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28 | International Events
clear winner or a shaky coalition. A sustained
turnaround in growth will still need a fiscal The impact of external events such
response and continued reform, which in turn
depends on a stable government.
India’s long term growth story continues to as the global financial crisis on
be driven by consumption and investment,
which we believe will remain largely intact
and possibly see a fresh impetus with the for- domestic sensibilities have also
mation of a new government. There are four
key themes that are likely to continue to drive
India post-election: been difficult to call
Consumption we feel that even if a third front comes into this sector is likely to slow down sharply this
India’s strong domestic consumption has its power; any drastic change in policy might be year following a decline in demand caused by
underpinnings in demand from semi-urban and unlikely. We may see some minor changes, but the global financial crisis (Source: National
rural India, which together account for 55% of in our opinion, the broader direction would Association of Software Services Companies
total domestic consumption (Source: RBI, IIFL remain the same. (Nasscom), as published in Financial Times
Research). Unlike China, where the population dated 5th February, 2009). Yet many in the
is already ageing and the labour force is expected Urbanisation industry remain hopeful that the Indian gov-
to peak in the near future, India’s population is The industry and service sectors in India are ernment’s ongoing economic policy will renew
young and its ratio of labour force to overall growing fast, generating significant employment confidence in the sector and that it will contin-
population is growing. According to the Asian potential in urban areas and attracting youth to ue to expand as companies outsource in order
Development Bank (ADB), India is expected to cities. In addition, advertising and the media to cut costs.
be the second largest economy in the world and have exposed traditionally rural areas to an Indian outsourcing also includes engineering,
have the largest consuming middle class by 2040. “aspirational” existence, further feeding the pharmaceutical, petrochemical and auto-ancil-
The current Indian Government has taken impulse to migrate to cities for a young working lary exports and there is still scope for exploring
various measures to boost consumption. In early population with a new disposable income. In investment in these sectors. Demand for out-
March this year, the government reduced the this environment, certain sectors of the finan- sourcing from these industries, particularly in
service tax rate by 2% to 10% (exclusive of the cial services industry, such as credit card pharmaceuticals and auto components, are
surcharge) to keep more money in people’s providers and insurers, are likely to benefit diversified across the globe, which reduces
hands. In fact, all the main parties contesting the more than others. reliance on the United States and the United
election have referred to their intentions to India also has strong rural growth, continued Kingdom during the economic downturn. One
reduce the overall tax burden, leaving consumers buoyancy in the service sector and the benefits advantage is that the weakened Rupee has meant
with higher disposable income and providing an of the falling oil prices. The rural economy has Indian businesses can price their services more
additional boost to the economy. We therefore seen significant changes in the past few years. competitively, so comparatively outsourcing still
expect India’s consumption growth to remain While only around 17-18% of India’s GDP now remains cheaper in India than other markets.
firm, despite the current environment of weak- comes from the agricultural sector (Source: Current valuations in the Indian markets
ening global demand and the slowdown in CSO), around 60% of the population still lives present a good opportunity for investment.
investment and corporate profit growth. in rural areas, making them more or less While short term market performance is hard
dependent on the agriculture sector. Inflation to predict, with valuations being close to the
Infrastructure seems to have at least benefited the farmer. bottom end of the historical range for the mar-
Infrastructure in India has expanded swiftly in Farmers have seen a huge jump in profitability ket, levels are attractive for investors seeking
line with the rapid growth of the economy in as input costs have remained more or less stable medium to long term gains.
the past decade. There have been significant whereas prices of agri-products have seen a sig- Just as the potential rewards of investing in
investments in electricity, transport, telecom- nificant rise. The much ignored rural sector is emerging markets like India are higher than
munications, irrigation and water supply, which bouncing back and the impact of this is now returns expected from the developed markets,
we expect to continue. Infrastructure spending continuously being seen in mobile phone sub- so too are the risks. Market volatility is signifi-
and development is a particularly strong driver scriber growth, two wheeler sales volumes and cantly higher and liquidity can be variable. In
of growth and remains one of the key spurs to growth of consumer staple companies that have addition, emerging markets have their unique
economic growth. a significant rural portfolio. geopolitical risks. Of course, the normal risks
The current Indian government set ambitious applicable to investments such as risk of loss of
targets to almost double investment in infra- Outsourcing capital and exchange rate risks all apply.
structure over the next five years, injecting The Indian outsourcing model has proved pop- That said; we strongly believe that talk of
US$300 – 450 billion into the sector (Source: ular for global firms, who have taken advantage ‘green shoots of market recovery’ in India is not
Planning Commission). Projects include mod- of the twin attractions of India’s large intellec- premature. We have seen increased liquidity,
ernising secondary airports, adding electricity tual capacity and cheap labour. The lower lending rates, improving sentiment,
generating capacity and port-related develop- Information Technology and Communications attractive valuations and an increasing appetite
ment. Should the Congress-led government sectors in particular have benefited greatly from for risk. India is well positioned to recover well
return to power it is likely to continue this outsourcing to India and the industry has and its real economy is likely to follow this
investment, which is essential for India to main- enjoyed high employment and sustained growth trend. Investors will be watching closely the new
tain the high growth rates witnessed during the for a number of years. government’s approach to reform and fiscal
last five years. The BJP has also indicated that it It is estimated that India’s outsourcing sector stimulus but our view is that the outlook will
would increase infrastructure spending beyond contributes about 25% of the country’s total improve significantly in India by the start of
current levels, which is encouraging. However exports. Analysts are predicting that growth in 2010.
May 2009 Investment International www.investmentinternational.com
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