Thursday, July 18, 2024

India is and will be an attractive investment destination

India’s macro-economy, micro-economy and demographic profile are far too attractive to ignore for investors.

In 2005, India was only slightly smaller than Japan in terms of Purchase Power Parity (“PPP“) adjusted Gross Domestic Product (“GDP“). India’s PPP adjusted GDP in 2005 was US$3.7 trillion compared to Japan’s US$4 trillion, and China’s US$8.8 trillion. Even developed countries in Asia are much smaller than India in terms of PPP adjusted GDP. For example, Korea’s PPP adjusted GDP in 2005 was less than a third of India’s at US$1.1 trillion, Hong Kong was at US$0.2 trillion and Singapore at US$0.1 trillion. India is expected to be the fourth largest economy in the world by the year 2025.

Not only has the long term growth rate of India’s GDP been one of the highest in Asia over the past decade, its growth rate has been one of the most stable as well. From 1995 to 2005, the real growth rate of GDP of India was 6.3%, significantly ahead of Singapore at 5.1%, Malaysia at 4.6%, Thailand at 2.7% and Indonesia at 2.7%. Only China exhibited a higher growth rate during this period at 8.6%. The “variability” in the annual growth rate of India was one of the lowest in Asia. Thus, from 1993 to 2003, the difference between maximum and minimum annual GDP growth for India was 4.7%, Korea was at 17.9%, Thailand at 19.7%, Singapore at 15.3%, and Malaysia at 17.4%.

Unlike many other countries in the region whose economies are dependent on a few sectors (e.g. Taiwan on semiconductors, Indonesia on commodities, Singapore on electronic manufacturing), the Indian economy is highly diversified across a wide range of industries. Thus, investors are not exposed to vagaries of one or two sectors alone. For instance, the share of information technology sector in the Morgan Stanley Composite Index (“MSCI“) India universe in fiscal year 2006 was 15%, the share of materials was 10%, consumer goods 15%, financials 16%, and energy 31%.

India’s micro-economy is on a sound footing aided by high quality entrepreneurs who have always operated in a competitive environment. Given the high cost of capital in the past (five years ago, Indian companies were borrowing at 17-20% interest rates), a large number of Indian companies understand the importance of conserving capital, and deploying it efficiently. This is illustrated by the fact that the return on equity or (“ROE“) for the top 500 companies in India for the past four years (since 2003) has been 18%, 20%, 22% and 20%, respectively.

The ongoing reform process in India that was initiated in early 1990s has transformed many industries dramatically over the years. Thus, from 2000 to 2006, mobile phones grew from 18 million to 81 million; airline passengers grew from 12 million to 51 million; exports of information technology related services grew almost four-fold from US$6 billion to US $23 billion; and the number of cars increased from 6.1 million to 10.6 million.

The demographics of India are probably the best indicator of the future potential of the country. India is one of the “youngest” countries in the world (among the significant economies), and will continue to be so for the next few decades. The median age of Indians is 24 years (compared to 30 years for the Chinese, and 36 years for the Americans).

The dramatic growth of the “consuming” class of India in the past few years is not expected to slow down, and this has obvious implications across almost all the sectors of the Indian economy. Thus, the number of households having incomes of greater than US$2,050 annually (that constitute the consuming class in the country) have grown from almost 50 million in the year 2002 to more than 70 million in 2006. This number is expected to exceed 110 million by the year 2010, and will constitute almost half of the total households in the country at that time.

India’s attractiveness for financial investors also lies in its large, well developed and well regulated capital markets. The Securities and Exchange Board of India (“SEBI“) is a progressive and strong regulator, and has reformed the capital markets significantly over the past decade.

India’s market capitalization in January 2007 was US$857 billion, which was only slightly smaller than China at $1,084 billion, and larger than Korea at US$787 billion, Taiwan at US$578 billion, Singapore at US$412 billion and Malaysia at US$257 billion. India has attracted more than US$15 billion of foreign direct investments from 2001 to 2005, and more than US$25 billion of foreign portfolio investments from 2003 to 2005.

In short, while there are some concerns regarding inflation, quality of infrastructure, and slowing pace of reforms, the overall India story continues to be very compelling for financial investors due to the size, growth rate and stability of the economy, deeply entrenched entrepreneurial culture, a vast available pool of managerial talent, democratic setup, an impressive institutional framework, high rates of return on capital and well developed capital markets.