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  • : If India were a stock...

    If India were a stock...

    …would you buy? This is indeed a grueling question. However, to answer this in a clear manner is even perplexing. We have tried, in this article, to put forth the reasons to buy and not to buy India, if it were listed as a stock on a stock exchange. The points mentioned hereunder are only illustrative and not exhaustive.

    Note: Hereunder, ‘India ’ will be used to refer to as a diversified company and a listed stock.

    Reasons to Buy

    The essence of democracy: One of the foremost reasons to buy India is its democratic setup, which allows everyone to have a voice. The management (government) is the elected representative of shareholders (general public) and is put to test every five years by way of general elections. If a government fails to address the broader needs of the populace, they are punished (the 2004 general elections are a proof). This is what allows the nation to introspect and to grow as per its aspirations.


    Changing population mix (rising middle-class and an younger lot): The population mix in India is changing for the better. Already, the country has a larger proportion of the population mix under the age of 15 as compared to major developed and developing countries. ‘Assuming’ that the younger lot is able to find jobs, income levels in the country would improve, thus improving the overall standards of living for the populace.

    Source: UNDP

    As per NCAER, the household mix is also changing. By FY07, the consuming class will form around 46% of the country’s total households as compared to around 17% in FY95. The combination of both these fundamental factors, in itself, could lead to the emergence of a huge consumer base for the various products and services.

    Growing entrepreneurial culture: A vibrant and strong entrepreneurial culture seems to be emerging in India. As the younger lot is exposed towards international practices, entrepreneurship is likely to emerge as a source of competitive advantage for the country. Look at the services sector!

    We believe that the seeds of entrepreneurship i.e. less government interference and its increased role as a facilitator, fewer bureaucratic hurdles and easy access to capital are being sown already. Though we have been rated amongst the most corrupt countries globally, the fact that de-regulation is happening in various aspects removes grey areas, which feeds corruption. The setting up of independent regulators in sectors like insurance, telecom, capital markets and improving regulations in infrastructure sectors like power is a key positive. Historically, though the population was entrepreneurial, constraints on these fronts has resulted in ‘brain drain’. However, we have witnessed a number of such people coming back to the country to enable entrepreneurs in India to fulfill their objectives. Of course, they bring along with them international best practices, know-how and, more importantly, capital. As we move forward, all these factors are likely to keep the spirit of ‘entrepreneurship’ alive.

    Inherent factors that enable entrepreneurship are in place: The English language, a legacy of the British, has provided a long-term competitive advantage for the country. Combining this with other advantages like high level of skill-set, low cost structure and time differences, India has emerged as a country with a large talent pool. This provides a strong platform for fast growing sectors like IT, pharma and manufacturing, which now service clients worldwide. Not only has this benefited India as a whole in adopting global corporate practices and governance, it has also aided the country’s objective to move up the value chain. The backbone is of course, India’s belief in having proper basic education. This is likely to add to the talent pool and enable us to sustain the competitive advantage.

    Growth sectors: Penetration levels
      India China
    Telephone mainlines (per 1,000 people, 2001) 38.0 137.0
    Internet users (per 1,000 people, 2001) 6.8 25.7
    Cellular subscribers (per 1,000 people, 2001) 6.0 110.0
    Source: UNDP

    Low penetration levels: The per-capita consumption of most goods and services in the country compares poorly with other economies (developing and developed). For instance, the table above lists India’s low penetration vis-à-vis its nearest competitor, China, in fast growing areas like cellular telephony and Internet subscriptions. With a growing middle class and rising income levels, the market size of each of these products and services could double in a decade’s time. This would entail larger investments by the government and corporates.

    Robust financial backbone: The financial sector is the backbone of India. The strength of the country’s financial sector can be gauged from the fact that it shelved us from the crisis that had engulfed almost all Asian economies during 1997. This is because we have a central bank i.e. the Reserve Bank of India that is independent in its true sense. The Reserve Bank of India (RBI) strictly adheres to the international and national rules and regulations. This strong financial backbone, as a whole, has set a platform to support India’s long-term objectives of growth with price stability.

    Reasons Not to Buy

    Lack of vision among policy makers: When was the last time you heard a ruling government discuss about the long-term growth and development of the economy? We have had some policy makers who have taken bold decisions. But one or two people from a large government cannot shape the country’s destiny. Short-term political compulsions have overshadowed the long-term economic progress.

    Bureaucratic hurdles & corruption: Someone had once said, “…you cannot fool a large number of people all the time. But you can fool enough of them to rule a large country.” Bureaucratic hurdles and corruption are probably the biggest factors that might deter investors from investing into India’s growth story. While the country has bred a class of active entrepreneurs, burdensome internal regulations and bureaucracy has impeded such efforts. This very bureaucratic nature has led to rampant corruption. If everything is black and white, there will not be any grey areas!

    Low on human development: While factors like acquaintance with the English language and high levels of technology skills play a very vital role, sustenance in growth can only be brought about by addressing basic needs of the populace. As is evident from the table below, India has been a laggard on some of these human development factors. Also, due to a huge workforce and inability in proper distribution of wealth, a large proportion (around 35%) of India’s population is poor. These factors, if not taken proper care of, are likely to ruin India’s chances of building up a solid and sustainable growth model for the future. Policy makers also have to balance decisions between rural and urban development.

    India: Laggard in improving standard of living…
      India China
    Population (million, 2001) 1,033.0 1,285.2
    Annual population growth (1975-2001) 2.0% 1.3%
    Population density (people per sq km) 324.0 130.0
    Population under age 15, 2001 33.7% 24.3%
    Population living below US$ 1 a day (1990-2001) 34.7% 16.1%
    Unemployment (% of labour force, 2002) 9.9% 9.0%
    Adult literacy rate (15 years and above, 2001) 58.0% 85.8%
    Female adult literacy rate (15 years and above, 2001) 46.4% 78.7%
    Life expectancy (years, 2001) 63.3 70.6
    Infant mortality rate (per 1,000 live births, 2001) 67.0 31.0
    Source: UNDP

    Concerning fiscal situation: If one were to list the factors that have impeded India from attaining a higher growth path in the past, the government’s fiscal imprudence (excessive borrowings to finance spending) would appear at the top. This fiscal imprudence has then, cost the country in form of high inflation and interest rates. While these high levels of deficits are not necessarily bad, more so for an emerging country, if unchecked, they have the capability to ruin its finances, thus having an ultimate impact on all its stakeholders (the populace).

    Sources: RBI, World Economic Outlook, 2003

    So, Buy or Sell?

    Valuations: There is nothing better than getting hands on a growth stock combined with cheap valuations. Despite the rally off late, the valuations now look quite attractive from a long-term perspective. The table below compares India’s market capitalisation to GDP (the output of the economy) with some developed countries and the Asian region, and arguably, we are undervalued!

    India ’s growth story: Coming cheap?
      Mkt. Cap. (US$ bn) GDP (PPP, US$ bn) Mkt. Cap. as % of GDP
    Global 28,519 50,428 56.6%
    Asia 6,103 16,959 36.0%
    US 11,357 10,626 106.9%
    China 1,244 6,354 19.6%
    Japan 3,220 3,518 91.5%
    India 433 2,890 15.0%
    UK 2,474 1,606 154.1%
    Source: World Federation of Exchanges, World Bank

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