The Investment Trajectory of Indians: From "Drain of Wealth" to "Gain of Wealth"

The Indian economic landscape has witnessed a monumental transformation over the decades, evolving from a country maimed by colonial exploitation to rapidly becoming a global investment hub.

The nation’s journey from the “Drain of Wealth” during British rule to the "Gain of Wealth" is a story that is yet to be fully discovered.

On this discovery path, India's investment landscape has undergone a structural makeover, reflecting evolving preferences, market dynamics, and economic trends.

The rising influx of capital into sectors such as SaaS (Software as a Service) and FinTech illustrates the growing influence of technology.

On the other front, traditional assets like property and gold play a significant role in shaping the country's wealth distribution.

This in-depth analysis will explore the multifaceted nature of investment trends in India, driven by a blend of generational preferences, risk management trends, and economic forces that would influence the future of investment broadly.

A Brief Historical Perspective

The concept of the “Drain of Wealth” theory, introduced by Indian economist and nationalist Dadabhai Naoroji in 1867, encapsulates the economic exploitation of India under British colonial rule. Wealth systematically flowed out of the country, leaving its population impoverished.

At the dawn of independence, India's economic indicators were bleak. Life expectancy was less than 40 years, and the average income barely exceeded Rs. 250 per year.

Over the decades, the country's per capita income has increased 500-fold since the 1950s. It all started with the dawn of the internet era in the 1990s, which introduced India as the world's back office, with companies outsourcing services such as software development, customer service, and business process outsourcing (BPO). This trend has only accelerated with the rise of distributed work models and the tightening of global labour markets.

India’s ability to offer a cost-effective, highly skilled workforce has made it a prime destination for outsourced services. A critical shift is now emerging. With the Make in India policy at the forefront, the country is slowly but steadily transitioning from merely being a back office to a global manufacturing hub.

The share of manufacturing in the country’s GDP is expected to increase from 15.6% to 21% by 2031, potentially doubling the share in the global export market. According to Morgan Stanley, multinational corporations’ confidence in the investment climate is at an all-time high.

The rise in manufacturing investments signals a diversification of India's economy away from traditional services, and the resulting capital inflow is expected to boost job creation, income levels, and broad economic output.

Digital Revolution, Financial Inclusion and Consumption Patterns

The digital economy, underpinned by the Aadhaar identification program and India Stack, has been instrumental in transforming the financial landscape. Aadhaar, with over a billion registered users, provides a unique biometric ID, enabling access to financial services, healthcare, and welfare benefits. India Stack, a decentralised public utility, has revolutionised how Indians spend, borrow, and manage data.

This system enables accessible loans to businesses and consumers alike. India’s credit-to-GDP ratio, currently at 57%, is one of the lowest in the world, but this figure is projected to increase to 100% in the next decade.

Meanwhile, the income distribution is expected to undergo a dramatic shift in the coming decade. Disposable income is forecasted to rise significantly, resulting in a doubling of the country’s overall consumption from $2 trillion in 2022 to $4.9 trillion by 2030. Non-grocery retail sectors, such as apparel, leisure, and household goods, are poised to experience the highest growth.

Rise of Ultra-High-Net-Worth Individuals (UHNWIs)

India has witnessed rapid growth in the number of ultra-high-net-worth individuals (UHNWIs), defined as those with a net worth of over $30 million.

According to Knight Frank Knight Frank’s Wealth Report 2024, the UHNWI population increased by 6.1% in 2023, and this growth trajectory is expected to accelerate by 50.1% by 2028. This surge reflects the increasing concentration of wealth in the hands of a few, but it also underscores the potential for luxury markets and high-end real estate.

HNWI (High-Net-Worth Individuals) wealth in India grew by 12.4% in 2023, driven by strong performance in equity markets and a resilient economy. India’s market capitalisation rose by 29% in 2023, illustrating the dynamism of the country’s capital markets. Furthermore, the unemployment rate declined to 3.1% in 2023, demonstrating improved labour market conditions.

The global population of wealthy individuals is projected to increase by 28.1% over the next five years, with India and the Chinese mainland leading with impressive growth rates of 50% and 47% respectively. In 2023, most major economies successfully avoided downturns, contributing to a healthy 3.1% expansion in global GDP. The recovery was spearheaded by emerging economies and Asia, with India standing out as a noteworthy example.

The global population of UHNWIs is projected to grow by 28.1% by 2028, with India and China leading the charge. The rise in wealth in India has been more pronounced among men, particularly millennials, with 75% expecting their wealth to grow soon.

However, a shift has been occurring among Gen Z women, with 81% of them expecting to see substantial wealth growth. Women currently make up around 11% of global Ultra High Net Worth Individuals (UHNWIs), according to recent survey findings from Altrata. This represents rapid growth from just 8% less than a decade ago.

India’s Sectoral Investment Preferences

According to an investor survey conducted in India in 2023, a staggering 77% of Indian investors expressed a preference for the Software-as-a-Service (SaaS) sector, making it the most favoured investment avenue.

SaaS companies have been at the forefront of the tech boom, driven by cloud-based solutions that cater to global markets. Fintech came second, with 59% of investors choosing this sector, reflecting the ongoing digital revolution in the financial services industry. However, sectors like Mobility and AgriTech garnered minimal interest, with only 5% of investors showing interest in each.

Pillars of Indian Wealth

Despite the rise of technology-driven sectors, traditional assets like property and gold remain the backbone of Indian wealth. Property investments account for 51.3% of total assets, showcasing enduring faith in real estate as a stable investment, particularly as urbanisation accelerated.

Gold, which makes up 15.2% of the total assets, is still considered a hedge against inflation and economic uncertainty. During 8 out of the last 10 recessions, gold has outperformed the S&P 500 index.

Breakdown of Asset Preferences:

●      Bank Deposits (13.3%): A preferred safe-haven due to assured returns and low risk, especially in volatile markets.

●      Equity (5.8%): While still a smaller portion of total wealth, equity investments are growing, driven by the rising participation of retail investors.

●      Insurance Funds & Pension Funds (5.7% each): These categories highlight a growing consciousness among Indians about financial security and long-term planning.

●      Cash (3%): The preference for liquid assets remains low, indicating a shift towards more structured investment vehicles.

Millennial Homebuyers: The Dominant Force in Real Estate

In 2023, millennials emerged as the largest group of homebuyers, with 52% opting for real estate over other investments. This generation’s preference is tied to long-term stability and the potential for property value appreciation. In contrast, Generation Z prefers more dynamic investment choices, such as spending on travel or launching businesses.

Real Estate as a Key Investment for Millennials:

●      Security and Tangibility: Property offers a tangible asset, providing a sense of security amidst economic volatility.

●      Urbanisation and Demand: The increasing urban sprawl and the desire for homeownership fuel demand for real estate.

Navigating Risk and Preservation: Wealth Management Priorities

Against the backdrop of a turbulent market, managing risks (73%) and preserving the value of assets (70%) are top concerns for Indian investors. Inflation and rising interest rates pose considerable challenges, necessitating robust risk management strategies.

Key Challenges:

●      Inflationary Pressures: The rising cost of living and diminishing purchasing power require investors to hedge against inflation by diversifying into assets like gold and equities.

●      Interest Rate Fluctuations: Higher interest rates have made debt instruments less attractive, pushing investors to seek alternative assets.

Interestingly, family offices show the least concern for cybersecurity (17%) and next-generation transition (13%).

Family Offices and Billionaire Growth

Mumbai's 39 billionaires place it 10th globally, highlighting the growing affluence concentrated in financial capital. Family offices, in particular, have been pivotal in steering wealth into startups and tech sectors, making India the third-largest focus for these investors in 2022.

India's Rising Billionaire Class:

●      India's Prominent Family Enterprises: Reliance Industries' inclusion in the top 10 of the Family Business Index is a testament to the growing entrepreneurial spirit and economic might.

●      Pharma Industry's Post-COVID Surge: Cyrus Poonawalla's 66.24% rise in wealth exemplifies the benefits reaped from the post-pandemic growth in pharmaceuticals, reflecting the broader success of family-run businesses in India.

Demographic Dividend

The ambition to become a developed economy by 2047 is heavily reliant on its demographic dividend, digital economy, and diplomatic ties. With a young population and expanding digital infrastructure, India is poised to become a global powerhouse.

●      Demographic Dividend: A youthful workforce much larger than that of China, America and Germany is expected to drive productivity and innovation.

●      Digital Economy: The rise of e-commerce, digital banking, and tech-driven startups will continue to fuel investment in the tech ecosystem.

●      Diplomatic Ties: Strategic partnerships and growing influence in international diplomacy are key to its economic rise.

The Growing Popularity of Mutual Funds

Mutual funds have seen a 4x increase in participation from women investors, particularly in Tier 2 and Tier 3 cities, reflecting a democratisation of financial markets.

This growth is accompanied by a rise in alternative investment funds (AIFs), with assets under management expanding to $101 billion, offering diversified opportunities in real estate, private equity, and infrastructure.

Rise of Passive Investing:

●      ETFs and Index Funds have seen compound annual growth rates (CAGR) of 38% and 129%, respectively, signalling a shift towards low-cost, diversified investment vehicles.

The Next Investment

ViTWO believes the rewards of Indian multifaceted growth are yet to be reaped, growing at a breakneck pace from the 12th to the 5th largest economy and now vying for a spot among the top three global giants.

With its companies contributing a staggering USD 590 billion in combined revenue, the nation is the fourth-largest contributor to global indices.

On its ambitious trajectory toward becoming a developed nation by 2047, India’s growth can be understood through a trifecta: evolving investment patterns, digital innovation, and policy shifts. Meanwhile, the capital allocation mirrors the blend of traditional values and modern ambitions. Real estate and gold, once dominant, are now complemented by a rising interest in technology sectors and alternative investments, highlighting the changing risk appetite and economic conditions across generations.

As India continues to diversify its assets, the rise of passive investments, alternative avenues, and the growing influence of family businesses will play a pivotal role. Demographic shifts, coupled with policy reforms, are set to further shape the nation's financial landscape.

Since 2011, India has given rise to over 110 unicorns, making it the world’s third-largest unicorn hub. What’s more compelling is that nearly every Indian state has contributed to this phenomenon, showcasing the widespread entrepreneurial spirit that transcends regional boundaries.

In the coming years, India's investment trajectory will be a dynamic interplay of tradition and innovation, creating a mosaic of opportunities that will not only drive domestic growth but also position India as a trusted player on the global stage.