Bullish Future for Indian Economy

Following a drastic downturn in the United States financial sector, countries around the world began a synchronized decline in economic growth. International markets that were once believed to be uncorrelated have recently become dramatically dependent in the short-term on worldwide economic and market changes. As investors scramble to find a safe-haven in the global marketplace, they must first ask themselves one question: Which global economy is best prepared to emerge from this crisis and provide investors with long-term growth prospects for the future? A lack of dependence on exports, effective stimulus packages, increasing transparency, and a young middle-class population provide India with a strong economic platform that will make it the best prepared emerging market to recover from this crisis, and provide investors with the best long-term growth opportunities.

Many critics to the emergence and growth of India argued that there was too much uncertainty surrounding the recent political elections for the world’s largest democracy. If the Congress party were not to gain a majority of the parliament seats, it may leave too much power in the hands of the communist party which would significantly hinder future economic growth. We can now safely put that concern to rest, as the incumbent party won with a large margin, securing the country’s road to global integration and continued prosperity.

Emerging Unscathed

Although the recent recovery in markets around the world has investors feeling optimistic, it is important to remain cautious in the near-term. Yet, there are a number of positive catalysts which will allow for India to emerge from this crisis, such as the country’s relative lack of dependence on exports. Most Asian countries are heavily reliant upon exports, as they account for roughly 60% of the region’s GDP. However, exports only make up less than 20% of India’s $1.2 trillion economy. This relative lack of dependence on external demand has led the country to fuel its growth from internal demand and growth. This is a fundamental reason why the country will be able to remain stable and continue growth during this global synchronized recession, albeit at a lesser rate than the 17% CAGR seen from 2003-2008.

Fiscal stimulus packages along with rate cuts from the Reserve Bank of India (RBI) will also work to stimulate growth in the economy. The recent and severe depreciation in commodity prices has given the RBI room to relax interest rates on a number of fronts. The RBI has cut interest rates six times since October to record lows.

We have also seen three stimulus packages by the current government since December 2008, which will work to stem growth deceleration. The reserves in India are also sufficient to finance effective stimulus packages, and according to Citigroup Global Markets, “a worst case situation of all possible outflows.” The robust system of the RBI and other government agencies will allow for government officials to stimulate and support growth from a number of angles. Prime Minister Singh recent stated that the country has “considerable scope to use its monetary policy further if needed to boost the economy.”

A Long-Term Prospect

Most importantly, the quickly growing middle class in India will continue to support strong internal growth for the long-term future of India. The middle class currently numbers about 50 million people, but is expected to grow to 41 percent of the population, or 583 million people, by 2025. The McKinsey Global Institute expects that these households will see their income increase 11 fold, and total 58 percent of Indian income.

The middle class currently spends the majority of its income on necessities such as clothing and food, which has led to strong growth in consumer goods. In the upcoming decades, this growth will shift more towards discretionary spending, as the emerging middle class sees a large increase in available income. Companies in India across all sectors are catering towards these currently low-income but relatively expanding, consumers. Most notably, Tata Motors (TTM) released its one lakh (100,000 Rs) car, which makes it the cheapest car in the world.

The fast growing middle class population will continue to support internal growth within India, and the growing wealth of this young population will lead to a vast expansion in the private sector, leaving ample opportunities for investors.

Disclosures: Daniel Miller is currently employed by a hedge fund which has long positions in Indian equities.

Comments

[Carazoo.com:]

Nice bit of info. :-)

May 26 07:25 AM

[Soldalma:]

Actually India is by far the Emerging Markets country with the worst future prospects. With an increasing population and a chronic shortage of water it is a good candidate for widespread famine. In several states more than 50% of power generation is used to pump water from aquifers. Due to this every single major city in India has daily blackouts. On the countryside it is common to get electricity for only one hour per day. At the rate of 250 cubic kilometers per year, aquifers are being rapidly depleted. Many farmers have to dig as deep as 400 meters to find water. India also does not have significant energy resources. The Congress party was in power for years and implemented a "zero reform" policy. It will be in power for a few more years and there is no reason to believe anything will change.

With all that, Pakistan as a neighbor and more than 100 million potentially disruptive Muslims inside its borders, India is a disaster waiting to happen.

May 26 09:58 AM

[himlynx:]

A pertinent comment by Soldalma. Chronic shortages of water and electricity are indeed problems. But please note that if an economy goes from minus 100 to minus 95, it is still a 5 % improvement.

J Thomas

May 26 12:28 PM

[Daku:]

Soldama comments are unrealistic, india is facing a power shortage but that is due to its explosive growth. About India depleting its aqcuifers?Who told you thats the only source of water. Plus water pumped out eventually finds its way back in the water table.
Energy demand is going to be adressed with the increasing investment in nuclear energy. The US India Nuclear deal is a plus in that direction.
About Congress being in power for the last 5 years and not being able to do much is why people are so excited this time around because they(Congress) will not have their hands tied by anti development parties.
Indian Muslims are not a problem, they have been satisfied living in India and with the failure of Muslim Pakistan they realise they realise they are better off in India.

May 26 07:43 PM

[Daku:]

Oh and i forgot to add to my reply to Soldama, indias population is a problem, its a huge market and Indias middle class is the largest in the world.
About India being a candidate for famine?? I cant understand where you are getting your facts but india has had reserves to last the entire population for at least 3-5 years for about 30 years now. This was achieved after the green revolution. The issue of public distribution is still a problem. I have known of tons of grain going to waste in silos and yet some remote areas do not receive aid in time.

May 26 07:49 PM

[punk_ash:]

Indian government made a wild sanctuary for Tigers, I cannot remember the name, but they cannot find any tigers there. India is in bad shape and always has been in that shape.

But, Indians are crazy for stuff just like Americans are and they need to buy and buy and buy, and that is good for the economy and the Sensex. I sold out of the Indian equities in May. An index doubling in 3 months is weird. It just might double again from here, but it will have to fall, in 6 months or 6 years. Sensex belongs at 10K.

May 30 12:39 AM