Is India Digging Out of an Economic Quagmire?

This is a guest commentary for CNBC.com.

Two decades ago, India found itself in dire economic distress when it had a gross domestic product (GDP) less than $500 billion and near-zero foreign exchange reserves to fulfill 15 days of import requirements. To bail itself out, the country had to pledge its gold reserves to the International Monetary Fund (IMF),and also embark on an economic reform initiative by opening its market to foreign investments.

Now India is reaping the benefits. With its current GDP touching $1.85 trillion, a fourfold increase in two decades, and robust foreign exchange reserves at $292 billion, India has catapulted itself into the top 10 economies in the world by size.

Recently, the nearly 10 percent GDP growth it had attained a couple of years ago has decreased due to the slowdown in the global economy.

Meanwhile, domestic factors — high inflation over the last two years, widened fiscal deficit (6 percent of GDP in 2012), current account deficit (4.2 percent of GDP in 2012), and lower business confidence — have added to the slowdown. (More:India Declares, 'We're Back in Business')

Just a little while ago, the rating agency Standard and Poor’s put India on a rating watch with negative outlook to be reviewed. If it does not address its pressing economic issues, the country stands to lose its BBB- investment grade.

Has India trapped itself in another economic quagmire? Perhaps not. But for some time now, economic analysts have said that India needs another set of reforms that would enable it to face challenges and emerge stronger as a global economic superpower.

Last month the call for reforms was finally answered when the Prime Minister of India, Dr. Manmohan Singh, said to his cabinet colleagues, “If we have to go down, we have to go down fighting.”

The coalition government, otherwise criticized for its policy paralysis, announced a slew of measures beginning with increased diesel prices, permitting and enhancing Foreign Direct Investment in sectors such as retailing (which could potentially pave the way for companies like Wal-mart to set up shop in India), aviation, and broadcasting.

These forward-looking measures could not only open up opportunities for companies and investors, but could also emerge as a game-changer in modernizing India’s trade, deepening its transportation network, augmenting its employment potential, and uplifting its standard of living. (More:Investing in India? Here's How)

India is already known for its Information Technology (IT) outsourcing industry. But now, Indian pharmaceutical companies are supplying generic drugs to the United States and other developing markets. The rising affluence of its younger population, coupled with increasing literacy, has thrown open a wide domestic market for products and services. The current set of reforms coupled with the ones expected in the areas of power generation, banking, infrastructure, and taxation, all lead to easing the business process to attract further attention of investors.

Is there a way for global investors to participate in and prosper with the opportunities these reforms would throw open? Of course.

The first set of reforms, in 1991, offered limited access to the Indian capital market. Only registered Foreign Institutional Investors (FII) could invest in equities. For retail investors, the option was limited to investing through Collective Investment Schemes (CIS) that then invested in mutual funds with India allocation. (More:10 Hot Indian Startups)

Also, the fixed income market was restrictive because of limits on investments and access only to FIIs and CIS. But infrastructure development through public-private partnership opened up avenues for foreign direct investments.

Despite restrictions, those who did invest received the benefit. Foreign capital inflows to India have significantly grown over the years. In this year so far, equity inflows have reached nearly $16 billion, and at its peak in 2010, touched $29 billion. These flows were influenced by strong domestic fundamentals and buoyant yields reflecting robust corporate sector performance. Indian market capitalization increased nearly seven-fold in two decades.

Months ahead of this second set of reforms, the government enabled a whole new set of investors, including individual investors, who can now access India under the Qualified Foreign Investor (QFI) scheme.

Even though one of the easiest ways to participate in India’s growth story is through India-dedicated mutual funds, institutions or individuals who are more convinced by a bottom-up story can take the QFI route and build their own customized portfolio. So why wait?

The writer is a strategist with the Kotak Mahindra Group. These views are his own. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. Investments into India are subject to the geographical, political, economic volatility and social issues specific to India.

For further information on investing in India, contact Saloni Dhir, Kotak Mahindra Inc. Tel: [phone], Email: [e-mail].

Kotak Mahindra Inc. is the US registered broker-dealer arm of the Kotak Group and is a member of FINRA/SIPC.