As the world’s richest nations face their first major financial crisis in many years, it is fascinating to compare the prevailing mood of Western pessimism with the optimism of India — an emerging economy that has spent considerable chunks of time in crisis, but whose attitude has much to teach us.
The world’s second most populous country routinely deals with adversity: poverty, poor infrastructure, and being at the mercy of unpredictable monsoonal rains, regional conflict and a thousand other logistical difficulties.
By our standards India has every right to be more pessimistic than us, but they simply refuse to embrace that attitude no matter the problem, allowing it to achieve great things.
India’s resolve to ‘get on with it’ is the reason it is one of only three countries making its own super computers, and one of only six that can launch satellites, and is the second largest small car market in the world and only the NYSE (New York Stock Exchange) lists more companies than the Bombay Stock Exchange. Daily news in India celebrates achievement and creativity, whereas in the west our news is fundamentally bleak.
So when pondering what may lie in store for India in 2009, we need to keep in mind the essential differences in attitude between India and the west. India’s optimism, combined with an incredible set of numbers, is why it is among the best placed nations in the world to handle the current adverse conditions.
India’s massive internal demand and low exposure to western economies such as the US has provided some protection from the credit crunch, though it has been impacted, principally through the withdrawal of foreign capital.
The Satyam accounting scandal has come at a bad time, but fraud is hard to stop in any country, and we can expect the Indian government to act on its already strong regulatory and corporate governance regime to maintain confidence.
But much worse were the recent terrorist attacks on Mumbai.
While terrorism is devastating it does not change India’s unique demographics, and does not threaten the prevailing political direction and reform path, which has been in place since 1991.
The place of December’s attacks, Mumbai, is important to the Indian economy, bringing in 40 per cent of foreign trade, 60 per cent of customs duty collections and 40 per cent of all India’s income tax. Plus it accounts for around US$10 billion in corporate taxes. You could say the economic health of Mumbai is the economic health of India.
But Mumbai is resilient; its people have a ‘get on with it’ attitude and cannot be stopped.
India’s trademark resilience has also been apparent during the global financial crisis.
While the year ahead remains uncertain, advisers and investors considering India will be investing in a period that looks like value, with some sectors still performing strongly and with GDP growth still expected at around 7 per cent for 2008-09.
There is evidence that India’s markets were only affected by liquidity constraints for a short period, as bank lending actually increased by over 76 per cent during April to November 2008 compared to the same period a year ago.
The services sector, which contributes 63 per cent to GDP and includes IT and education, retained a growth rate of over 10 per cent, according to the Federation of Indian Chambers of Commerce and Industry.
Telecommunications continues to grow strongly: India put on a record 10 million new mobile phone subscribers in October, and demand for wireless and broadband Internet resulted in 28.44 million subscribers being added in the September quarter. This took the total subscriber base to 353.66 million, according to the Telecom Regulatory Authority of India.
Government is also ensuring that infrastructure spending remains strong over the next two years, a vital growth sector and important for nation building.
Other sectors that look attractive for 2009 include energy and pharmaceuticals.
The most punishing aspect for India’s markets has been the withdrawal of foreign capital and the key question is, will this money return?
The answer is yes, because the facts about India are still in place. It still has 1.1 billion people moving out of poverty and into middle classes (about 300 million are there already), and is home to some of the globe’s largest conglomerates.
A recent Ernst & Young report that looks to 2020 and predicts a “tectonic shift” in the distribution of global capital means BRIC economies (Brazil, Russia, India and China) will likely contribute 40 per cent of global growth by 2020.
India depends less on trade with the west than China does and unlike any competitor country, India still has a young population with the following ingredients:
- approximately 40 per cent of the country is under 21 years old;
- per capital income growth is rising;
- the middle class is growing;
- education and skills training are booming; and
- rapid urbanisation is underway.
While this long-term trend is in place, the government is dealing with short-term issues arising from the global financial crisis. What will be important in 2009 are the Government stimulus packages of US$35 billion and now another US$4 billion, which should have a much bigger positive impact than larger allocations in the west.
Compared to the US, Japan, Germany or even China, the Indian economy remains quite small (India’s GDP is only one-third of China), and these are big dollars that will drive change. That India has the capacity to pour this amount of money in response to the global downturn should give investors hope that it is embarking on a major transformation.
The oil-fuelled inflation of 2008 has dropped substantially and is currently down to 5.24 per cent, approaching a welcome return to normality for 2009.
Being a nation of savers with low exposure to mortgages and consumer debt has helped India deal with the credit crunch internally, and its sheer weight of demographic numbers and resilient character provide hope for the future.
But to participate in one of the world’s great growth stories, advisers and investors need to accept that there will be some bumps along the way, and focus well beyond 2009.
John Pereira is managing director of India Equities Fund and Olympus Funds Management.
