India is a country with many challenges. It is a democracy of over a billion people, most of whom live in poverty. However, as Shailesh Jain from Lonsec reports, it offers major potential investment opportunities.
Having recently returned from India, it is clearly apparent why the very mention of the country could conjure up Third World images of poor healthcare, lax security, and rampant corruption and, as recently witnessed, a less than perfect Commonwealth Games.
In a democracy of more than a billion people, packed into a land mass one-third the size of Australia, real estate is a precious commodity. India is a developing nation and for this reason the fiscal divide between the haves and the have-nots is still large.
India has an ancient, rich and vibrant culture – and enough historic sites to keep anyone busy exploring for a lifetime. But the fact remains that the majority of India’s 1.2 billion people live in poverty.
Economically, India faces an unpleasant trinity of moderating growth, high inflation and monetary tightening. In the first three months of this year, India’s gross domestic product growth rate slipped to 7.8 per cent, down from 8.3 per cent annual rate in the fourth quarter of 2010.
While there are a number of drivers, India’s heavy reliance on oil imports, (around 75 per cent of consumption) and heavy government subsidies mean that for every $10 rise above $90 there is a 10–20 basis points negative gross domestic product (GDP) impact.
The primary contributor to inflation in India – as it is in China and much of the emerging world – is food inflation. This is not the market-based inflation of higher demand, or the industry-based inflation of unionised wage increases. It is simply the self-induced inflation of a government that is trying to keep the majority of its population from declining back to poverty.
For example, the price of onions doubled within the first half-year of 2010 due to unseasonal rain during harvesting season.
As at May 2011, the price of onions had dropped by 60 per cent on a year ago. While there is a pricing movement, more broadly food inflation remains sticky at elevated levels.
In response to continued inflationary pressure, the Reserve Bank of India has raised its key borrowing rate 10 times since March 2010 – to 7.5 per cent as at June 2011.
While rising interest rates due to the pickup in economic growth are not necessarily negative, excessive tightening can impact negatively on market sentiments, as appears to be the case currently.
At a time when the inflation issue refuses to go away, manufacturing growth continues to decline and interest rates inch upward quarter after quarter, the government has its hands full fighting fires on other fronts – such as the corruption charges faced by senior ministers and the ongoing struggle to maintain harmonious society.
In days gone by it was an accepted fact that many ministers asked for bribes. Now it seems they may demand shares in firms to which they are about to award contracts.
Recently this involved telecommunications minister Andimuthu Raja, who is accused of rigging the auction of second generation (2G) mobile telephone licences in 2008, thereby depriving the exchequer of $39 billion – a sum about equal to India’s defence budget.
Scandals such as this have inhibited good decision-making and paralysed development projects.
However, the fight against corruption has taken a new turn with large gatherings of everyday citizens getting actively involved by rallying against corruption and continuing scandals. The news media has contributed significantly to bringing the issue of corruption to political India’s centre stage.
This is supported for the first time in many years by the judiciary system actively pursuing corruption cases on a day-to-day basis. This is causing businessmen, politicians and bureaucracy to readjust their thinking and strategies on existing and new projects due to fear of getting tainted.
Joys of youth
India is a young population by global standards, with more than 50 per cent of its population below the age of 25 and more than 65 per cent aged below 35.
It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan. According to UN estimates, the population is forecast to rise to 1.4 billion by 2025 and approximately 67 per cent of population is likely to be in the working age bracket.
India has a large English-speaking population, many of whom are highly educated, and importantly – compared to China – is an open democracy where its citizens’ personal liberties are protected and its elected leaders do not have an ironclad grip on power.
Hence global players are now eyeing India as the most attractive destination for doing business and are planning aggressive investment strategies to this effect.
The consumption statistics are impressive: around 30 per cent annual growth in beer volumes, 40 per cent growth in air-conditioner sales, monthly domestic two-wheeler sales of over a million, and 15 million new mobile subscriptions added every month to the existing base of 700 million mobile connections.
These figures, along with the fact that 85 per cent of India’s aggregate economic demand is domestically driven, illustrate that the Indian economy is more than just hype – there is a level of growth that many expect to continue for many years as India’s middle class grows and consumerism follows suit.
For instance, in 2010, employees in India enjoyed a salary hike of 11.7 per cent. This is expected to jump to 12.9 per cent this year – among the highest in the world. This equates to high disposable income, which further equates to increased consumption, which results in higher growth.
The Taj Mahal of all challenges
While the main restraint on India's growth remains its infrastructure, this area also provides great opportunity. Persistent migration to the cities is putting tremendous pressure on existing infrastructure.
The building of the Taj Mahal is a good metaphor for the work that lies ahead if India is to make the move from a potential global economic power to realising this potential. The Taj Mahal took 22 years and 22,000 workers to build under the guidance of an imperial Mughal ruler in memory of his wife.
In a traffic system that's so helplessly overloaded, it would seemingly take a miracle for things to work perfectly. Public transport continues to be a major problem. Many of the country’s dynamic entrepreneurs waste hours each day stuck in traffic.
Firms are strangled with the cost of building their own infrastructure – for example, fleets of buses are needed by companies like Deutsche Bank to ferry staff to work at subsidised rates.
However, there are examples of progress. The new Bandra-Worli Sealink, a two-kilometre, eight-lane bridge in Mumbai works effectively. It currently brings together the CBD of one of the world’s most populous cities with the west side of the city, reducing travel time from 75 minutes to about 7-to-10 minutes.
There are some promising changes that are soon to be implemented. Firstly, in a positive sign that roadblocks and inefficiencies are being dealt with, the government has constituted a committee headed by the Prime Minister to get core national infrastructure projects underway.
The committee plans to spend US$1 trillion (8.4 per cent of GDP) annually on infrastructure under the 12th governmental five-year plan, due to start in 2012, compared with a US$542 billion (7.5 per cent of GDP) in 2010.
Secondly, the introduction of the Unique Identity Number system and establishment of bank accounts will mean around 600 million people (mainly in rural areas) will have direct access to government subsidies, which often do not reach the targeted recipient.
Clearly a number of roadblocks stand in the way of development and growth for India. Economic reforms are slow to eventuate, infrastructure issues continue to hinder many projects, overbearing poverty and malnutrition will place higher costs on the system in the long run, and the government and its systems are not easy to deal with.
These problems are all too painfully visible. But the good news is the economy has now shifted on to a higher growth trajectory, one that has made India one of the fastest growing economies in the world, and one which, if sustained, is set to see India become a stronger power in the world economy.
Even today, however, 61 per cent of the population of the country live below the poverty line, compared to 89 per cent just five years ago. India is heading in the right direction, but with the burden of population, it will take some time to realise its potential.
Shailesh Jain is an analyst at Lonsec.
