India, the world’s biggest democracy, is engaged in a month-long general election, but as we await the voters’ verdict on the politicians, what are the prospects for the nation’s stock market?

Pretty volatile, if history is anything to go by. Between June 2004 and January last year the market increased fivefold. It then lost two thirds of its value in the next 14 months, before bouncing back by 35 per cent from its low point in March.

The fall in share prices shows that India is not immune to the credit crunch. Its exports have been hit by reduced global demand while foreign investors have sold Indian shares as part of a worldwide flight to safety.

But Sam Mahtani, director of emerging markets at F&C, the fund manager, says that the Indian economy looks set to recover rapidly, which would provide the foundation for a sustained stock market rally.

He says: “Some of the recent statistics for sales of cement and consumer durables suggest that the economy may be starting to turn. Annual inflation has fallen to 0.4 per cent and India’s central bank has cut its key interest rate to a record low of 3.25 per cent.”

One of the key elements working in India’s favour is demographics. The average age of its population is 25, so it does not face the problem of an ageing population. These baby-boomers will drive consumption in the future with their growing aspirations.

India has a middle class of about 200 million, out of a total population of 1.1 billion. This already substantial group is expected to grow rapidly, boosting demand for credit and consumer products.

Aditya Agarwal, of Morningstar, the fund research group, says: “About 70 per cent of the economy is based on domestic consumption, which makes India less vulnerable to the global downturn. It also has a high savings ratio, at 32 per cent of earnings. Some of this will eventually be spent on consumer goods, while an increasing amount is going into the country’s stock market. This should help to underpin share prices.”

All these factors help to explain why India is able to maintain a solid growth rate when many of the world’s largest economies are in recession. The economy is expected to grow by more than 5 per cent this year — the second highest, after China, of any leading economy.

For many years India has been held back by its poor infrastructure, but in the past decade it has taken enormous strides towards resolving this. Between 2007 and 2012 it is scheduled to spend £100 billion on infrastructure, which will include the building of ports, power stations, railways and roads.

However, John Hatherly, of Seven Investment Management, the wealth manager, says that problems remain. “Although commentators focus on the 200 million Indians who are middle class, that still leaves 900 million who are not, many of whom are very poor,” he says.

“There is still a very large agricultural sector which is not very efficient. And as the cities grow richer, there is the potential for a growing social divide between richer urban and poorer rural dwellers. There is also the fear that Pakistan could implode, creating huge problems for India.”

Mr Hatherly says that economic growth is hampered by bureaucracy and by the fragmented pattern of development. For example, while Kerala in the south is fairly advanced, parts of northern India remain very poor, with quite high levels of illiteracy.

But some of the negatives could have a positive side, Mr Hatherly says. India’s agricultural land is richer and therefore more productive than that in China. The middle class also has the potential to grow quickly. He also points out that the Indian stock market is long-established. “It has been going for more than 100 years,” he says. “Unlike the Chinese stock market, which consists largely of state-controlled companies, there are many genuine private companies with a strong private sector ethos.”

Investors seeking to gain exposure to the Indian stock market can do so in a number of ways. One would be to opt for an Asia-Pacific fund or an emerging markets fund containing a stake in India. The more risk-tolerant could put money into a fund that invests solely in India. A variation on this approach would be to buy an exchange-traded fund (ETF) that tracks the Indian stock market index.

Tim Cockerill, of Rowan & Co, the independent financial adviser, says: “For those who are prepared for the extra risk of a single-country fund, I would recommend JPMorgan Indian Investment Trust or the First State Indian Subcontinent Fund. JPMorgan has long experience of investing in the region, while First State’s conservative approach — looking for quality stocks with sustainable businesses — is a good way to achieve long-term growth.”

Times Recommends

• How to sell your home in a downturn
• How to boost your spending power
• Unemployment benefits explained