India Projected to Be the Fastest Growing Economy in 2010

By Neena Mishra

The World Bank has projected (in its Global Development Finance Report) that the Indian economy will grow at 8% in 2010, which would make it the fastest-growing economy in the world for the first time, surpassing China, which is projected to grow at 7.7% rate. Please read Dirk Van Dijk's post for more information about the World Bank's forecast on the global economy.

For the current year, the Indian economy is projected to grow at 5.1%, revised up from an earlier projection of 4%. It may be added that India has consistently outperformed World Bank's forecasts in the past.

The slow pace of reforms in critical areas had affected India's growth in the past years. However, the re-elected Government has promised to bring about desired reforms in infrastructure, social sector and financial sector. Among other reforms in the pipeline are opening up of retail, insurance and banking sectors to more foreign investment and reducing Government ownership in refineries, banks and fertilizer companies.

Prospects for strong economic growth have resulted in the recent surge in prices of Indian ETFs such as PowerShares India (PIN). While ETFs are good vehicles for exposure to the country, investors may also look at specific sectors, which are poised for higher growth than others.

The Indian mobile industry has now moved out of its hyper-growth mode, but is expected to continue to grow at double-digit rates in coming years as operators focus on rural parts of the country. Mobile market penetration has been projected to increase from about 40% currently to about 65% in 2013. Companies like Vodafone (VOD) are expected to benefit.

India's retail sector (the fifth largest in the world) is expected to grow at a 10% rate. Consumer demand has remained strong and is growing as the young population is booming. The next phase of retail expansion is expected to come from the rural areas.

The financial sector is currently on the rebound with improvement in the macroeconomic environment. However, deterioration in the asset quality still remains an issue, particularly for banks like ICICI Bank (IBN), which have had massive expansion in the last few years.

The Indian IT sector has been hurt by the global slowdown as most of its revenues have come from clients in US and UK. Outsourcing competitiveness is also declining as other low cost centers are emerging in Eastern Europe and Asia. Top IT companies like Infosys (INFY) and Wipro (WIT), which saw 20-25% revenue growth in the past, now project near flat growth. These companies will benefit once the global economy recovers.

There are some areas for concern, though. Due to its deteriorating fiscal position, the government is not in a position to offer a large stimulus package in the budget slated for release in July.

Further, although the government now has a healthy majority in parliament, strong political will is required (which has been lacking so far) to cut popular subsidies and modernize labor laws.

Comments

[Bandwagon2009:]

And in my opinion it would grow even faster, and be more sustainable, if they got rid of the last vistages of the "license raj".

I will take an un-controlled, chaotic, anarchic, creative, innovative economic model, over state control anyday...which is why I believe that inspite of the recent hiccups the US economy is going to be more robust in the long term than the our friend in Europe.

For India's sake though I hope the growth percolates down to the 2/3 of the population who still on the edge of abject poverty. What we need is torrent, and not a trickle "down".

Jun 24 08:19 AM

[Alan Young:]

Thanks for pointing up this vital piece of news. However, your stock picks seem a bit lacking.

VOD has worldwide operations--how much of its revenue comes from India? Why would a British company benefit more than a local telecom like TCL or MTE?

In the other sectors you only told us what was problematical. Where are the winners?

(disclosure: long RDY)

Jun 24 09:09 AM

[Chandragupta:]

Alan Young's comments are absolutely correct. India may show high growth, but the stock picks are all wrong. You cannot benefit from India's growth by buying Vodafone. Infosys and Wipro are totally dependent on the developed West for growth, which is unlikely to come about. ICICI Bank has burnt its fingers in Retail loans, and will take time to recover, and the retail sector is still struggling, seeing profit - less growth.

India's growth, if at all it does materialize, will come from Power, Roads, Automobiles and Cement. And even processed foods, FMCG and consumer durables.

Jun 24 01:00 PM

[HaavBline:]

India can finally reach its high growth phase if it truly bigins to open up key domestic sectors to foreign investment, especially to quickly improve overall infrastructure.

Due to very poor agricultural infrastructure, India remains heavily depending on a normal harvests to support economic growth. This is a major risk factor that has been overlooked recently because the weather has been cooperating in recent years. But this could just mean that bad monsoon may be overdue to happen soon.

Jun 24 03:17 PM

[donzelion:]

I'm not sure why you'd opt for Vodafone over Nokia for India, but to be honest, there are plenty of American/European companies that stand to benefit from Indian growth.

As for the key Indian players, I'd take some of the claims on asset values with a grain of salt for now and demand consistent dividends as an indication of fiscal discipline (but even then, I'd be cautious - the family trading companies are as convoluted as their Chinese analogues).

Jun 24 04:46 PM

[desicon:]

Isn't US economy now more under the control of state? I am bearish on the US economy.

In addition to government interference of the free market; high government debt, projected high inflation and nationalization of healthcare will keep the economy bogged down. Also, if cap & trade pass you can expect whatever manufacturing that is left will also shift to China & India.



On Jun 24 08:19 AM Bandwagon2009 wrote:

> And in my opinion it would grow even faster, and be more sustainable,
> if they got rid of the last vistages of the "license raj".
>
> I will take an un-controlled, chaotic, anarchic, creative, innovative
> economic model, over state control anyday...which is why I believe
> that inspite of the recent hiccups the US economy is going to be
> more robust in the long term than the our friend in Europe.
>
> For India's sake though I hope the growth percolates down to the
> 2/3 of the population who still on the edge of abject poverty. What
> we need is torrent, and not a trickle "down".

Jun 24 04:53 PM

[BargainHunter:]

I totally agree with Alan. The picks are not correct.
I would suggest investing through
-banks such as HDFC,ICICI
-Telcom companies such as Bharti Airtel Ltd
-SLT, RDY,etc.

Infact if you wan to invest using ETF then the best bet is IIF and not PIN.

Sumeet

Jun 24 07:38 PM

[Danah:]

But always remember one thing the re-elected congress government is not coming first time in power. All most all the time india is being rulled by this goverment only. More over the beurocratice nature of india economy will also have a negetive impact on future growth.

Jun 24 10:58 PM

[nobby73:]

If you want to do some reading around the history of Enron and Dabhol, you will understand why there is reluctance. Or, of course, you could go a bit further back and think about Bophal.

Western and particularly US industrial companies are treated with mistrust and it is not hard to understand why.


On Jun 24 03:17 PM HaavBline wrote:

> India can finally reach its high growth phase if it truly bigins
> to open up key domestic sectors to foreign investment, especially
> to quickly improve overall infrastructure.
>
> Due to very poor agricultural infrastructure, India remains heavily
> depending on a normal harvests to support economic growth. This
> is a major risk factor that has been overlooked recently because
> the weather has been cooperating in recent years. But this could
> just mean that bad monsoon may be overdue to happen soon.

Jun 25 04:12 AM

[Mad Hedge F...:]

Could be. Emerging markets are still the place to be, especially China, Thailand, Brazil, Mexico, Turkey, and South Africa, but don’t take your eye off the ball, because the volatility in these markets can be huge. China will continue to lead the global market recovery. Commodities are a buy, as are their producing stocks. You also want to own consumer stocks in countries where there are rising standards of living. Russia took it on the nose last year, but will get bailed out by a rising price of oil, and in any case, is economically much stronger than its last crisis in 1998. If you are going to play in this space, it is best to diversify to spread around risks. No country has a monopoly on making money. Also be patient and invest for the long term. These markets can be tough to trade. All great advice to live by. I think you need to keep the emerging market ETF (EEM) and the China ETF (FXI) permanently on your radar.

Jun 25 09:06 AM

[Sundeep:]

I am optimistic about the new line up in the govt and feel that if they produce nerves to go all out on reforms( disinvestment for their own sake, libralisation of FDI norms in banking and insurance, strong accountability on infrastructure spends etc) , it will set the pace for hypergrowth for the next two decades for India. We can have it grow in excess of 10%.
Massive project delays is resulting in increasing costs and delayed implementation which in turns saps the potential benefit that we may otherwise get out of it. We need increased accountability and strict project cost tabs with deadlines.
According to estimates, India will need greater than $500bn in infrastructure spend in the next 5 years,that kind of money can single handedly generate massive employement and support a comsumption driven economy on its path to 10% growth.

Jun 29 06:09 AM