India: What's the root problem? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

India: What's the root problem?

Nov 23, 2005

India is one of the fastest-growing economies in the world today. In FY05, the economy grew by an impressive 6.9%, and this kind of growth rate is likely to be maintained in the near future. The country's services sector is booming. Software and BPO exports, hotels, transport and communication registered impressive growth, while industry also grew at a strong pace. Agriculture recorded a 4% growth. India is believed to be an 'emerging economic superpower'. The country has a huge middle class with increasing affluence, thus giving this massive 'prospective consumer base' more buying power. More importantly, this consumer base has the 'willingness to buy', which is the most vital part of the equation. Therefore, it is but natural that companies ranging from FMCG, automobiles, consumer durables, retail, textiles and housing would be keen to grab a share of the pie.

Foreign investors are also queuing up to invest in the country in order to ensure that they do not miss out on the opportunity. Companies like Vodafone and Sing Tel have invested in India's largest GSM mobile operator, Bharti Televentures, in order to cash in on the mobile boom in the country, where mobile tariffs are amongst the lowest in the world.

However, if there is any one problem that is plaguing the economy and restricting its growth to a higher trajectory, it is clearly infrastructure. Of course, other problems abound, such as poverty, illiteracy and unemployment, but in this write-up, we will be concentrating on infrastructure.

Where's the problem?
In order to maintain and sustain a good growth rate over a period of time, it is extremely vital to have good infrastructure. The importance of good roads, ports, airports, telecommunication links, power and railways cannot be overstated. This is, unfortunately, one area that has crippled the country's economic growth in the past. Fiscally imprudent government policies coupled with under-investment have resulted in a highly disappointing ground situation. The power cuts suffered by a large part of the population are only too well known. Power theft is rampant and technical losses are much higher than international standards.

On the other hand, the state electricity boards (SEBs) subsidise residential consumers by charging higher industrial tariffs. This has, in fact, backfired on them, as the industries have turned to captive power generation, resulting in the subsidizing consumer base dwindling and as a result, becoming even more economically unviable. The planned capacity additions by the government have never materialized and this has crippled the growth of the industry. Reliable and consistent power is a crucial feature in any industry and shortage of this will hamper investment.

The road situation is not too encouraging either. According to the Tenth Five Year Plan document, the National Highways, which form less than 2% of the highway network, carry as much as 40% of the traffic, while another 40% is carried on State Highways that account for 12% of the system. However, as much as 40% of the villages in the country are not connected by all-weather roads. This is a big problem, as it impacts the movement of agricultural commodities and thus, acts as an impediment to the growth of agriculture, an activity that sustains the livelihood of nearly 650 m people!

Agriculture continues to be far too dependent on the monsoons. Irrigation has not reached the desired levels. The past experience of investments made in irrigation has not been too good. Massive investments were made in the 1990s, resulting in numerous incomplete projects. There is an urgent need for expanding the net irrigated area over the next few years, but given the past track record, getting investments might be a problem. Issues such as low user charges that recover not even the operating and maintenance (O&M) costs, have resulted in many problems.

Telecom is one sector that has done phenomenally well. In 1991, cellular services were opened to the private sector and in 2000, a variety of long distance and fixed line services had been opened to competition. The results have been dramatic - teledensity has now crossed 10% of the population, well over double the level of 4.4% in 2002. In fact, the telecom sector is probably the only sector where the government has actually managed to meet its target - achieving a teledensity of 9.9% by 2007!

What is the government doing?
The government, conscious of the need to sustain a good rate of GDP growth and create employment, has outlined ambitious expansion plans in various infrastructure sectors over the next few years. They are outlined in the table alongside.

Infrastructure investments
Road DevelopmentRs 2,466 bn
AirportsRs 228 bn
PowerRs 9,000 bn
RailwaysRs 749 bn
PortsRs 250 bn
TotalRs 12,683 bn

The government clearly has big plans to improve the infrastructure in our country. The domestic demand is not such a problem, as has been the case in economies like South Korea and Japan, but enablers to growth, such as infrastructure have been found wanting to some extent and this is one thing that does need correction. However, the actual achievement of these investment targets could differ, given previous track records, like in power, the capacity additions planned have never materialized. Therefore, one could take these figures with a pinch of salt. However, the general direction is very clear and that is a positive.

Taking a market perspective, stocks that could benefit from such investments could be power stocks, engineering stocks (as witnessed by their bulging order books), construction companies and so on. However, this is clearly a long-term story and such factors must always be looked at with a long-term horizon in mind and, of course, taking a company-specific view. We believe that, in order to maintain a sustainable rate of economic and corporate performance, improved infrastructure is an absolute priority. Only when this happens, will India be able to achieve a higher growth trajectory in the future and, of course, by extension, India Inc. and the stock markets.

Equitymaster requests your view! Post a comment on "India: What's the root problem?". Click here!


More Views on News

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

ONGC to NMDC: Here are 5 Stocks Value Investors Should Closely Track (Views On News)

Nov 26, 2021

Before investing in value stocks, research the company and gain insight into why the market is discounting it.

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

Watch This Before You Buy NBFC Stocks (Fast Profits Daily)

Dec 3, 2021

My view on NBFC stocks.

Charlie Munger: This is "Even Crazier" than the Dotcom Era (Views On News)

Dec 3, 2021

Is the investing legend's pessimistic view on the stock markets justified?

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Dec 3, 2021 (Close)