The Indian economy is an elephant growing at 9%, making it a formidable beast in the global financial jungle, a financial expert from India recently said.
An amusing parallel, but the pachydermal analogy actually makes a strong case for the world’s fourth largest economy as an investment destination of choice.
“India is the country of investment opportunity and high potential returns,” says Bhim D. Asdhir, president and CEO of Mississauga, Ontario-based Excel Funds Management. “Investors should be allocating at least half of the equities component of their investment portfolios to emerging markets.”
Asdhir puts his money where his mouth is. “About 80% of my money and my kids’ money is in emerging markets; a substantial part of that in India,” he said. “This is how confident I am.”
Asdhir’s assertions are backed up by Mumbai-based Ajay Argal, portfolio manager for Excel India Funds, who also heads offshore equities of Birla Sun Life AMC, a joint venture between the Birla group in India and Sun Life Financial of Canada.
“The interesting thing to note is that over the next five years India is actually going to outpace China in growth, and this growth is going to be of better quality, because there is going to be lower cyclicality due to the domestic oriented nature of consumption, which is two thirds of GDP,” says Argal who is currently in Canada as part of an India-themed road show organized by Excel Funds.
This constant comparison may project India as the next China, but Argal says the two economies are very different. “Interesting thing to note about India and China is that they’re complimentary in nature,” says Argal. “For any global investor, it’s a case of India and China, and not either/or.”
The Indian story, he said, is about consumption, a young population, rising income levels and aspirations. In addition to being hi-tech and capital intensive, it is largely domestic oriented, with exports representing less than 35% of GDP.
China, on the other hand, is low-tech and labour intensive. “If you look at China it’s the other way around, because there are a lot of fixed asset investments, which are going to support manufacturing capacities, primarily for the export market,” says Argal.
The world is familiar with China’s impact on global economy, and Argal believes India will have a somewhat similar impact in the time to come. “It is estimated that in the incremental global GDP, 10% will be contributed by India’s growth; it is a meaningful and a significant chunk and it is very important for any global investor to note this.”
Demographics and domestic consumption form the bedrock of Indian economy, but it’s the numbers, not the narrative, that tell the real story:
- India’s GDP stands at a whopping $4 trillion in purchasing power parity (PPP) terms
- 10% of its growth driven by domestic consumption, a middle class of 350 million people
- 180 million people are about to join its workforce
- 8.4% is the expected GDP growth over the next five years
- 50% of India’s 1.2 billion population is under the age of 25
- 610 million of those are future car buyers, twice the size of the entire U.S. population.
Translation: vast investment opportunities in India.
“We think that the coming two or three decades are going to be very good for the Indian economic growth as well as the returns in the stock market,” says Argal.
Yet, India’s per capita consumption is a fraction that of China. Poor penetration levels of consumer goods – mobile phones, televisions, vehicle, for instance – is said to be the culprit.
India wants to get closer to the per capita consumption of China. But it’s unlikely for the next 15 years, says Argal.
“If you look at a parameter like power consumption, India’s current demand is about 165 gigawatts, whereas China’s current demand is 800 gigawatts; as for the estimates by various analysts, even by 2025 India’s power demand is going to be just 540 gigawatts, far short of where China is today.”