This article is a guest contribution by Sharat Shroff, CFA, Portfolio Manager, Matthews International Capital Management, LLC.
There seems to be a quiet sense of confidence among Indian management teams recently—much in contrast to the display of hubris that I encountered in the days before the onset of the global economic crisis. In recent meetings with companies in India, I got the distinct feeling that managers are focused on building the right strategies and platforms to address growth opportunities that should arise in the coming decade. This is also a far cry from the prevalent short-term steps some management teams took about five years ago to create market capitalization. The recent crisis has perhaps forced a more honest and realistic assessment of strengths and weaknesses. Some entrepreneurs have even decided to exit parts of their business. As such, there has been a pick-up in corporate mergers & acquisitions in India. In some cases, multinational firms have been the acquirers—a reflection of India’s importance as an emerging growth destination.
A key theme that seemed to resonate in many meetings during my last trip to India was the gradual resurgence of rural areas and smaller Indian cities, and hence the need for innovative products and solutions that can cater to demand from these parts. Car companies pointed to a near doubling in sales last year, and consumer companies were quick to highlight their pricing strategies and plans for distribution reach into the country's hinterlands. Even as some of the metropolitan areas suffered a slowdown last year, company performance in second- and third-tier cities seems to have escaped these pressures. Often criticized for being a drag on India’s economic growth, the rural consumer is growing in importance in the marketing campaigns of companies eager to establish a foothold in some of India's emerging consumption centers.
It is easy to get carried away with the potential of a full economic revival of rural (and consequently, agricultural sectors) within India. Some of the recent strength can be attributed to new policies by the central government, including guaranteeing employment for 100 days (under the National Rural Employment Guarantee Act). The early results of these policies are encouraging, but the impetus needs to be sustained in the form of more forward-thinking investment in some parts of the social infrastructure, such as health and education. Nonetheless, it is hard for any long-term strategy focused on India to ignore the potential of these smaller markets.
Sharat Shroff, CFA
Portfolio Manager
Matthews International Capital Management, LLC
(c) Matthews Asia
