India's flagship Nifty Fifty index has almost doubled over the last five years and hit a new record high last month, but Morgan Stanley thinks there could be more gains to come.

The bank thinks recent financial reforms in India are very significant and create real opportunities for the financial services sector. They amount to a 'digital leap' which presents a 'multi-trillion dollar opportunity' for financial services firms and investors. At the same time, these reforms should also boost growth in the wider economy - especially for smaller businesses.

Morgan Stanley highlighted three particular reforms in its recent 'digital leap' note:

  1. Aadhar, a new universal biometric ID system
  1. Jan Dhan, measures to boost financial inclusion
  1. GST - a national, online Goods and Service Tax has been introduced (similar to VAT).
Aadhar means that 1.2 billion Indian citizens can now be identified by fingerprint or biometric scan. Thanks to Jan Dhan, almost every Indian household now has a bank account and can access that account anywhere. When you combine these two reforms with rising smartphone penetration, it's now much easier for Indian citizens to transfer money and pay for goods online.

India has traditionally been a very cash-driven economy with a large shadow economy, but these innovations are changing that.

The new national GST also helps this transition. The tax replaces some local taxes and simplifies the tax system considerably. Morgan Stanley thinks it should also boost government revenues. The new GST system, which is operated online, means that it's much easier for banks to evaluate the performance of a small business. As a result, small business lending is rising. Consumer credit is also rising from very low levels which is boosting consumption.

All of these changes could push real annual gdp growth to 7.1% over the next 10 years which would be very impressive if achieved. Morgan Stanley says there's been a good correlation between GDP growth and earnings growth in recent Indian history. The bank argues that earnings growth will boost share prices and price/earnings multiples will rise as well, providing a further boost to share prices.

And it's not just Morgan Stanley who are optimistic about the long-term prospects for India. In the latest 'Big Call' radio show, I spoke to David Cornell, manager of the India Capital Growth investment trust, and he's pretty upbeat. He also thinks there are opportunities in the digital finance space.

However, he does acknowledge that the Indian share prices have been pretty buoyant:

"the stock market is up 30% more or less this year, it's had a good run. A lot of good news and exciting momentum is already priced into stocks. But this is not a short-term game…if you look ahead 3 or 5 years I'd say there's bags of value left in the market, no doubt at all."

Crucially Cornell emphasises that India offers skilled, English-speaking labour in a democracy with the rule of law. He argued that no other major emerging market offers that combination.

How to invest

If you want to invest in India, the India Capital Growth trust is definitely a runner - it focuses on small and mid-cap Indian companies and has delivered excellent returns in recent years. Over the last three years its net asset value has risen 70% while the benchmark MSCI Index has only risen 14% over the same period. However, that kind of performance doesn't come cheap - the total expense ratio is 1.98% a year, and there are no guarantees the strong performance won't be repeated in future.

ETFs are, of course, a less expensive option. The cheapest India ETF is the db x-trackers MSCI India Index UCITS ETF GBP (LSE:XCX5) which has a TER of 0.75% a year.