India on the Horizon

Carl Otto, with the help of Arshad Zakaria, looks at the future of India

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story_images_IndiaWhile the limelight is on Brazil and China, we should not overlook the impressive economic achievements and prospects of India.”

India’s economy has grown over the last decade by seven percent per annum, reducing poverty from 35 to 25 percent of the population and raising GDP per capita to over US$3000, according to the December 2009 CIA World Factbook update.

As Arshad Zakaria, chief executive and founder of New Vernon Capital LLC, reminded us in his presentation to the CFA Chicago seminar last July, India’s middle class is estimated to reach 120 million this year, or 12 percent of its population. This number is likely to double over the next decade.

The fundamental driver of India’s recent and future growth is strong domestic demand. For example, for the 12 months ending May 2009, growth in wireless subscribers was 11 million subscribers a month. Over the same period, auto and two-wheeler sales were up by 20 percent.

As Zakaria documents in his presentation, India’s financial system is underleveraged. The ratio of consumer debt to GDP is a mere 11 percent, compared with 59 percent for the other ‘Asian Tigers’ and a disturbing 130 percent for the United States. The patterns of consumption are shifting away from staples and toward non-food and higher margin consumer products.

Furthermore, more than 50 percent of the one billion population is under the age of 29, which, as Zakaria points out, could have the same effect on India‟s growth that the Baby Boomers had in the United States.

These trends have been reflected in corporate earnings which have grown at a 20 percent rate since 2001. For the quarter ending March 2009, while the rest of the world was in recession, the top 100 companies in India had a YOY net profit growth of 24 percent.

Taken from the CIA update, the following table illustrates the future growth potential of India’s economy as young labour continues to move from agriculture to better paid, higher value adding and more productive industry and service sectors.


Agriculture is accounting for only 18 percent of India’s GDP but employs 60 percent of its total labour force.

Strong institutions, together with economic liberalization, have allowed India’s macroeconomic position to improve considerably. In 1991, India’s foreign currency reserves were essentially zero. Today, it holds reserves of approximately US$265 billion, which makes India one of the largest holders of foreign reserves. India’s currency exchange rate has been stable and the Prime Minister is a proponent of making India’s currency more free floating. Exports constitute only about 15 percent of GDP, which has helped the Indian economy weather the global financial storm.

While illiteracy rates are still high and primary education in the villages weak, two million graduates emerge from India’s universities each year.  However, as The Economist reminds us in its January 28 e-article, ‘Testing India’s graduates’, only a small percentage of graduate engineers are qualified enough to work for a software or IT services firm.

The lack of infrastructure is, according to Zakaria, both a problem and an opportunity. Though the current rate of infrastructure investment is only 3.5 percent of GDP, the government is targeting a rate of 8-10 percent. This will require reforms in the laws governing foreign direct investments and public/private partnerships.

From 1991 until May 2009, India was governed by coalition governments, which made the reform process arduous. In last year’s election, the United Progressive Alliance (primarily the National Congress Party) won a much larger position in Parliament, opening the way for a stable government for the next five years and one that will be able to carry out economic reforms.

Zakaria concludes, “The Indian economy has made remarkable progress since 1991 as a result of economic liberalization. If the country builds on the policies that have worked so far, the outlook is promising. But India also faces challenges in the areas of infrastructure and power, dependence on agriculture, income distribution, education, and health care. Nevertheless, future growth—and even the challenges —offers opportunities.”

Carl Otto is Founder and Chairman Emeritus of Cordiant Capital Inc. and member of the investment committees of the J.W. McConnell Family Foundation and the Lucie and André Chagnon Foundation. He recently won the Benefits Canada Lifetime Achievement Award for outstanding contributions to the pension and benefits industry.

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