During the Renaissance and the Age of the Exploration, where did everyone want to go?

India.

Christopher Columbus found Hispaniola (today, the Dominican Republic and Haiti) by accident while sailing westward to India, thus naming the newly discovered islands the “West Indies.”

#-ad_banner-#Even the Beatles went to India seeking enlightenment.

I like Indian food. Ravi Shankar’s trippy sitar tones are incredibly cool. But what I truly dig about India is the yet-to-be-realized investment potential.

Right now, an amazing collision of timing and fundamentals are priming the region for incredible growth.

As the chart of the iShares India Index ETF (NYSE: INDA) demonstrates, the Indian market outperformed its Chinese and American counterparts handily.

More importantly, the India growth story is just starting to sprout legs and still has room to run.

The Right Stuff

The Indian economy is growing in all the right places by transitioning from an agriculture-based workforce to a manufacturing one. Consider these numbers:

Over the past 12 years, agricultural employment, as a percent of the total economy, shrank to 47.2% from 59.8%. During the same period, industrial employment grew to 24.7% from 16.1% and services grew to 28.1% from 24.1%.

The most important sector in an emerging market, manufacturing, experienced the most significant growth.

But how does India’s employment growth by sector compare with China’s? Take a look:

	China	India
Agricultural	-36%	-21%
Industrial	40%	53%
Services	31%	17%

Over the same 12-year period, Indian industrial employment grew at a much faster rate.

But, the most significant number is the difference between service sector growth. China grew at nearly double the rate of India.

To me, this is indicative of a real, tangible slowdown in China’s growth as a manufacturing center as it transitions to a more consumption-focused economy. Strong industrial growth traditionally fuels capital investment, which translates into rising investment markets for that particular region.

India’s demographic profile is also in a remarkable sweet spot for all kinds of economic growth.

The median age of India’s population of 1.25 billion people is 28. Nearly 200 million people, or 16% of the population, are between the ages of 18 and 25 — one of the most important consumer demographic bands.

And 64% of the population is between 15 and 64 years old — the ideal working age. That percentage is expected to grow to 67% by 2020.

Not only will India’s industrial base expand, but its consumer base will blossom as well. As a young, vibrant and largely educated workforce turbo-charges productivity and efficiency, more money will be spent on consumer goods.

That means consumption of everything from soft drinks to televisions will keep rising. Between 2006 and 2011, Indian consumer spending nearly doubled from $549 billion to $1.06 trillion. The bottom line is that investors in India will get substantial returns fueled by international and domestic growth.

Two individual stocks that would allow investors to play this trend are pharmaceutical firm Dr. Reddy’s Laboratories Ltd. (NYSE: RDY) and carmaker TATA Motors Ltd. (NYSE: TTM).

Although its focus is on the international community, Dr. Reddy’s stands to benefit from a rising standard of living in India. Increased prosperity means higher demand for goods like health and beauty products. The company is recognized as one of the most trusted brands in India, which should help fuel market share gains as the need for prescription and over-the-counter drugs rises.

TATA Motors is also focusing on both the international and domestic markets. During the financial crisis, the company bought two of the world’s most recognized luxury automotive brands: Land Rover and Jaguar. The acquisition of those brands, from Ford Motor Co. (NYSE: F), was, in hindsight, a deep bargain. Not to forsake the rise of the Indian middle class, TATA rolled out the world’s most affordable car, the Nano, with a price tag of just $1,600.

However, China is a completely different story demographically. With a median age of 37.6, the unintended consequences of the “one child” policy are starting to appear. The work force — those that are age 15 to 64 — is shrinking. The predicted result is a labor shortage by 2050.

Tight labor markets equal wage inflation. While that’s great for the workers, it shrinks margins for businesses who, in turn, seek cheaper labor elsewhere.

India’s per unit labor cost is one-third that of China’s. In 1992, presidential candidate Ross Perot predicted a “giant sucking sound” as American manufacturing jobs migrated to Mexico. That same sound is barreling toward China.

Risks To Consider: As with any  emerging market investment, the biggest risk is political instability. For India, politics are also a virtue:  As the world’s largest democracy, 800 million eligible voters hold the power to propel India into a bright future. Newly elected Prime Minister Narendra Modi ran on a pro-business, anti-corruption platform. So far, many of his initiatives are succeeding.

India is also a nuclear power and is constantly managing tensions with its neighbor, Pakistan. Again, India’s pro-democracy, moderate profile can help cooler heads prevail in the region.

And while rich with human resources, India faces challenges concerning natural resources. The country imports nearly 80% of its oil. Energy inflation can rapidly cripple the emerging economy. Luckily, the global price of oil is in a sharp,  sustainable (in the near-term) downtrend thanks to oversupply, helping to forestall this threat.

Action To Take –> The pump is primed for further growth in India. Using a broad-based ETF approach, the iShares MSCI India ETF is a fine option. Holding mid-sized and large Indian companies, the fund gives investors exposure to 85% of the Indian stock market.

Since its inception in 2012, the fund has generated a 10% annual return, though plenty of upside remains, based on the factors noted earlier.

In terms of specific stocks, TATA Motors and Dr. Reddy’s are poised for success thanks to their dual role as growing international players and as domestic providers to emerging Indian consumers.  Regardless of the path chosen, investors should be able to enjoy robust  annual returns for the better part of a decade, thanks to India’s growth as a manufacturing center and the country’s gigantic demographic advantage.

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