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By Joseph Hogue, CFA

The ruling Congress party staged a huge rally over the weekend to defend recent reforms and build support for more foreign investment in retail and insurance. Just last week the Premier, Manmohan Singh, replaced members in his cabinet to reach the younger electorate and restore credibility to a government that has been racked by widespread corruption. Elections in India are held every five years and are scheduled next for 2014.

Whether the government is able to push through reforms or improve credibility leading up to the elections is debatable. There is one sector that continues to grow rapidly across this emerging economy.

Internet usage may be the bright spot in a country that has struggled with growth and inflation over the last few years. While global internet usage increased 7% last year, usage was up 41% in India. Retail and apparel showed some of the strongest gains in unique visitors with increases of 18% and 36%. As with neighboring China, the story here is the huge potential in e-commerce and advertising from the largest populations in the world.

Even with about 62.6 million Indians accessing the internet, usage still only accounts for about 5% of the 1.2 billion population.

Some of the biggest beneficiaries to the Indian internet boom may not be emerging market companies at all. Amazon (AMZN) topped the list of visits to retail sites and accounted for 14.7% of the online population with 6.8 million visitors. Facebook (FB) saw a growth rate of 47% in the country over the last year.

ADR issues for Indian companies are limited to a few sectors like financials, information technology, and industrials. Investors may need to look to funds or foreign companies doing business in India for exposure to the retail sector.

The WisdomTree India Earnings fund (EPI) is one of the largest ETFs for investors. The fund invests in companies that are incorporated and traded in the country. It holds a fairly diversified mix of sectors with financials (26.3%), energy (20.2%), information technology (12.1%), materials (11.5%) and industrials (10.6%) accounting for the majority of holdings. Total returns over the past year have underperformed the index slightly with 2.07% after a dividend of 1.8% and a 0.83% expense ratio.

The EGShares Indxx India Consumer (INCO) provides a more focused investment on the theme with 69.3% of holdings in consumer goods, followed by consumer services (21.7%) and industrials (8.9%). The fund charges a 0.89% expense ratio and has returned 12.8% over the last year.

Source: Invest In India, With Or Without Government Reforms