable, and near-zero-cost transactions, democratizing digital payments and accelerating the formalization of the informal economy. FPIs benefit from a clean, traceable, and tax-compliant ecosystem.

Financial Deepening through DPI:

• PMJDY and Aadhaar: The foundation—Aadhaar (biometric identity) and PMJDY (universal banking access)—has brought over 500 million people into the formal banking system. This inclusion accelerates the process of financialization, where household savings shift from physical assets (gold, real estate) to financial assets (mutual funds, stocks, insurance).
• Open Networks: Upcoming protocols like the Open Network for Digital Commerce (ONDC) aim to decentralise and democratise e-commerce, which is expected to further fuel consumption and small business growth by reducing the monopolistic power of large platforms. This creates a much broader and more competitive marketplace for products and services.

This digital leap is a key enabler for FPIs, ensuring transparency, scale, and efficient execution across all economic activities.

Aspirational Consumers, Corporate Confidence, and Market Depth

Youth Spending and Aspiration (Elaborated)

India's large cohort of Gen Z and Millennials, often termed the "Aspirational Consumers," is a potent force reshaping consumption patterns and driving the growth of organised retail and services. This demographic shift is critical for FPIs focused on consumer discretionary and high-growth sectors.

Key Consumer Trends and Impact:

• Premiumization and Brand Loyalty: Unlike previous generations focused purely on necessity, the younger cohort displays a strong inclination towards premiumization. They are willing to pay a premium for branded goods, quality, experiences, and convenience. This trend is evident in sectors like branded apparel, high-end electronics, quick-service restaurants, and specialised healthcare services.
• Experience Economy: Spending is shifting towards experiences over mere possessions. Travel, entertainment (multiplexes, streaming services), fitness, and dining out are seeing explosive growth. This sustained demand fuels the growth of high-multiplier service sectors.
• Digital Influence on Spending: Digital literacy is extremely high among this group. They use social media and e-commerce platforms extensively, which accelerates purchasing decisions, increases market transparency, and drives consumption, particularly in Tier-2 and Tier-3 cities. The ease of access to credit through digital lenders and fintech solutions further facilitates spending.
• The Power of Financialization: As this young workforce enters the formal economy, their savings are increasingly flowing into financial assets (mutual funds, insurance, direct equity) rather than traditional physical assets. This sustained, high-growth inflow is a long-term structural tailwind for the domestic capital markets.

Global Corporate Confidence and Value-Chain Upgradation

The unprecedented wave of investment and strategic shifting of global corporate functions to India signals profound confidence in its long-term stability and talent pool. This extends beyond simple outsourcing to strategic integration.

Foreign Direct Investment (FDI) Confidence:

• Mega Investment Announcements: Recent investment commitments from major global corporations underscore India's status as a top destination. For example, prominent announcements from semiconductor firms, cloud service providers, and renewable energy giants are in the tens of billions of dollars, representing a decisive shift in global capital allocation towards India. This FDI not only injects capital but also brings advanced technology and best practices.
• Shift from Outsourcing to 'In-sourcing': Global Capability Centres (GCCs) in India are the clearest evidence of this upgradation. Once known as captive back-offices, GCCs are now operating as strategic command centres, driving global R&D, product innovation, artificial intelligence (AI) development, and sophisticated engineering work.
• Talent and IP Generation: GCCs employ over 1.9 million highly skilled professionals, contributing significantly to intellectual property (IP) creation. The total revenue generated by these centres is projected to have crossed $64 billion in the last fiscal year, cementing India's role as a high-value hub. The presence of world-class talent reduces operational risk and enhances the technological competitiveness of global firms operating from India.

This movement up the value chain transforms India from a cost-arbitrage location to a core strategic partner in the global corporate ecosystem.

India as a Global Manufacturing Hub

Government-led industrial policies are actively repositioning India as a key player in the global manufacturing landscape, leveraging the ongoing de-risking of global supply chains.

The Impact of the PLI Scheme:

• Incentivizing Scale: The Production-Linked Incentive (PLI) scheme, rolled out across key sectors (including mobile phones, automotive components, white goods, and pharmaceuticals), offers performance-based incentives on incremental production. This has successfully attracted both large foreign manufacturers (especially in electronics) and spurred domestic giants to commit to large-scale capacity expansion.
• Sectoral Success Stories: The mobile manufacturing sector is a prime example. PLI incentives have led to a massive increase in domestic production and a surge in electronics exports, demonstrating India's capability to integrate into complex global supply chains.
• Building Ecosystems: The focus is not just on assembly but on creating complete manufacturing ecosystems, particularly in high-tech areas like semiconductors and solar PV modules. These investments, supported by state and central governments, are fostering local component suppliers and R&D.

This policy-driven shift towards manufacturing is crucial for employment, exports, and sustainable long-term economic growth, providing FPIs with robust opportunities in industrial and capital goods sectors.

Deepening and Expanding Capital Markets

The increasing depth, liquidity, and regulatory maturity of the Indian capital markets make them a highly attractive destination for FPIs seeking large, tradable investment avenues.

Primary Market Vibrancy:

• IPO Momentum: India has consistently ranked among the top global markets by the number and value of Initial Public Offerings (IPOs) in recent years. This success is driven by strong domestic investor interest and robust corporate earnings, which provides FPIs with a constantly refreshing pipeline of new investment opportunities across diverse sectors.
• SEBI's Regulatory Strength: The Securities and Exchange Board of India (SEBI) maintains a mature and globally respected regulatory framework that ensures investor protection, market transparency, and efficient dispute resolution, giving FPIs confidence in the market's integrity.

Market Size and Retail Participation:

• Soaring Market Capitalization: The total market capitalization of listed companies has grown exponentially, often crossing critical psychological and statistical thresholds (e.g., $5 trillion), which places the Indian market among the world's largest. This size provides the necessary liquidity for large FPI transactions.
• Financialization of Savings: The surge in retail participation, evidenced by the record number of new Demat accounts opened, is a structural tailwind. Domestic Institutional Investors (DIIs) are now a counterbalancing force to FPIs, providing necessary stability and depth during periods of global volatility. This diversification of the investor base is a sign of a maturing capital market.

The growing scale and resilience of India’s capital markets ensure that FPIs can deploy and withdraw capital efficiently, optimising their portfolio management strategies.

Macro Policy Pillars Enhancing India's FPI Appeal

Macroeconomic Stability and Low Current Account Deficit (CAD) (Elaborated)

A stable external sector, characterized by a manageable Current Account Deficit (CAD), is a vital indicator of an economy's health, directly reducing the foreign exchange risk for FPIs. India has achieved remarkable stability in this area.

CAD Management and Resilience:

• Sustainable CAD Level: The CAD, which represents the difference between the country's foreign currency inflows and outflows (excluding capital flows), has been successfully contained. Projections consistently place the CAD as a percentage of GDP in a comfortable range, often between -1.0% and -1.2% in the near term. This level is widely considered sustainable and easily financed by robust Foreign Direct Investment (FDI) and FPI inflows.
• Reduced Vulnerability: Unlike the "Taper Tantrum" period of 2013, when a high CAD (near 4.8% of GDP) exposed India to massive FPI outflows and currency depreciation, the current low CAD significantly reduces the economy’s vulnerability to global monetary tightening cycles or commodity price shocks.
• Financing the Deficit: Crucially, the current CAD is typically financed by stable capital inflows (like FDI and remittances) rather than volatile debt flows, indicating a higher quality of external financing. A low and stable CAD is a prerequisite for a stable exchange rate, which is paramount for protecting FPI returns.

Robust Foreign Exchange Reserves

India's massive and steadily growing buffer of Foreign Exchange (Forex) Reserves is a primary source of confidence for global investors, acting as a crucial line of defence against external shocks and speculation.

Forex as a Stability Anchor:

• Size and Strength: The Forex Reserves, which stood at approximately $687.26 billion as of December 2025, represent a substantial war chest. This figure places India among the top reserve holders globally.
• Import Cover: This high reserve level provides import cover for well over 11 months (the number of months of imports that can be paid for with current reserves). This ratio is a critical measure of external resilience; a higher cover means the country can withstand disruptions to trade or capital flows for an extended period without facing a crisis.
• RBI's Intervention Capacity: The size of the reserves gives the Reserve Bank of India (RBI) substantial firepower to intervene in the foreign exchange market to smooth out unwarranted volatility in the Indian Rupee (INR). This proactive and measured intervention policy, aimed at preventing sharp depreciation, is highly valued by FPIs as it mitigates currency risk.
• Sovereign Risk Mitigation: High reserves reduce the perception of sovereign risk, making Indian debt and equity assets more appealing to international investors by signalling financial strength and the ability to meet external obligations.

Significant Improvement in Ease of Doing Business (EoDB)

Despite the temporary suspension of the World Bank's global report, India's own internal reforms have fundamentally improved the regulatory environment, creating a more conducive climate for foreign and domestic enterprises.

The Reform Trajectory:

• Leapfrog in Rankings: India achieved a phenomenal improvement in the World Bank’s Ease of Doing Business ranking, soaring from 142nd in 2014 to 63rd in 2020. This was one of the steepest climbs by any major economy.
• Targeted Reforms: This improvement was driven by targeted reforms in key areas:
• Dealing with Construction Permits: Simplifying and digitising the approval process, drastically reducing the time required.
• Getting Electricity: Making connections faster and more reliable for businesses.
• Trading Across Borders: Reducing documentation and time required for imports and exports through digitisation and integrated logistics.
• Compliance Burden Reduction: The government has made a sustained effort to decriminalise minor economic offences and reduce the overall compliance burden, fostering a low-friction environment for startups and large businesses alike. These changes directly lower the operational costs and uncertainty for FPI-invested companies.
• State-Level Competition: The central government's ranking of states on their own EoDB parameters has fostered competitive federalism, leading to a race among states to attract investment by offering clearer, faster administrative processes.

Fiscal Consolidation

The government's disciplined and credible commitment to fiscal consolidation is foundational to long-term macroeconomic health, ensuring that public finances do not crowd out private investment or fuel inflation.

Discipline and Credibility:

• Fiscal Deficit Roadmap: The government has consistently laid out a credible roadmap to bring the fiscal deficit down to 4.5% of GDP by FY 2026 and further over time. This commitment provides a clear, long-term outlook for public debt management.
• Quality of Expenditure: The composition of government spending has shifted decisively towards Capital Expenditure (CapEx), as discussed earlier. CapEx creates long-term assets, enhances productivity, and has a high economic multiplier, distinguishing it from unproductive revenue expenditure (subsidies, consumption).
• Impact on Interest Rates: A sustained path of fiscal consolidation reduces the government's borrowing needs. This helps keep interest rates lower in the long run by reducing the demand for credit from the sovereign, which is highly favourable for equity valuations and makes corporate debt issuance cheaper.
• Sovereign Rating Outlook: The sustained fiscal discipline has led major global rating agencies to maintain a stable or even positive outlook on India's sovereign debt rating. An upgrade would unlock a massive pool of investment from global pension and bond funds currently restricted by their mandates.

Conclusion: The Time to Allocate is Now

The stars have aligned for India. The economy boasts high growth, clean financial health, a powerful domestic consumption engine, and policy credibility. The government’s proactive stance, especially through the PLI scheme and reforms aimed at improving the ease of doing business, is successfully repositioning India as a key global manufacturing and high-value services hub.

FPIs that remain underweight on India risk being left behind. The transition from a promising emerging market to an essential global growth market is complete. Investors must increase their allocations now to secure exposure to the secular, long-term growth story that India represents.