IN all the hype surrounding China’s emergence as an economic superpower, India can sometimes appear relegated to the sidelines. Yet India, too, is a budding superpower in its own right. Its gross domestic product (GDP) has expanded from £16 billion in 1980 to £500 billion today, and its economy is now the fourth biggest in the world, in terms of purchasing power parity.

India’s rapid annual growth rate of more than 7 per cent is reflected in the performance of funds investing in the country. Since its launch in 2004, Fidelity’s India Focus fund has produced a return of 246 per cent for investors. But even this impressive showing is eclipsed by JPMorgan’s Indian investment trust, which has returned an extraordinary 735 per cent over five years.

This month the Indian Government, concerned about the dangers of a market “bubble”, stepped in to limit the amount of money that foreign investors can feed into the market, triggering a sharp correction in share prices.

But India’s future still looks rosy, according to Arun Mehra, manager of the Fidelity India Focus fund. He says that one of the biggest drivers of growth is the country’s changing demographics. Wealth is beginning to filter down to rural and traditionally low-income sections of society, while India’s middle class – 200 million in a population of more than one billion – is expected to grow to 500 million by 2015.

Mr Mehra says that India has one of the youngest populations in the world, with about 50 per cent of people having been born after 1982. “As these young people move to the cities and their aspirations grow, life-styles are changing. More people are using credit cards, buying mobile phones, eating out and spending on healthcare, travel and luxuries.”

These “baby boomers” will not only drive consumer spending, he says, but also help India to avoid the long-term demographic problems faced by countries such as China, with its ageing population.

In the next three years, 71 million Indians will join the working-age population, while in China the “one-child only” policy means a comparable figure of just 44 million. India’s business sector is thriving too, with corporate profits expected to grow by 30 per cent in 2007 – a bigger increase than any of its main Asian rivals.

Pinakin Patel, of JPMorgan, says this rapid growth is driven by the success of a number of different businesses, such as the mobile phone industry. “This sector is signing up six million subscribers every month, more than any other country in the world, and yet with a market penetration rate of just 9 per cent there is plenty of scope for future growth.” JPMorgan has a stake in Bharti Airtel, India’s leading mobile phone provider.

JPMorgan also favours infrastructure, a sector that, Mr Patel says, was much neglected by the Indian Government until about 2000. “But it then received a terrific wake-up call when it saw how greatly China was outstripping it in this field, and decided to take action. Between 1950 and 2000 the country built 11,000km (6,800 miles) of roads each year. Since 2000 it has built 11,000km of road per day,” he says.

Furthermore, the country plans to spend $195 billion (£96 billion) on infrastructure over the next five years. Mr Patel says: “We have invested in Larsen Toubro, one of the key firms in this area, which is involved in building ports, roads, bridges and airports.”

Lack of universal education could spell trouble for investors

HOWEVER bright the future may be for India, taking a punt on the sub-continent still carries considerable risk, says Robin Geffen, managing director of Neptune Investment Management, which launched an India fund in January this year.

Mr Geffen says: “India has a lot going for it but, right now, valuations are not cheap and a lot of the good news is already priced into shares.

“One of the biggest problems that India currently faces is the barrier to social mobility caused by a lack of universal education opportunities.”

Nonetheless, if you do want to hold a stake in India, you have two principal choices: first, to put money into the handful of Indian single-country funds, such as those offered by Fidelity, JPMorgan, Aberdeen or Neptune or, secondly, you could spread the risk more widely and pick an emerging-markets fund with some exposure to India.

Rob Harley, of Bestinvest, the independent financial adviser, says: “We tend to favour the option of spreading the risk because single-country funds are fine when markets are going up, but painful to be in when they are going down.

“We like funds such as First State Global Emerging Markets Leaders, managed by the highly experienced Angus Tulloch, which has a stake of just under 5 per cent in India.”

Times Recommends

• How to profit from your holiday
• Is there anywhere left to make money?
• 10 sites that could change your life