• MAY 17, 2006

India: And miles to go!

India has come a long way from its inward-looking economic strategy practiced for around 50 years post the independence. Economic liberalisation and the gradual opening up to the world have boosted economic growth. It is being estimated that India will become the fastest growing economy by 2020, thus overtaking China. Moreover, its GDP per capita will double from roughly US$ 2,500 currently to almost US$ 5,000 by 2020. India is increasingly attracting the world's interest as a result of the country's impressive economic performance. In this write-up, we classify the factors that are leading the Indian economy in its way forward.

Factors driving India's growth

Population and demographic trends: 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 (which is what a big challenge is), income levels in the country would improve, thus improving the overall standards of living for the populace. As per the National Council for Applied Economic Research (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.

Rising integration into global trade and investment: India has made significant inroads into opening up its economy to the world outside. While the country's international trade volume as percentage of GDP pales in contrast with other major Asian countries and its import tariffs remain comparably high, we seem to be moving in the right direction. In order to gain further access to world trade, the government is expanding the trade agreements with many countries (like Singapore, Thailand, and other ASEAN members). The potential for FDI in India seems considerable.

Huge potential in infrastructure: World-class infrastructure plays an important role in creating a strong and sustainable growth path for an economy, more so for a developing one. In this regard, while India has been lagging its developing peers in terms of quality infrastructure, the realisation has finally set in. Over the past two years, the government has laid great emphasis on infrastructure development and it has been duly supported by private investments. The policy framework for the sector has changed favourably over time, including the lifting of FDI caps.

Growth across industries: Beside the IT sector, a huge growth potential is being noticed in the auto, pharmaceutical and Banking sectors. India's auto ancillary sector is rapidly getting integrated into the global industry. Outsourcing of production by large auto manufacturers to India is only expected to increase in the future. It is being expected that this sector shall grow between US$ 33 bn to US$ 40 bn by 2015. Similar is the case with the pharmaceutical and banking sectors, which are all contributing to the country's growth.

While these are some broad factors that have been aiding India's growth over the past few years, there exists solid support in the form of a strong institutional framework and a sound financial system. The country's growth potential over the next 10 to 15 years is going to set it at the forefront as compared to other developing and developed countries. India's favourable demographics, talent pool and the reforms process shall help India to a more advanced stage of development as we move forward. However, concerns like bureaucratic hurdles, corruption and low levels of human development still need to be addresses before we can call this century as 'India's century'.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407