Restricted investment for Indian market ETFs

Paul Burgin looks at the Indian ETF market, where despite high demand, there are many limitations to investing there

The potential market within India for ETFs is huge. Demand from overseas investors is hampered by a lack of product choice and local investment rules.
As one of the four largest emerging economies, India has been a major beneficiary of interest in and inflows into emerging markets. Indian equities make up just over 7% of the MSCI Emerging Market index, a fractionally larger exposure than that enjoyed by Russia. At around 14%, India is the smallest of the country components of most BRIC index based products.

Yet as an investment story in its own right, India often sits in the shadows of Brazil, Russia and China. It has neither the commodities clout of Russia and Brazil, nor the world conquering industrial might of the Chinese economy. Its equity market is more reflective of domestic demand rather than being a proxy for oil or globalisation themes.

The OECD reports Indian annualised GDP growth of 9% stalled in the financial crisis but rebounded last year. At 10.4%, India grew faster than the other BRIC nations and four times faster than the developed world average.

Two decades of growth
Economic reforms that started in the early 1990s have helped propel India up the economic, export and social indicator scales. Industrial output lags that of China, although India enjoys sold expansion of its software and services sectors. An emerging middle class has lead to the creation of headline grabbing products such as the low cost Nano minicar.

As a result, its leading conglomerates, Tata Group and Reliance Industries for example, are spreading their tentacles worldwide. Yet the economy is not as dynamic as it could be. Red tape and petty rules sill clog many of the wheels of progress, a throwback to the License Raj days of the planned economy.

Ben Johnson, head of European ETF research at Morningstar, notes growing demand for Indian specific products, despite a lack of products in the market. He says: “Flows have been relatively strong and steady into Indian products for the last three years. They reversed course in the first quarter of this year, part and parcel of the broader reallocation towards developed markets.”

Globally, BlackRock counts 47 Indian exchange products with assets of $7.7bn in its latest survey. Inflows were positive in 2010 to the tune of $1.7bn. Year to date, investors have pulled $324m as local investors opted for high rate cash savings accounts and international investors reduced emerging market exposure.