Time To Buy Or Wait For Further Correction?

This year’s top global growth story may be India, thanks to a confluence of improving fundamentals and pro-market government policies that have caught investors’ attention. However, the Indian stock market has stumbled recently, with the BSE 500 shedding 19% from its recent peak last September—this after climbing 14.8% in 2024 and 25.1% in 2023. The key question now is whether this setback represents a temporary pause in an otherwise robust uptrend or if it represents a degrading of India’s long-term investment outlook.

Economic Backdrop

India’s central bank recently shifted toward a more accommodating monetary stance by cutting its benchmark repo rate from 6.5% to 6.25%, its first reduction in nearly five years to bolster economic activity. Despite remaining the fastest-growing major economy, India’s quarterly GDP growth recently dipped to 5.4%, its weakest pace in two years, and the government projects further moderation at 6.4% for the current fiscal year—down from 8.2% in 2023-24. Prime Minister Narendra Modi’s administration also introduced tax breaks for middle-class households to stimulate consumption, highlighting the government’s intent to combine monetary and fiscal measures to reignite growth.

The current economic soft patch needs to be considered along with the broader trend that has seen significant foreign and domestic investment over the last decade. To understand the enthusiasm for Indian assets over the last few years, one needs to identify what has actually changed from an economic and political perspective. India’s potential has been highlighted for decades, but lack of investment in infrastructure, poor corporate governance, political inaction, and corruption across all levels of government prevented the country from breaking out to the upside.

The breakout story is not hard to imagine. India has 1.4 billion people, with a growing 15-64-year-old working-age population. The country has a nascent middle class with a relatively low expected $2,900 GDP per capita, compared to $13,900 for China. As India’s young population enters the workforce, the middle class is expected to expand, consumption is projected to increase, and the country could be lifted from poverty.

However, despite the favorable narrative, for years India failed to meet global expectations. Things started to change a decade ago with the election of Prime Minister Narendra Modi. After more than ten years in power, the government reforms he enacted are finally providing upward momentum.

One significant step was the bold modernization move in November 2016 to shift from a cash-oriented society to a digital ecosystem. Without warning, Modi eliminated the use of all notes larger than 500 rupees, removing 86% of India’s cash currency overnight. The demonetization aimed to curb the underground economy, tackle corruption, and move transactions to digital payment. By 2021, 96% of Indians had bank accounts, up from less than 50% in 2006. The rapid digitization and the increased tax compliance that followed positively impacted the fiscal budget. According to the Indian Ministry of Finance, direct tax revenues grew by roughly 14% to 18% year-over-year in the fiscal cycle immediately after the ban on the larger cash notes.

Much of that new tax revenue was reinvested in infrastructure across the country. Federal government spending on infrastructure increased from 3 trillion rupees ($34.5 billion) in 2016 to 11.1 trillion in 2025. The spending accelerated following the pandemic, with long-term capital expenditure rising to 3.4% in 2025 compared to 1.7% in 2020. Money has flowed into creating new highways, with the highway budget increasing by 500% since 2014. The country has also made significant investments in the railway system, port infrastructure, and the electrical grid. For example, the average daily electricity supply in rural areas increased from 12.5 hours in 2014 to 22.6 hours in 2025.

Infrastructure spending is just one component of Modi’s Make in India initiative launched in 2014. The initiative sought to transform India into a global manufacturing hub by encouraging domestic production, attracting foreign investment, and creating jobs. The goal was to increase the manufacturing sector’s contribution to GDP from 15% in 2014 to 25% by 2025 by introducing reforms to improve the ease of doing business, such as de-licensing industries and simplifying regulatory processes. According to the World Bank, India ranked number 63 in the Ease of Doing Business index in 2019, improving from a position of 142 in 2014.

Risks Still Prevail

India’s transformation is impressive, but there are still risks to the growth story. Volatile food and beverage prices comprise 54.2% of the current CPI basket and have kept inflation above the central bank’s 4% target level. Along with most other major emerging and developed economies, the Indian rupee has weakened significantly compared to the dollar in the last year, increasing import costs. Given India’s dependence on oil and coal to fuel its expansion, rising energy costs can significantly affect fiscal balances and inflation. For example, India imports 88% of its domestic oil requirements. A supply shock on the energy front could be devastating to the Indian economy.

Another concern is the inability of the Modi government to grow its manufacturing base to 25% of GDP. Despite the improved logistical network and lighter hand in regulation, manufacturing has remained in a range of 13% to 17% of GDP and accounts for just 3% globally. By comparison, China’s manufacturing share of the economy is 27.6% and represents 31.6% globally.

Failure to meet the government’s manufacturing goal may be due to gaps in infrastructure and a skilled workforce. Logistics costs in India account for 14% of GDP, significantly higher than the 8% to 10% seen in developed nations. On the labor side, 70% of India’s workforce, which earns an average of just $1.50 per hour, lacks formal training, posing a challenge as India attempts to move up the value-chain ladder in the production of electric vehicles and semiconductors. The government is acutely aware of these issues and is taking steps to improve these areas in the latest budget.

Tariff uncertainty is also a concern. The potential imposition of U.S. tariffs poses significant risks to India’s economy, particularly its manufacturing and export sectors. As the U.S. is India’s largest export market, higher tariffs on goods like steel, pharmaceuticals, and electronics could reduce competitiveness, leading to job losses and production cuts. India’s pharmaceutical sector may see squeezed profit margins, while textiles and electronics could lose market share to competitors like Vietnam, further challenging Modi’s efforts to grow the manufacturing sector.

Equity Market Correction

How does all this impact India’s equity market? The BSE 500 index dropped 13% in dollar terms in 2025. Valuations have fallen, but at 19.5 times 1-year forward earnings, stock prices are still relatively rich compared to other emerging markets. However, strong historical earnings growth provides some justification for the perpetual valuation premium.

The current price setback provides an opportunity for investors to embrace the long-term growth story. There are a number of ways to get access to the Indian equity market. For example, the iShares MSCI India ETF (INDA) tracks the performance of the MSCI India index, and the iShares MSCI Small-Cap ETF (SMIN) focuses on small and mid-cap stocks. Alternatively, investors can deploy a more actively managed strategy via funds such as Matthew’s Asia India Fund (MIPIX), or its ETF equivalent, INDE. These funds are all off between 19% to 24% from their six-month highs.

With the Modi government still in comfortable control, investments in infrastructure and manufacturing are likely to persist. Further manufacturing development, especially for higher-value-added products like solar panels and electric vehicles, should keep employment high, lift the average wage level, and allow for higher consumption, which is ultimately needed to advance GDP per capita.

A further valuation correction is certainly possible, but the fundamental story is still intact for now. Long-term investors looking to bet on India’s transformation should consider taking advantage of the drawdown and adding exposure to the Indian market.