India could provide investors with promising opportunities for emerging market (EM) investors looking to diversify their allocations beyond China, suggests Linda Sun-Mattison, senior research analyst on the developing market team at Invesco.

Commenting on the macroeconomic picture in neighbouring economies, Ms Sun-Mattinson outlined that she was feeling very positive about India, believing it could attract sustained investment that went beyond the Covid-19 recovery period and the spill-over effects of China’s continued consumer growth and burgeoning middle class.

The research analyst noted that her team was communicating to clients that it ‘could be the next big thing’ due to its long-term growth opportunities. However, this was dependent on its ability to evolve its economy. As it stands, she believed that the country had not yet realise its full potential.

She said: “I think the reason India has not really realised its growth options is the lack of structural reform. We will keep a close watch over that.”

In her view, structural reform was generally key to encouraging emerging market investment outside of China, and remained the real differentiator between China and rival markets in the region.

Consequently, it would not be possible to lure allocations to developing markets simply through the spill-over effects of China’s modernisation, even if some countries were set to benefit from the world’s second largest economy shifting away from low-skilled manufacturing opportunities.

Ms Sun-Mattison explained: “When we look at EM outside of China, we will look not only for the spill-over effect, but also which country can implement the structural reforms. This is in terms of not just building better road ports and factories, but also improving education, improving health care access, labour reform, and tax reform.”

Her uncertainty about India’s ability to appeal to investors reflects the current difficulties the governing Bharatiya Janata Party (BJP) is having in liberalising its markets.

On the one hand, IMF data is now projecting India to be the fastest growing economy in both 2021 and 2022, with 11.5 percent growth this year alone, following the announcement of a pro-stimulus budget. This includes a 26 percent year on year increase in government spending, a rise in foreign direct investment (FDI) limits in the insurance sector to 74 percent from 49 percent, allowing external control for the first time, and ambitious infrastructure plans for railways and roads.

Yet, Ms Sun-Mattison’s concerns about India are corroborated by the latest logjam regarding the hotly-contested Farm Bills, which seek to loosen the rules around the sale, pricing and storing of agricultural produce and increase the role of private buyers.

The long-term intention is to incentivise the shift towards a developed, urbanised economy, the kind of sophisticated structural reform likely to appeal to international investors alongside India’s growing population. After all, farming accounts for approximately 50 percent of the country’s workforce, yet only contributes approximately one-sixth to the nation’s GDP. However, following sustained protests after all three acts of the bill were passed in the Lok Sabha in September 2020, with approximately 40,000 people still publicly dissenting the bill after seven months of civil disorder, the country’s Supreme Court has stayed the bill and has appointed a committee to look into the laws for an extended period before they can pass.

While Ms Sun-Mattison considers the situation with India to be ambiguous, she remains ‘bullish’ on China.

Overall, she is highly confident in the country’s recovery pathway from the pandemic, and pointed to technological reforms and energy upgrading as clear signs of its prosperous future. Fundamentally, it possessed an ability to adapt its economy in a way its neighbours in the region could not.

She argued: “Economic reforms are going to be led by technology investments as well as energy upgrading. China has laid out a very ambitious plan to become carbon neutral by 2060. Whether it will deliver that is a question, but I think the plan laid out by the latest five-year plan is credible. These fundamental structural reforms will power China into high-quality growth ahead.”

Linda Sun-Mattison was speaking at Invesco's latest event, 'China & Emerging Markets: Will China continue to drive growth?".