This article is a guest contribution from American Century Investments.
June 14, 2010
Last week India's finance minister Pranab Mukherjee announced that his country's economy was poised to enter into a double-digit growth path in the near future. With normal monsoons (needed for agriculture) and an industrial recovery gaining momentum, India's gross domestic product (GDP) is likely to increase by 9% this year.
In his address to the 102nd Annual General Meeting of the Indian Merchants' Chamber (IMC), Mukherjee said other positive factors also bode well for the economy. He also noted that Indian exports started picking up from November 2009 and infrastructure services, including rail freight, transport, power, telecommunications and civil aviation, have shown a visible positive change in 2009-10.
Mukherjee added that favorable capital market conditions with influx of capital flows and improved business sentiment are also very encouraging. In addition, factors such as expected demographic dividend, high rates of saving and investment, depth of the domestic market and the increasing presence of Indian corporations in the global market brighten the growth prospects of the economy in the medium to long run.
Since the country's national elections in 2004, India had a multi-year bull market leading up to the global economic crisis of 2008-09. In the course of 2007, its economy started to get overheated and the central bank put on the brakes pretty aggressively after the Bombay Stock Exchange (BSE-SENSEX) Index peaked out at around 20,500 in January 2008. This caused a significant sell-off, which was exacerbated by the global economic crisis in the second half of 2008. In concert with the global stock market recovery in March 2009, India's stock market started its own recovery (see chart below). So, the sharp drop in the country's stock market was not solely attributed to the global slowdown as much as the government reining in growth and inflation. Even though the Indian economy certainly took a hit, GDP growth never dipped below 4% in any quarter during the 2008-09 time frame.
India's recently released Medium Term Fiscal Policy Statement 2010-11 projects that the fiscal deficit will decline to 4.8% of GDP in 2011-12 and further to 4.1% in 2012-13.
One of the main reasons India fared better during the crisis compared to other emerging market and developed countries is the fact that its economy is mainly fueled by domestic consumption and not exports. For example, agriculture represents about 18% of its economic output and supports 600 million people. By comparison, agriculture represents about 1% of the economy in the U.S. Sound macro fundamentals and stimulus measures helped India weather the global financial crisis. And unlike the U.S. and other developed countries, consumers in India did not take on the huge amount of debt and its financial institutions did not have exposure to toxic assets such as subprime mortgages. It was also insulated from the problems of the developed world by years of conservative fiscal policy resulting in higher savings rates, increases in business and infrastructure investment, a strong domestic economy and job creation.
With more than one billion people, India is the second most populous country in the world after China. Like China, India has a very large rural population, which represents a reservoir of economic growth for years to come. In fact, economic growth in India's rural areas is about 10% compared to 6% growth in urban centers. From an investment point of view, what makes India attractive is its domestic consumption-driven economy. There is a lot of growth potential in terms of domestic consumption because many people in the rural areas of India are purchasing mobile telephones and other household goods and appliances for the very first time. Another key point is that wealth is trickling down to the rural population. More and more, India's economic growth is becoming less reliant on demand from developed countries and being driven by an emergent consumer class with buying power.
India was not severely impacted by the global economic recession and the country is projected to grow rapidly over the next decade. For investors, we believe a consumer-based Indian economy holds positive implications because many global companies view potential Indian demand as a ticket to future growth. Indeed, the country's economy is one of the biggest and fastest growing consumer populations in the world. Nevertheless, India's growth may by tempered by the government's inability to keep building infrastructure and power generation and tackle core problems in education, land reform, corruption and social reform.
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