India's Government: Investors' New Best Friend

Rare is the government that actually helps investors. Be it intentionally or unintentionally, many policymakers around the globe have shown a tendency to roil financial markets. An argument can be made that the bigger the government (think the U.S., China and developed Europe), the heavier the hand of government interference is in financial markets.

India, the world's largest democracy, is starting to do things differently. Earlier in 2012, Standard & Poor's lowered its outlook on India's sovereign credit rating to negative from stable, citing deteriorating economic fundamentals.

A large part of the problem with India, and a major contributing factor to Indian equities and ETFs, has been a government that foreign investors have viewed as turning its back on the countries economic woes. Those problems include inflation and infrastructure that can be described as decrepit at best.

Already home to the lowest credit rating, BBB-, of the BRIC countries and grappling with faltering stock prices, India's government has recently taken steps to garner favor with foreign investors. In short, Indian policymakers have reduced the country's punitive diesel subsidy, opened the insurance and retail sectors to more foreign investment while injecting more liquidity into the banking system.

"I was pleased to see that the Indian government took significant steps in mid-September to strengthen the economy and encourage foreign investment into India," WisdomTree Research Director Jeremy Schwartz said in a research note. "In my opinion, these new policies have already started improving sentiment toward India, which was reflected in India's ranking as the best-performing country in the MSCI Emerging Markets Index in September."

The impact of India's reforms on its equity market have been palpable. In the past month, the iShares S&P India Nifty 50 Index Fund (NYSE:INDY), the WisdomTree India Earnings Fund (NYSE:EPI) and the PowerShares India Portfolio (NYSE:PIN) are up an average of 9.7 percent. That is better than triple the gain posted by the iShares MSCI Emerging Markets Index Fund (NYSE:EEM).

It is now fair to classify India ETFs as "resurgent" after the funds were damaged by negative sentiment earlier this year.

"Earlier this year, the Indian government proposed a series of tax measures, including General Anti-Avoidance Regulations (GAAR), that would have a significant impact on foreign investors," said Schwartz. "This hurt sentiment toward India; and given the widespread criticism of this proposal, the prime minister established an expert committee to review the application of GAAR. The committee made various recommendations, including deferring the implementation of GAAR by three years and grandfathering existing investments, among other things."

India's efforts to open its burgeoning retail sector could be a boon for funds such as as the EGShares India Consumer ETF (NYSE:INCO). INCO is the only ETF exclusively devoted to the Indian consumer. With INCO up 40 percent year-to-date, it might be fair to say the market is pricing in an anticipated surge in Indian consumer spending.

As far as the impact of other reforms on India ETFs, the opening of the country's insurance sector to more foreign direct investment is going overlooked. India's insurance industry is worth an estimated $41 billion, but coverage penetration is poor at just 4.4 percent of the population in life, and 0.71 percent in non-life business, according to the SME Times.

Any positive sentiment toward Indian financial services firms should benefit EPI. EPI, frequently viewed as the marquee India ETF because it is home to over $1 billion in assets under management, allocates over 25 percent of its weight to financial services firms.

For more on India ETFs, click here.