On Monday, the Indian government reported that the country's GDP expanded at 7.9% year-over-year in the quarter ending in September, a sharp pickup from the 6.1% gain in the prior quarter. The growth easily beat analyst estimates of a 6.3% gain and led to a strong rally on Mumbai's benchmark Sensex index on an otherwise rough day for global markets.
The unexpectedly strong growth now has investors contemplating whether India will join the handful of countries to raise interest rates in the coming months and roll back stimulus measures. Australia and Norway have notably hiked rates already. That should put India on more solid footing than other Asian countries like China and Japan, where massive stimulus measures and concerns about government currency intervention have rattled investors.
Ironically, the relative isolation of India's economy has helped cushion the global downturn. The country is much less dependent on exports to areas of sluggish economic growth like the United States and Western Europe than major exporters such as China and Japan.
India's general lack of industrialization has also helped its economy. Manufacturing will account for a larger share of GDP than the agricultural sector for the first time only in 2010. "But low export dependence, a large consumption base and the high share of employment (two-thirds) and income (one-half) coming from rural areas has helped sustain consumption," noted New York University economist Nouriel Roubini pointed out during the summer.
As it returns to fast growth, India still has a ways to go. While often bucketed with other fast-developing economies like Brazil, Russia, and China -- sometimes called BRIC countries -- India is still just catching up. India's GDP per capita is just $2,600 -- a fraction of the $9,500, $14,800 and $5,400 for Brazil, Russia and China respectively.
Exchange traded funds like the Wisdom Tree India Earnings Fund (EPI) and the PowerShares India Portfolio (INP) allow investors to make a play on the Indian growth story.
Of course, investing in emerging markets tends to be riskier than investing in developed countries. But Indian shares like other emerging markets also tend to be less correlated to U.S. stocks, making those ETFs attractive for investors looking to diversify their portfolios.
And as investors worry about low growth rates and fears of inflation around the world, investing in India, where growth is mounting but interest rates could be going up as well, could serve as a useful hedge.
