My focus turns to India at a time when the US is struggling to maintain its GDP growth, GDP growth in Europe is also expected to remain sluggish and China is trying to prevent overheating of its economy.
In the midst of all this, the Indian economy has witnessed fairly robust growth along with some smart action by the Central Bank in order to balance growth and inflation expectations. The inherent strength of the economy is reflected in the stock price movement of the Indian equities which have held up pretty well at higher levels.
Without doubt, if the global economy witnesses another slowdown, India’s growth will also be impacted and stock prices would also trend down. However, in my opinion, India’s GDP growth is all set to overtake China’s in the foreseeable future. Also, the upside growth potential for the Indian economy is far higher than China where several sectors are witnessing overcapacity. Therefore, it might be one of the best times to consider long-term exposure to India and enjoy the fruits of a prolonged period of double digit growth.
In terms of becoming the fastest growing economy in the world, two scenarios might pan out:
1) China slows down significantly in the near-term making India the fastest growing economy in the world
2) Both India and China continue to grow at robust pace. However, India does relatively well in long-term starting from a much lower base than China
In my opinion, scenario one is likely in the very near term and scenario two is a big possibility over long term. Discussed below are some key sectors which might prop up growth of the Indian economy beyond 10 per cent and the possible investment opportunities.
In terms of growth and investment, my first attention goes to a sector which employs around 60 per cent of India’s population and contributes to less than 20 per cent of the GDP. The agriculture sector in India has huge upside growth and development potential with agricultural yield per hectare still being half that of China.
The Indian farm sector is likely to grow at 3-3.5 per cent annually during the 11th five year plan ending 2011-12. India’s GDP can grow at double digit pace even if this growth is pushed up to 5 per cent (very possible in my opinion) in the next five year plan. However, this needs investments in better technology and greater private sector participation (which is being witnessed in recent times).
Another major factor, which impedes India’s growth, is the control of key mining resources by the government. Just as an example, India has the fourth largest coal reserves in the world and still needs to import coal for its power needs. In India, 85 per cent of the coal mined annually is from a government enterprise (Coal India Ltd). The government needs to open up the sector and allow greater private sector participation. This will not only spur mining sector growth but also help in robust growth of the power sector.
Large Indian companies are reluctant to enter the power sector with big investments due to the absence of abundant coal to run large scale operations. China happens to add more power capacity per year than India does in five years. This can only change if the government reduces its control of the mining sector.
I would like to add here that the efficiency in the government sector as a whole needs to improve in order to achieve a growth rate of over 10 per cent in the long-term. In several states in India, it takes several months to approve a small private sector project. This kind of inefficiency discourages local as well as international companies to make big ticket investments. Therefore, it is not surprising to see much higher levels of foreign direct investment in China than in India (which holds almost equal growth potential).
Coming back to the positives, another factor, which might place India ahead of China in terms of growth potential, is the level of urbanisation in the country. Urbanisation level in India is just at around 30 per cent as compared to over 45 per cent in China. As the level of urbanisation increases, growth in infrastructure, housing and consumption (India’s household savings rate is at 38 per cent) are bound to prop up growth.
Considering all these factors, India stands well placed to move to a higher growth trajectory. Investment themes such as infrastructure, agriculture, real estate and all consumption based themes are bound to give attractive returns over long-term.
The most important thing to watch out for will be the likely changes in government policies in trying to make the scenario more investor friendly. This factor will decide how fast India overtakes China to become the fastest growing economy in the world.
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