On 23 July, India announced its first budget under a new coalition government led by Narendra Modi, who became prime minister for the third time albeit with a reduced majority of 293 MPs for his BJP (Bharatiya Janata Party).

In the Indian general election held between 19 April to 1 June, 642 million people voted out of a total population of 1.4 billion.

WHAT WERE THE KEY POINTS?

India’s finance minister Nirmala Sitharaman unveiled several key proposals in her coalition government’s first budget, including an increase in short-term capital gains tax from 15% to 20% and an increase from 10% to 12.5% in long-term capital gains tax on all financial and non-financial assets.

Both these moves were poorly-received by investors, with India’s benchmark Nifty 50 index falling more than 1% on the day, although up to that point the index was up around 25% on the year so some profit-taking was inevitable.

There were, however, positive announcements including a $24 billion jobs plan with one scheme targeting first-time job entrants and two more aimed at boosting manufacturing jobs.

There was also good news for India’s burgeoning middle class, foreign corporates and start-ups, with the angel tax levied on capital raised by private companies abolished and corporation tax on foreign companies reduced from 40% to 35% to promote investment.

The finance minister announced a 260-billion-rupee (roughly £2.5 billion) industrial corridor through the state of Bihar, and 150 billion rupees (roughly £1.4 billion) for a new high-tech capital in the state of Andhra Pradesh called Amaravati.

ACTION TO REDUCE THE BUDGET DEFICIT

The target for India’s fiscal deficit was lowered to 4.9% of GDP (gross domestic product) for full-year 2025, down from the previous forecast of 5.1% of GDP.

Rita Tahilramani, assistant investment manager of the Abrdn New India Investment Trust (ANII), told Shares said the new target could prove beneficial for India’s ratings outlook.

‘This narrower deficit target could prove beneficial for India’s ratings outlook. The additional dividend of 1.1 trillion rupees from the Reserve Bank of India might have allowed the government to increase the allocation towards rural and social welfare schemes without cutting government capex, which has been in line with our expectation.

‘Overall, central capex support was maintained at around 3.4% of GDP for the current fiscal year, and allocation to core ministries such as roads, railway, and defence were broadly unchanged compared to the interim budget, while there was an increase in allocation to housing and rural road schemes. Special assistance to states was also raised.’

India’s finance ministry expects the economy to grow between 6.5% and 7% in the financial year ending March 2025, lower than last year’s 8.2% and below forecasts from the IMF (International Monetary Fund) and ADB (Asian Development Bank) but significantly faster than say China where forecasts are below 5% with Citibank the latest to downgrade its outlook.

WHAT DOES THE BUDGET MEAN FOR INVESTORS?

M&G portfolio manager Vikas Pershad, who covers Asian equities including the Indian market, says the budget includes plenty of opportunities for investors but also some risks so it is important to ‘stay informed’.

Pershad sees opportunities in the infrastructure and renewable energy sector, where the government has prioritised large-scale development projects including 5.54 trillion rupees (roughly £52 billion) allocated to the ministry of road transport and highways and the expansion of the national infrastructure pipeline to 9,000 projects.

The government has promised significant incentives for renewable energy projects with companies involved in solar, wind and other green technologies standing to benefit from favourable policy support, says Pershad.

ACTIVE OR PASSIVE

For investors who just want exposure to the market and aren’t interested in stock-picking, the easiest and cheapest way to gain access to India is through ETFs (exchange traded funds), better known as tracker funds.

Over the past one and three years, many Indian-focused tracker funds have performed well including the Franklin FTSE India UCITS ETF (FLXI), which has returned 35% and 59% respectively, and the iShares MSCI India UCITS ETF (IIND), which has returned 34% and 58% respectively.

Ongoing charges for these India-focused ETFs are generally low in comparison to India-focused investment trusts: the charge for Franklin FTSE India ETF is just 0.19%, but the charge for the MSCI India ETF is a fairly hefty 0.65% which is not much less than some funds and trusts.

There are a number of investment trusts solely focused on India and there are broader Asian or emerging market funds with some exposure to India, which helps spread the risk across a portfolio and keep it diversified.

Among the country-specific trusts, Abrdn New India (ANII) has returned 46% over one year and 13% per year on an annualised basis over three years while its slightly larger rival Ashoka India Equity (AIE) has returned 36% over one year and 20% per year annualised over three years.

James Thom, co-lead manager of abrdn New India, attributes the strong annual performance to the trust’s bottom-up stock picking process, the consistency of earnings growth across the portfolio and the fundamentals of their holdings.

The top three equity holdings as of 30 June 2024 were ICICI Bank (ICICIBANK:NSE) at 7.1%, Aegis Logistics (AEGISLOG:NSE) at 5.4% and HDFC Bank (HDFCBANK:NSE) at 5.3%.

Thom concedes investing in India is never without risk as it expensive compared to other emerging markets.

‘While high valuations reflect the long-run potential of the country, they leave less margin for error. Hence, it is important to be selective in finding good companies which can consistently deliver on earnings.

‘There are some other external risks too: potentially higher energy prices when India is a net oil importer; a global economic slowdown which can affect exports; and geopolitical tensions with neighbours China and Pakistan, which could also have an impact on political stability.’

Another India-focused investment trust which has generated strong returns in the long term is India Capital Growth (IGC), although the ongoing charge of 1.57% is the highest in the AIC India sector.

The fund has returned a solid 31% over one-year and 19% annualised over three-years, and it is currently trading at a 9% discount to NAV (net asset value).

For investors looking to include India in a diversified trust, JPMorgan Emerging Markets (JMG) gives investors that exposure alongside markets like Taiwan and South Korea. Over 10 years the trust has returned 120% and the ongoing charge of 0.85% is relatively low cor an emerging markets product.

NEW WORLD ORDER

According to Morgan Stanley, India is on track to become the world’s largest economy by 2027, and have the largest stock market by 2030, so investors should definitely consider having some exposure when embarking on their investment journey.

The budget, while generally well-received, did highlight some of the challenges facing the country says M&G’s Vikas Pershad.

For instance, while the budget has increased spending on healthcare, ‘the sector faces challenges related to pricing pressures and regulatory changes’, while the energy sector also has problems due to global oil and gas price volatility and environmental concerns.

‘The transition towards cleaner energy sources may pose long-term challenges. The ongoing global push for carbon neutrality and potential policy shifts towards reducing fossil fuel dependency add layers of uncertainty for this sector,’ observes the manager.

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