Growth rarely follows a linear path, and India’s journey is no exception. This month, we explore several structural shifts shaping the country’s economic landscape – from the evolving dynamics of global supply chains and the rise of Indian global capability centers (GCCs), to the growing pains of renewable energy integration. These transitions provide legs to India’s sustained growth story, creating compelling investment opportunities for the coming 3-5 years and beyond. But for the near term, we explain why investors should get used to the noise along the way. Enjoy.
Indian equities returned 1.20% (in USD terms1) in May, modestly underperforming regional peers but maintaining its positive momentum. Sector-wise, Industrials and Real Estate were the top performers, while Utilities and Health Care were the laggards.
Strong institutional flows drove the market, with total equity inflows reaching USD 8.7 billion, split between domestic mutual funds (+USD 5.6 billion) and foreign portfolio investors (+USD 2.3 billion).2 We’ve also observed a notable uptick in investor engagement over recent weeks, with many discussions that were delayed during April’s uncertainty now materializing. This renewed interest, combined with growing conviction in emerging markets broadly and India specifically, suggests institutional flows could remain robust through the coming months.
Escalating tensions between India and Pakistan caused brief market volatility in May as skirmishes along the border raised geopolitical risks. However, a swift ceasefire agreement brokered mid-month helped de-escalate the conflict, improving investor sentiment as the resolution was seen as a positive step toward regional stability.
India’s real GDP growth rebounded to a four-quarter high of 7.4% in 4QFY25 (January-March), supporting the full-year growth estimate of 6.5%.3 This acceleration was driven by robust fixed investments, which grew at a six-quarter high of 9.4% in 4QFY25 (up from 6.0% in 4QFY24 and 5.2% in 3QFY25), alongside a stronger contribution from net exports. However, private consumption growth slowed to a five-quarter low of 6%, while government consumption contracted 1.8%. On the positive side, the government’s fiscal position has improved, with the FY25 deficit narrowing to 4.77% versus the revised estimate of 4.84%.4
Various indicators are suggesting a notable pick-up in domestic economic activity. Freight rates saw a meaningful 7.0% y/y increase in May, while E-way bill generation jumped 23% y/y in April.5 Government infrastructure spending remains robust, with March and April 2025 seeing record capex growth of 68% and 61%, respectively. FastTag toll collection volumes (essentially the number of vehicles crossing a toll gate on highways) have also shown sequential improvements over the past 3 months.
India’s dominant services sector sustained growth in May, driven by strong export demand and record hiring, with the Services PMI rising slightly to 58.8 from 58.7 in April.6 Export strength saw strong international demand improvement, with growth fueled by new client wins and increased staffing. Conversely, the Manufacturing PMI dropped to a 3-month low of 57.6 in May from 58.2 in April, reflecting eased but still strong business conditions. Robust demand supported growth, though it was tempered by intense competition and geopolitical tensions between India and Pakistan.7
Headline consumer price index (CPI) inflation moderated to 3.16% y/y in April from 3.34% in March, marking its lowest level since July 2019 and the sixth consecutive monthly decline. Food prices, which account for nearly half of the consumer price basket, rose just 1.78% compared to 2.69% in March, though this moderation was partly due to a favorable base effect.
Over the past four months, we’ve seen unprecedented activity from the Trump administration, reminiscent of a “bazooka” approach with numerous proposals being rapidly introduced. This pace often means that not every initiative is fully fleshed out beforehand. The administration’s strategy appears to embrace a “fail fast” mentality – iterating and adjusting if proposals don’t achieve their desired outcomes. This tech-sector-like approach is quite unorthodox for a government, and it’s fairly unusual for investors to see a government run in such a way.
As we’d anticipated, reciprocal tariffs have been pushed out, with the 90-day window set to expire in early July. Leading up to this expiration, we expect heightened volatility and increased noise in the markets. The administration wants to bring countries and regions to the negotiating table with more favorable terms for the US. However, having watched the US-China playbook unfold, counterparties have grown savvier and are likely to hold their ground.
Our view is that post-July 9th, the administration’s focus is going to pivot away from tariffs to focus more on deregulation and growth. Recent months have shown the administration’s tendency to pivot at the last moment, suggesting that preparing for the worst-case scenario may not be the most effective strategy. Instead, understanding the administration’s true intent is crucial. And that is, primarily to bolster domestic manufacturing and reduce dependency on China.
US-China relations remain tense, with the relationship entering a new phase of strategic recalibration. Unlike China’s quiet economic ascent over the past decade, the US has taken a notably vocal stance about reducing its dependence on Chinese manufacturing. In a way, the Chinese manufacturing experiment proved almost too successful, with companies concentrating the majority of their production in a single country – a concentration that, in hindsight, deserved more scrutiny from a risk management perspective. This realization has accelerated the China +1 strategy, with India emerging as a key beneficiary.
India’s positioning in this evolving landscape is particularly advantageous. The government’s Production Linked Incentive (PLI) scheme, covering 14 key sectors, has already attracted significant investment. This, alongside the acceleration of China +1, has spurred major global manufacturers, from the likes of Apple to Samsung, to expand their operations in India.
Looking ahead, we expect US dependence on Chinese imports to decrease by 30-40% over the next 3-5 years. India stands to capture a meaningful share of this shift, particularly in electronics, pharmaceuticals, and industrial goods. The country’s large domestic market, skilled workforce, and improving ease of doing business make it an attractive alternative. Recent policy reforms and infrastructure development have further strengthened this position.
While the US-China relationship won’t unwind overnight, the directional shift is clear. India’s role in global supply chains is set to expand significantly, supported by both push factors (like companies seeking to diversify away from China) and pull factors (like India’s improving business environment and strategic alignment with Western economies).
In addition to manufacturing, Global Capability Centers (GCCs) have become pivotal to India’s economic growth, transforming the country into a global services powerhouse. GCCs are specialized offshore units established by multinational corporations to manage functions such as operations, analytics, finance, and IT. Unlike traditional outsourcing, GCCs integrate deeply with the parent company’s operations.
Over the past 14 years, GCC revenues have grown more than 5x to USD 65 billion in FY24, employing over 1.9 million professionals across various functions and business processes.8 This surge is driven by India’s strong engineering expertise in AI, machine learning, and the Internet of Things (IoT), enabling GCCs to handle high-value functions like R&D, analytics, and innovation.
Economically, GCCs attract significant foreign direct investment (FDI), directly boosting GDP and stimulating sectors such as real estate and professional services. The engineering R&D segment alone accounts for over half of India’s GCC revenues and has grown at a 12.3% CAGR over the eight years to FY23.9 GCCs also drive job creation with high-paying opportunities. Median IT salaries have risen from INR 0.5 million (~USD 7,400) in FY15 to INR 0.9 million (~USD 11,000) in FY23, attracting top talent and reducing unemployment.10 Additionally, GCCs invest in workforce training, enhancing skills and competitiveness.
We expect this sector to maintain strong growth momentum, supported by India’s deep talent pool, competitive costs, and improving infrastructure. As GCCs continue to diversify into Tier 2 and Tier 3 cities, India is set to sustain its services growth and enhance global competitiveness.
India’s power markets are experiencing unprecedented dynamics, with spot electricity prices dropping to zero during peak daylight hours on consecutive weekends in May-June 2025. This remarkable situation reflects growing pains in India’s energy transition, particularly the challenge of managing increased solar generation against inflexible baseload power. The severity of the mismatch is evident in the approximately 34GW of spot power that remained unsold even at zero prices, suggesting significant solar curtailment may be necessary to maintain grid stability.
The grid faces a complex balancing act. With coal plants operating near their technical minimum and solar generation surging during daytime hours, the situation is further complicated by the early arrival of monsoon, which has reduced peak summer demand while promising increased wind and hydro generation. Significant volatility in grid frequency during solar ramp-up periods indicates the challenges operators face in matching demand-supply patterns.
While renewable energy remains a favored long-term theme, these grid integration challenges require a more nuanced view of companies’ ability to scale within the sector. We will continue monitoring these dynamics, particularly their impact on capacity addition plans and valuations across the renewable energy value chain.
India continues to offer a rare growth proposition in today’s global landscape. Few markets can match its 8-10% growth potential, let alone sustain it over the next 5-10 years. Currently, we find the risk-reward more attractive in large-cap names, though we anticipate small and mid-caps will present opportunities later this year after a period of more time correction.
In terms of portfolio exposure, financials remain a core holding, mainly in retail banks. Leading private sector banks like ICICI Bank and HDFC Bank offer exposure to India’s growing financial services penetration, while demonstrating robust mortgage growth, expanding SME lending, and strong wealth management franchises.
Consumer discretionary presents compelling opportunities through category leaders in emerging segments. As job creation accelerates and incomes rise, we favor companies disrupting traditional categories – from digital-first platforms (like Zomato and Nykaa) to travel and tourism plays (like MakeMyTrip and GMR Airports).
Infrastructure and industrials benefit from India’s capex cycle and manufacturing push. With many facilities operating at high utilization, we expect sustained capital investment in the coming years as companies expand their capacity to meet growing domestic and export demand. We expect key beneficiaries to include engineering companies like L&T (infrastructure projects, green energy transition), automation specialists like ABB India (industrial digitalization, smart manufacturing), and power equipment manufacturers such as CG Power (power transmission and industrial systems).
Finally, technology services, particularly companies facilitating AI adoption and digital transformation, round out our core holdings. Indian IT providers like Cognizant are well-positioned to capture this secular growth trend, as the adoption moves beyond hardware to focus on high-value services like generative AI implementation, legacy system modernization, and development of vertical-specific solutions across manufacturing, financial services, and healthcare sectors.
Our investment approach looks beyond headline narratives to identify companies where improving macro tailwinds intersect with distinctive competitive advantages. While India’s growth story is compelling, we believe success lies in selective exposure to sectors and companies demonstrating clear earnings progression and sustainable growth runways over a 3-5 year horizon.
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Investment involves risk. Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the investment product will generate a return and there may be circumstances where no return is generated. Investors could lose all or a substantial portion of any investment made. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the investment product and should also consider their own investment objectives and risk tolerance levels. Investors are advised to seek independent professional advice before making any investment.
Shikhara’s investment products are suitable only for sophisticated investors and require the financial ability and willingness to accept the high risks and lack of liquidity inherent in Shikhara’s investment products. Prospective investors must be prepared to bear such risks for an indefinite period of time. No assurance can be given that the investment objectives of any given investment product will be achieved or that investors will receive a return of their investment.
Certain of the information contained in this material are statements of future expectations and other forward-looking statements. Views, opinions, and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance, or events may differ materially from those in such statements.
Certain information contained in this material is compiled from third-party sources. The information and any opinions contained in this document have been obtained from sources that Shikhara considers reliable, but Shikhara does not represent that such information and opinions are accurate or complete, and thus should not be relied upon as such. Furthermore, all opinions are current only as of the date of distribution and are subject to change without notice. Shikhara does not have any obligation to provide revised opinions in the event of changed circumstances. Whereas Shikhara has, to the best of its endeavor, ensured that such information is accurate, complete, and up-to-date, and has taken care in accurately reproducing the information, Shikhara takes no responsibility for the accidental publication of incorrect information, nor for investment decisions taken based on this material. Neither Shikhara nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and nothing contained herein should be relied upon as a promise or representation as to past or future performance of any investment product or any other entity.
MSCI India Index is designed to measure the performance of the large and mid-cap segments of the Indian market. The index covers approximately 85% of the Indian equity universe. MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
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Shikhara Investment Management LP is currently an Exempt Reporting Adviser that is exempt from registration as an investment adviser with the U.S. Securities and Exchange Commission and Shikhara Capital (Hong Kong) Private Limited has been approved by the Hong Kong Securities and Futures Commission. This website does not constitute an offer to sell or the solicitation of an offer to buy in any state of the United States or other U.S. or non-U.S. jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such state or jurisdiction.
Investment involves risk. Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the investment product will generate a return and there may be circumstances where no return is generated. Investors could lose all or a substantial portion of any investment made. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the investment product and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Shikhara’s investment products are suitable only for sophisticated investors and require the financial ability and willingness to accept the high risks and lack of liquidity inherent in Shikhara’s investment products. Prospective investors must be prepared to bear such risks for an indefinite period of time. No assurance can be given that the investment objectives of any given investment product will be achieved or that investors will receive a return of their investment.
Certain of the information contained in this website are statements of future expectations and other forward-looking statements. Views, opinions, and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance, or events may differ materially from those in such statements.
Certain information contained in this website is compiled from third-party sources. Whereas Shikhara Investment Management has, to the best of its endeavor, ensured that such information is accurate, complete, and up-to-date, and has taken care in accurately reproducing the information, Shikhara Investment Management takes no responsibility for the accidental publication of incorrect information, nor for investment decisions taken based on this website. Neither Shikhara Investment Management nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and nothing contained herein should be relied upon as a promise or representation as to past or future performance of any investment product or any other entity.
The contents of this website are prepared and maintained by Shikhara Investment Management and has not been reviewed by the Securities and Exchange Commission of the United States or the Securities and Futures Commission of Hong Kong.
The Shikhara logo and name are trademarks of Shikhara Investment Management LP, registered in Hong Kong, the People’s Republic of China (PRC), Australia, the United Kingdom and the European Union and pending registration in the United States.