Why India is a hot long-term investment destination?
(Feb 23, 2015)
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In this issue:
» Money making opportunities from India's youth aspirations
» Subsidies cannot be the only means to income parity
» Can gold find a place amidst equity frenzy?
» ...and more!
What do you think about the young generation of today?
If you are a typical Indian patriarch, you would probably say something like this: "Oh, they are a crazy lot... too fast and impatient... too much into gadgets... too materialistic... too individualistic..."
If you are a parent, it would be a tough job to handle the growing demands and aspirations of today's youth. What are the differences you see in the current young generation and time when you were young? How radically have people and the world around you changed? How do you feel about it?
It is interesting to note that how you feel about a given situation depends on which hat you wear. If you look at the youth from an old-fashioned father's point of view, you may be a worried person. But if you wear the hat of an investor, you will see the opportunity of a lifetime.
To elaborate this point, we would first like to briefly talk about how India as an economy and culture transformed since the time of independence. We mention culture in the context of economy because the economy and the societal forces share a symbiotic relationship, each influencing and getting influenced by the other. For the sake of simplicity, we could talk about two Indian personalities - the India of the pre-1990s and the India of the new millennium.
The Indian economy of the pre-1990s was broadly characterized by what is sometimes referred to as Nehruvian socialism. What this meant was that it was not a free, capitalistic economy driven by market forces but an approach aimed at achieving social goals such as removal of poverty and inequality. Given the mistrust towards private profit-seeking enterprises, a lot of major industries were controlled and regulated by the government. There were a lot of barriers to starting and operating businesses. Also, there were heavy restrictions of foreign investments. In a nutshell, India was quite a closed and controlled economy back then.
These factors coincided with the social and cultural landscape prevalent at the time. India's rich cultural and spiritual legacy has traditionally worked as a force against materialism and individualism. Money and material excesses were seen as evil things. Abstinence and sacrifice were noble virtues to be upheld. Religion and social relationships came before individual needs and aspirations.
Now let's fast forward to the India of the new millennium, specifically after the major economic reforms of 1991. The three keywords that define this economic Megatrend are liberalization, privatization and globalization. In other words, India opened up, not fully but substantially, to the global economy and the idea of free enterprise. This new era ushered in a plethora of opportunities for entrepreneurs and businessmen.
How did these changes shape the social landscape? The opening up of the economy made Western culture easily accessible to us. It showed people a new way of thinking and living. And now with the mobile phone and internet revolution, the full world is now at our fingertips.
How does this shape the mind and aspirations? For a person who spent most of his growing up years in the pre-1990s, the exposure to global culture was limited. And culture is key tool that shapes aspirations and motivations. Hence, people had limited material goals. They were content with fewer things.
Now, coming back to the topic that we started with - today's young generation. The young population of today has easy exposure to unprecedented amounts of information and culture. With increasing penetration of technology, this exposure is no more restricted to the urban youth alone. The world is opening up in a big way to the rural youths as well. This has a very strong impact on how people perceive themselves and what they dream of becoming. The ownership of things is no more merely utilitarian, but a personal statement.
Take mobile phones for instance. It amazes us when we see many people spending, at times, their entire month's salary on just a mobile phone. And mind you, many of these people may not be very well-to-do, economically speaking. What is it then that gives them the desire and courage to loosen their purse strings? One of the main drivers we think is rising aspiration levels. The onslaught of the Western mindset has created a growing culture of individualism and materialism. The taboos related to money and ownership are rapidly falling apart. Ownership of things is seen as an assertion of self-esteem and identity.
Whether these developments are good for the society, environment and the planet is a topic for another discourse. For now, we are wearing the hat of an investor. From this perspective, these developments are truly alluring. Remember, we may be second to China in terms of total population. But as per a UN report, we have the largest youth population in the world with about 356 million (28% of India's total population) people between the age of 10 and 24 years. To give a sense of how big this is, the size of China's youth population is way behind at 269 million. India's youth population is expected to grow even further in the coming years. Can you perceive the potential value unlocking that will happen when this population enters the workforce, generates income and realizes its material dreams and aspirations? Can you imagine what a massive wealth-creation opportunity this new young generation represents? Whenever you start getting anxious looking at short term stock price fluctuations, we recommend you to remember this big picture view of India. Rising youth population and rising aspirations are set to be the key drivers of India's future economic growth. Provided job creation does not falter!
Do you think India's youth population represents a big money-making opportunity for long-term investors? Let us know your comments or share your views in the Equitymaster Club.
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The biggest drawback in India's demographic profile is the wide income disparity amongst different sections of the population. Successive governments have tried to bridge this disparity by doling out subsidies. Subsidies in food, fuel and fertilizers have been the most popular budget measures too since India's independence. And since a significant proportion of the subsidy has gone into non planned Budget expenditure, the share of the same has increased substantially over the years. To put things in perspective, the total allocation to the three subsidies in the Budget for 2014-15 was Rs 2.5 trillion whereas the allocation to defense was Rs 2.3 trillion. The fall in prices of crude oil and fertilizers globally will help the government tone down the subsidy spend in the coming Budget. However, it is for the government to ensure that subsidies do not remain the only means to bring about parity in standard of living.
Will subsidies play a smaller role in non plan expenses?
In the run up to the Union Budget later this week, investors in stocks are in a mood of frenzy. Expectations and sentiments are running high as investors expect the Budget to be a magic wand of sorts for corporate fundamentals. Even as earnings results of India Inc have failed to enthuse, valuations of stocks across market caps are soaring. And investors are in no mood to pay attention to other asset classes for the time being.
In fact not just in India, but the appeal of a safe haven asset like gold has taken a beating world over. Even as Greece battled with its creditors to avoid default and keep the euro zone intact, the precious metal used as a hedge against economic and currency volatility found no takers. The strengthening dollar and record valuations for global equities are diminishing bullion's appeal as a store of wealth.
However, according to us, the excitement to own equities cannot be a reason to not protect your portfolio against currency and economic uncertainties. No doubt speculating on the yellow metal or being overweight on it is fraught with risks. But keeping a small portion of one portfolio in gold is advisable as the macro economic and currency risks are far from subsiding.
The Indian stock markets were trading firm today on the back of buying interest in engineering, IT, auto and power heavyweights. At the time of writing, the BSE-Sensex was trading higher by around 74 points. Losses were largely seen in banking and energy stocks.
"I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going." - Peter Lynch
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