According to the International Monetary Fund, India is on track to become the world's third-largest economy by 2027. It's truly an impressive achievement when you consider that the nation's first modern appearance on the IMF's top ten ranking only came in 2010, say Abhinav Mehra & Andy Draycott, co-managers of the Chikara Indian Subcontinent Fund.

At the centre of the progress is ongoing reform.

By this, we of course mean reforming the economy at large. But we also mean reforming the rules governing how Indian companies operate and are held to account.

India's government has been on just such a campaign of corporate reform for more than three decades now, and the pace at which it is driving change is only accelerating.

We believe these efforts not only underpin the nation's impressive economic growth forecasts but are also the driving force behind its increasingly large pool of quality stocks.

Economic liberalisation

India first embarked on a period of economic reform in 1991 to avoid a looming crisis sparked by government intervention, protectionism, and limited foreign investment.

These efforts took many forms across many sectors. But the overall goal throughout was to increase foreign investment through simplified trade, deregulation and privatisation.

Long story short, the reforms worked.

Indian companies could expand and compete effectively, foreign capital flowed into the country, and many new jobs were created.

As a result, the nation's GDP per capita rose to an impressive annual rate of 6% in the years after the reforms began while exports grew to an annual rate of 17.3%.

Then came the Global Financial Crisis in 2008.

After a long period of economic strength, India's export growth rate slowed, the rupee depreciated, interest rates increased, and foreign investment stalled.

So, to prop things up, India once again shifted into "reform mode" - this time focusing particularly on corporate regulation.

Among the most significant moves of its move was the introduction of the Companies Act in 2013, which clearly establishes the duties of companies and directors.

An equally important milestone then came in 2016 with the introduction of the Insolvency and Bankruptcy Code. This was designed to fix India's historically weak system for cleaning out non-performing companies.

Taken together, the implications of these reforms are vast.

The Companies Act enhanced shareholder rights, corporate social responsibility, board accountability, and investor protection. The Insolvency and Bankruptcy Code, meanwhile, facilitated the timely resolution of non-performing assets, freeing up capital for banks and incentivising responsible borrowing.

In short, the pair set out to reform India's approach to corporate governance entirely. And a quick look at figures suggests they were very successful in doing so.

A leap in foreign investment not only helped to keep GDP growth strong through much of the 2010s, but it also enabled India to bounce back remarkably after Covid. In fact, the nation's GDP growth came in at 9.05% in 2021 and 7% in 2022 against global averages of 6% and 3.1% respectively.

The next chapter

Widespread corporate reform corresponding with prolonged economic strength is, of course, excellent to see in India. Still, if the nation's economy is to reach the heights forecast then further changes to the ways firms are governed seem inevitable.

The good news is, such changes are already emerging.

First-of-all, the Indian government is continuing to tackle the nation's ongoing problem of over-bureaucratisation through increased amounts of process reform. This is pretty much what it sounds like - going through the economy sector-by-sector and removing red tape.

As of February 2023, the Government reported that it had already eliminated more than 39,000 compliances to foster ease of doing business and was planning the removal of many more.

The second area where we expect to see reform over the coming years is India's judiciary system.

The nation's courts had a backlog of some 40 million cases as at April 2023. In a market-based economy underpinned by contracts held between two or more parties, that's a very big issue.

It may take time; but as pressure continues to mount, we expect to see the government and the judiciary spearhead a move towards a simpler, more efficient court system. This, as far as we're concerned, will be another big tick in the box for India among foreign investors.

Expanding opportunity set

As things stand today, our view is that improvements to India's corporate governance standards are being underappreciated. The direction of reform is clear and there is little doubt in our view that foreign investment will continue to rise in response to additional efforts over the coming years.

We look forward to benefitting from an ever-increasing pool of opportunities as more and more companies see the benefits of listing.

By making India a more attractive investment destination, these measures should also help the nation to remain on track for becoming the world's third-largest economy within just a few short years.

By Abhinav Mehra & Andy Draycott are co-managers of the Chikara Indian Subcontinent Fund