When India won its independence 60 years ago, expectations about its future were abysmally low. Winston Churchill famously described India as a mere "geographical expression" — a land that was "no more a united nation than the Equator" — with more than 35 languages and each language spoken by one million people. Although the country belied predictions of disintegration, India was an economic tortoise for much of its history. Growing at just 3% a year until the 1980s — the famous "Hindu rate of growth" — the notion that India could ever rise to the level of an economic superpower seemed a distant prospect.
The turning point came in 1991 when then-Finance Minister (and current Prime Minister) Manmohan Singh introduced wide-ranging economic reforms that began to unleash India’s enormous potential. By all outward indications, the reforms have been a spectacular success. India’s GDP growth last year touched 9.4% to make the country the second-fastest growing economy in Asia. India today ranks as the world’s fourth-largest economy (in purchasing power parity terms) and has created more billionaires than any other country in Asia.
India’s stock market also has been on fire, with the benchmark BSE Sensex index peaking at 15,776 for the first time in July. And even after the recent correction, local investors have almost doubled their money in the past 12 months. Foreign investors have done even better, their returns boosted by an appreciating rupee.
Viewed in this context, the recent stock market wobbles are a mere ripple in an apparent inexorable path upward. Indeed, India is booming. More than 6.8 million mobile phone subscribers are added each month to make India the fastest-growing cell phone market in the world. By 2025, India’s middle class will jump more than tenfold to almost 583 million people. And thanks to the legacy of the English language left by the British, Indians now can cross the globe and integrate with ease into the world of global commerce to give the country’s elite a tremendous advantage over other Asian rivals such as China.
The "New India" in Perspective
Positive press notwithstanding, it’s important to keep perspective on India. In real terms, India’s economy today still is an economic minnow — less than half of the size of California. Only one in 50 households has a credit card. Only one family in six has a refrigerator. What about India’s much vaunted "middle class" of 300 million? A narrower definition — families making more than $4,400 per year — puts that figure at just 58 million.
And before it takes on the mantle of global economic champion, India must overcome many challenges. India is still a very poor country, where 260 million people — that’s close to the entire U.S. population — each live on less than $1 a day. The child malnutrition rate is higher than sub-Saharan Africa. Half of Mumbai’s population of 14 million live in slums and lack sanitary drinking water facilities. And India’s socialist past still weighs heavily on its economy. India today accounts for a smaller share of global merchandise exports than it did in 1947.
India’s Achilles heel in terms of economic development is its poor infrastructure. There are pockets of excellence in India, such as the gleaming Silicon Valley-style campuses built by big software-development firms in Bangalore. But India’s rival to Silicon Valley suffers from traffic jams, overflowing hotels, power interruptions and an inadequate airport. A 1,340-mile trip between major urban centers such as Kolkata (Calcutta) and Mumbai (Bombay) takes eight days — with an average speed of 7 mph and 32 hours of waiting at toll booths.
And Indian red tape and bureaucracy is legendary. A new shop must get, on average, 15 licenses from 11 government bodies, and securing them takes six months. The International Finance Corporation (IFC) lists India 116th out of 155 countries in terms of ease of doing business. That’s 25 places below China — and two behind war-torn Iraq.
And although India has become the Saudi Arabia of outsourcing, growth is showing signs of ebbing as labor shortages and sky-high salaries are starting to bite. It now is cheaper to hire expatriate managers in India than a domestic counterpart. The country is facing a shortfall of about 500,000 skilled knowledge workers by 2010 unless drastic action is taken.
A Global Bull Market Champion Between Now and 2020?
Yet there are plenty of reasons to think that India will continue to generate big profits for investors over the next few decades.
First, the Indian government remains firmly committed to the 15-year-old process of economic reforms. India’s Planning Commission expects the economy to grow by 9% during the 11th five-year plan period (2008-2012). With its high savings rate and young population, that number seems as attainable as ever.
Second, Indian elites have a strong work ethic and emphasis on U.S.-style education. Fathers might have gone to Oxford or Cambridge. But their sons now have Harvard, Stanford and Wharton in their sights. Combine this motivation with common law-based legal traditions and institutions, and you have factors that oil the wheels of commerce in ways that don’t show up in economics textbooks.
Third, the spate of cross-border takeovers involving Indian companies confirms that Indian companies now are players on the global stage. Tata Steel’s $11 billion acquisition of Corus, the Anglo-Dutch steel group, and Vodafone’s $11 billion purchase of a controlling interest in Hutchison Essar, the fourth-largest Indian mobile operator, have been among the biggest M&A deals of the past year. Indian expatriate Lakshmi Mittal has cobbled together the world’s largest steel company, Mittal Steel, to personally join the ranks of the world’s top five wealthiest men in the process.
India has much left to do to fill current high expectations. Even if income and spending levels triple by 2025, India barely will have caught up with present day Egypt. But India’s openness to technology, favorable demography, tradition of democracy, and high caliber top leadership may yet allow it to displace China as the #1 economic growth story of the 21st century.
Nicholas A. Vardy
Editor, The Global Guru
P.S. No fewer than two India-related plays are on our current watch list of picks in my monthly investment service, Global Stock Investor. One top Indian bank — which I call the "Citibank of India" — is set to double in size over the next three years alone. Sign up for a 90-day trial subscription to Global Stock Investor today.
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