India Funds Offer Investors Potential for Sustained, High Level Growth

India has one of the best potentials for emerging growth over the next few decades. The country is growing fast and requires a great deal of infrastructure over the coming decades to sustain its people.

India is a democracy and has instituted major reforms to attract foreign investment. The country's GDP growth for the quarter ending September, 2007 came in at 8.9%. This was lower than the 10.2% growth achieved in the same quarter last year, but better than the 8.7% economists expected. India's economic growth is second only to China's among the major economies in the world. The Indian government is targeting 9% growth for each of the next five years.

The country, unlike its neighbors, is not pegging its currency, the rupee, to the US dollar and has a current account deficit of about 1% of GDP. India has allowed its currency to appreciate which helps to control inflation for imported commodities. A strong rupee hurts its exporters, but exports are not as large a percentage of GDP as in Eastern Asia and China. India is driven more by internal demand than exports and it is likely to have less exposure if the US economy falls into recession. The rupee is up about 12% versus the US dollar this year. The policies of allowing the rupee to rise may not last forever though and the RBI has occasional bouts of intervention.

This week the World Economic Forum [WEF] met for the India Economic Summit in New Delhi to discuss the country's growing needs. The summit included 800 participants representing over 40 countries. The WEF released a report leading up to the event entitled "India at Risk 2007" (.pdf file).

Highlighted risks include:

• Economic Impact of Demographics
• Loss of Freshwater (Quantity and Quality)
• Economic Shocks and Oil Peaks
• Globalization vs. Protectionism
• Climate Change: The Environment and Challenges to India’s Growth
• Infectious Diseases
• Emerging Risks
  

According to the report:

It is clear that India is at an inflection point - the prospect of sustaining 8-10% growth is achievable, but a number of basic challenges are acting as a handbrake on development and need to be addressed. It is well known that the existing infrastructure in India is stretched to its upper limits, and that increased investment is required. But there is also an urgent need for the government, private sector and civil society to collaborate on governance reforms to eliminate corruption and ensure equity in the provision of basic of services such as education, water and sanitation. Finally, much can be gained by removing constraints inherent in inefficient government Bureaucracies, complex tax regulations and labor market rigidities.

Montek Ahluwalia, Deputy Chairman of India’s Planning Commission said India wants to spend $500 billion over the next five years including $150 billion provided by the private sector. The country currently spends 5% of GDP on infrastructure, but wants to increase that level to 9% by 2012. The Asian development bank suggests the need may be as high as 12.5%. Either way, there exists opportunities for investors over many years.

As someone who also researches and invests in water, I found these statistics from the report very interesting:

• 83-95% of the people in India have access to drinking water, but only 60-65% have ready access to quality drinking water
• no municipality in India can provide a continuous 24-hour clean drinkable water service
• only 22% (rural) and 59% (urban) of the population have access to adequate sanitation

India will need billions of dollars for investment in pumps, distribution systems, dams and treatment systems for drinking water.

I have been investing in India through The India Fund (IFN) for years. IFN is a closed end fund managed by The Blackstone Group. The current management took over the fund in 1997. This allows me to invest in a country where I would not easily be able to setup a brokerage account. The fund gives me the unique opportunity to have direct exposure to India's equity markets in a Roth IRA account. Further, there is no one single industry I am looking to own in India, I want to own all industries for the long term.

Another closed end fund option is The Morgan Stanley India Investment Fund (IIF) which started in 1994. IFN and IIF are similar and trade like ETF's. They are both actively managed funds that invest directly in equities listed in India.

The iPath MSCI India Index ETN (INP), a third option, was launched last December. This ETN correlates directly to the MSCI India Total Market Index and is not actively managed, hence, its fees are lower. ETN's trade like ETF's, but they are debt instruments. This means their risk is additionally tied to the viability of the issuing company. For INP, all dividends will be paid out when the ETN matures in 30 years. Additionally, INP may have different tax implications for investors than the other two funds mentioned. As with any investment, you will need to do the proper research to make sure any investment works for your strategy.

There is considerable risk investing broadly in India. The country has grown fast and its infrastructure has not kept pace. While this may create an opportunity, the possibility exists for economic, political and environmental pressures in the future. Emerging markets in general are often quite volatile in the short term. Recently, the three India securities mentioned have had a strong run. Investors looking to open a new position may want to be patient and wait for a dip, or a correction. For investors with a long term strategy though, India may offer the potential for a sustained, high level of growth over many years.

Disclosure: Author is long IFN.

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Comments

[User 43900]

Interesting to learn about India investment opportunities. This gives
basis for study to invest in India

[User 128374]

I am a direct investor in the Indian market and am in the country probably once every 4-6 weeks on average. You are probably underestimating the water situation in the country.

However, you will not be able to isolate great themes via funds. In fact, when I looked at the Sensex a few months ago (I am sure these statistics are dated), 40% of the members were actually down on the year and six of the thirty were down by 35% or more. The Sensex's performance this year has been driven by massive performance by a few select names like Reliance and HDFC. There is a lot of alpha to be earned in India, if you have good ideas.

The only benefit I see to funds is that many in the US are trading at a discount to their NAVs. Other than that, you guarantee average returns. But maybe your water idea is better than average?

IVRCL, hyderabad based, is the company you want to buy if you have conviction. It's the best water play in India (desalinization, purification, irrigation), but also leveraged to infrastructure such as construction and roads--no shortage of work there, either.

UBS can set you up with an account to trade in countries like India for a min USD 1 million in assets. You don't need that much if you are willing to pay a fee (maybe USD 400 per year) for the account--but that's doesn't seem like that much if you want access to this market.

There have been changes in the availability of P-notes in the country, so it may be incrementally more difficult. But I think they can still set you up.