Ever since the economic reforms of 1991 were implemented, India has been on a steady growth path. And the path has been a two step dance - two steps forward and one step back. Growth has sometimes been painfully slow, often sprinkled with stock market scams, and marked by political upheaval and changes, but India has still managed to keep moving forward, even if at one step at a time.
CLSAs report argues that 10 years down the line from the 1991 reforms, the country has finally turned a corner. Moreover, they make the point that it is Indias solid long-term fundamentals which will eventually take it to greater heights. The purpose of the report is to correct the ignorance among non-specialist portfolio and equity investors, who have often ignored India in favour of China, Japan, Hong Kong, Taiwan and Korea - that India today is a very different place from what it was 10 years ago.
Let it be said upfront that India loses out to China in the numbers game. In terms of statistics like GDP growth, exports and foreign direct investment (FDI) India significantly lags China. However, three key fundamentals are seen as driving Indias growth: favourable demographics, a thriving market economy and a rich entrepreneurial spirit.
Demographics: In 2001, 54% of Indias population of over 1 billion was less than 25 years of age and only 10% was over 55. As this youth comes of age over the next decade and joins the workforce it will result in a dramatic increase in the purchasing power of the core consuming class, making India an even more formidable economic power on the world stage. Indias young population stands in stark contrast to the aging western population. Even when compared to China, India has the upper hand.
Ironically it is Chinas one child policy, which has helped it contain its population in the short-run, which may be Chinas undoing in the long-run. In terms of demographics, the one-child policy will eventually result in a smaller productive workforce. This policy is also likely to have an impact on demographic profile. Many argue that as these children who have gotten used to getting their way, come of age, it could result in bitter power struggles being staged in political and economic arenas.
Market Economy: India, even during the heyday of its socialist economic policies, had a vibrant market economy. The economic reforms just gave the pre-existing market economy freedom to grow and develop. The roots of this market economy are deep-seated and are not limited to the cities but extend to Indias many villages.
As the Indian economy comes into its own, it is Indias own professional workforce, trained at IITs and IIMs, which will drive growth. Indias educational institutions had long been producing world class executives but until recently, they were forced to go abroad to realise their full potential.
Even Indias century old dream factory - Bollywood started gaining international appeal only once it was given wider access to funding and financing options, thereby allowing it to experiment with different kinds of cinema with broader appeal. But once again, the talent, the infrastructure had been in place for decades.
Equity Markets: The Bombay Stock Exchange has over 6,000 listed companies - second only to the New York Stock Exchange (NYSE). Indias strong entrepreneurial culture has helped it build global businesses in areas like software and pharmaceuticals - two of the most promising export sectors in Asia today.
Even today Sensex is trading at only 12% above 10-year lows, indicative of the latent growth potential. The report sites Infosys, HDFC and Dr Reddys, whose share prices have risen by 28, 489%, 513% and 1,627% over the last 10 years, as examples of the Indian stock market rewarding long-term investors. This has seldom been the case with other emerging stock markets.
Indias stock market today is among the more developed stock markets in Asia-Pacific. It is certainly much more developed and functions more freely than Chinas stock markets. Even in the area of corporate governance, historically a weak point for countries in Asia, India is rated high. Indias weak spot is infrastructure development. However, the emergence of public-private participation as a feasible option could help alleviate this bottleneck.
Several key infrastructure projects are scheduled for completion over the next 5 years and depending on the outcome, they could be critical catalysts for growth.
Cynics will be quick to point out that the same arguments are put forth every three years, yet the Indian economy has never really taken-off and continues to totter on the edge of realising its potential. When a ship the size of India tries to change course mid-stream it will always be a painfully slow process particularly given the democratic framework within which decisions are made.
India doesnt have the advantage of size that many of the East Asian Tigers enjoyed which allowed them to nimbly alter their growth path. There will be times when it will seem like the boat is not moving at all. Nevertheless, despite the baggage that India carries as a country and the constant jostling at the wheel which has marked Indian economic policies, India has still managed to continue turning the wheel. Lets hope that India has finally set its new course and will now forge ahead.