This summer marked the seventieth anniversary of India’s independence and each passing decade seems to bring about more radical changes in India’s socio-economic landscape than the last. Looking at the past ten years, this could not be clearer. 
Total power generation has doubled, wind capacity has quadrupled and solar capacity has increased ten-fold in the last five years alone. In 2007 there was just one modern metro rail system in an Indian city but now there are seven, with eight more under construction.
The consumer experience has changed radically too. The number of internet users has increased by a factor of 10, to 460 million, making India the second-largest web market globally and Facebook’s fastest-growing and second-biggest national community.
The market has not been without its challenges. As recently as four years ago, India found itself being dismissed as one of the 'Fragile Five' economies: the 'Taper Tantrum' resulting from global investor concern about the withdrawal of US stimulus measures affected Indian assets badly while, closer to home, a series of high-profile corruption scandals had brought both public and private-sector capital expenditure to a standstill. GDP growth was at its lowest for a decade amid double-digit inflation and both the country’s current account and fiscal deficit had reached unsustainable levels.
India’s turnaround in the ensuing four years shows what can be achieved by a committed progressive government – admittedly one helped, to an extent, by softening commodity prices. Bold reforms such as the Goods & Services Tax, an uptick in infrastructure spending, and a renewed monetary policy focus on consumer price inflation business all played their part. The result is GDP growth around a healthy 7 per cent, inflation back under control under its 4 per cent target, the current account and fiscal deficits down to 0.5 per cent and 3.5 per cent.
From this very strong base, we look to the future with confidence. With much of the world concerned about the consequences of a return to protectionist policies and geopolitical flare-ups, India’s unique domestic situation offers some degree of insulation from this major global headwind.
Central to this is the accelerating expansion of India’s middle class. This will increase discretionary spending to a marked degree over the next decade, presenting unprecedented opportunities to industries including tourism, electronics and automobiles.
Intimately linked to this is the seismic shift being undergone by the country’s IT sector. Previously dominated by IT services exporters deriving most of their income from Europe and the US, strong domestic competitors to Amazon, Uber, PayPal and Zagat are emerging.
These related themes inform our view that India is one of the best regions within the emerging markets cohort and is in a better position now than at any point over the previous five years. If the government can fulfil its potential – specifically by improving the ease of doing business, expanding the manufacturing base, building infrastructure and investing in technology – we believe there is every reason to be optimistic.
Hard projections are always difficult, but with even a normally functioning government we believe that the Indian economy could grow by 7-8 per cent over the next decade. With the Reserve Bank of India now explicitly targeting inflation at 4 per cent, that would equate to nominal GDP growth of approximately 12 per cent and should, in our opinion, translate to an equivalent growth in corporate earnings.
Here we need to sound a note of caution: for all its achievements, India underperformed the US by around 30 per cent over the last 10 years. But despite this stark differentiation from asset class to asset class, the selection of the right alpha manager can reverse even an imbalance of this magnitude.
Much of India’s potential will only be realised if the government holds steady on its reform programme. External factors – a spike in oil prices, for example, or fresh political tension in other emerging markets – could also hurt the Indian economy, despite its strong domestic orientation. While we recognise these overarching concerns, we remain optimistic and continue to focus on our core competence of picking the stocks that we believe will ride the wave of reform and economic expansion.
Hiren Dasani is co-head of emerging markets equity at Goldman Sachs Asset Management. All views are his own and should not be taken as investment advice.