Unlocking India’s Potential
by Jim Hall, CIO, Mawer Investment Management Blog (The Art of Boring)
I stepped out of the airplane to an immediate assault on the senses. As the jet’s engines wound down a steady racket of car horns arose from the chaos of Jaipur’s streets. It smelled like a dirty garage on a stuffy summer day—a mixture of oil, dirt and car exhaust, combined with a whiff of the chemical scent of air freshener. The car ride to our hotel took us past shanties with people cooking dinner over open fires, wedding celebrations complete with music and dancing not more than 10 feet from the highway, stray dogs scrounging through garbage, hundreds of small shops offering everything from cement to smartphones, and, at the midpoint, a man on an elephant going about his evening’s business.
This was my first lesson in India. When you arrive in the country, you don’t just land at the airport, India lands on you.
India is on many investors’ minds these days as it is one of the few markets in the world in which investor optimism is upbeat. With a population of one billion people, we can no more ignore India as an investment destination as we can shut out the sights and sounds when visiting. Thus, my trip was a good opportunity to further my understanding of this immense and complicated country.
The Potential of a Nation
There is reason behind investor excitement for India. Compared to many regions in the world, India is blessed with several long-term trends that should be positive for economic growth. The country’s population is relatively young, with over 200 million people projected to be added to the workforce over the next twenty years. It is also urbanizing. In the next twenty years, over 350 million people are projected to move to its cities. By 2050, the equivalent of the population of two United States is projected to urbanize within India.
The country is also poised to reap huge productivity gains through the adoption of better technologies and processes. Just how much potential growth is possible through even basic improvements is plainly visible. As an example, I saw three construction workers at the airport as I was leaving to come home. The three men were squatting down with hand-held hammers, their tools each weighing no more than a kilogram, slowly whittling away at the concrete. It was shocking to see. Where this method would surely take all day to finish the task, one jackhammer could probably do the job in fifteen minutes. And this kind of labour-intense activity is prevalent throughout the country.
The process of adding capital to labour, moving people from the countryside to cities and shifting from agriculture to manufacturing has been a well-worn path for many countries to lift economic growth. Sometimes, as in the case of Japan, South Korea and China, the results have been spectacular. Adding to its potential, India remains under-banked and under-levered. Unlike countries like China or Thailand, India is in the early stages of a credit cycle and has a lot of room to borrow, expand investment and finance consumption.
In short, there is a great deal of upside to economic development in India. So the question is why hasn’t more of this potential already been unlocked? If India’s natural rate of growth is purportedly around 9%, why has the country recently been growing closer to 4.5-5%?