BJP TODAY

May 16--31, 2003 - Vol. 12, No. 10

Destination India
A Sure Bet for long term investment
Ajit Ranade

But by the metric of purchasing power parity, India is the fourth largestin the world, behind USA, Japan and China. Over the last two decades, India's growth rate ranks among the fastest ten in the world. This long period was marked by many macroeconomic shocks - such as the gulf war of 1991, two major droughts, cyclones, the East Asian crisis and international sanctions following the nuclear tests. This was also a period when India's population growth rate slowed down, so that per capita incomes are growing much faster than in the past. This has led to a rapidly growing middle class, whose members have bigger aspirations. The recent boom in industries like consumer durables and housing is testimony to the growing middle class. Hence, there is now an impatience with a "just 6 percent growth", and the Prime Minister has pledged to achieve 8 percent growth over the next five years.

To achieve this 8 percent growth will require annual inward flows of $50 billion of foreign direct investment (FDI). The current flows of inward FDI is much lower, but there has been a perceptible increase in the recent past. Also India's officially reported FDI is much lower than actual, since it is measured conservatively (e.g, it ignores re-investments from profits). Last year India was the highest recipient of private equity flows in Asia. FDI will most likely be further enthused by complimentary public investment in infrastructure such as roads. The $12 bn investment of the "Golden Quadrilateral" programme, which will link the four main metropolitan cities with four-lane highways, is already running ahead of schedule. The recent passage of the electricity bill also paves the way for further deregulation, and revitalisation of the power sector. In telecom, India is one of few countries where investments continue at full steam.

Globalisation has also presented a great opportunity to Indian players. Some recent achievements do stand out. These should enhance the confidence of these players, of engaging with the world. For example India is now the largest milk producer in the world. It also has the world's largest manufacturer of two wheelers, and the world's lowest cost producers of both steel and aluminium. Indian software services have the largest share of out- sourced off shore services. It is a preferred hub for business process outsourcing (BPO). Most major international corporate names have either a BPO centre, or a research facility, or both in India. This includes automobiles, banking, chipmakers and airlines. India will export 100000 cars this year, and many international auto companies' source components from India. An Indian company will soon become the world's largest producer of compact disks. An Indian company is among a handful in the world that can launch commercial satellites into geo-synchronous orbit. Indian software companies service half of all the Fortune 500 companies, and continue to clock bottom line growth of more than 25% per year, year after year, despite a global slowdown. In the IT-enabled services, the revenues were close to half a billion dollars last year. In five years, India aspires to be "the world's back office"-a $16-billion-a-year industry employing 1.1 million people.

The financial services industry is also growing rapidly. This sector with insurance, banking and capital markets has seen a sea change in the past ten years. The electronic order book driven, National Stock Exchange and the BSE rank as #3 and #5 in number of trades world-wide, and also have the lowest transaction costs. Retail banking is booming and there is a thrust on asset securitisation. Innovations like doorstep banking, mobile ATM's, Internet banking have been enabled due to an unprecedented growth in telecom infrastructure.

The insurance business is growing at more than 20% per annum, now spurred by several private and foreign players. Pension reforms are in the offing, and will help deepen the financial sector further India's demography presents an advantage not seen in most other economies, which are graying. The labour force is expanding at a pace much faster than the population growth rate. This means more youngsters are entering the labour force, including more females, as two income families becomes the norm (rather than female work remaining unpaid). As a result the average age of the labour force will remain young, and possibly decline for a little while into the future. So unlike most other countries, India does not face the problem of an ageing population. This presents an advantage from the perspective of pension reform, and also calls for the promotion of labour intensive Indus tries like textiles, tourism and construction. And also an employment focused strategy for agriculture.

Any bets on India have to be long term - the "elephant" economy unlike the tigers of East Asia, moves relatively slowly but surely. This slower speed and also surety is a consequence of a federal democratic polity. However for long term investors, this is surely a plus feature.

The author is Chief Economist, ABNAMRO Bank, India.
(Courtesy, Indian Express)