• OCTOBER 15, 2008

Is India still worth investing into? Part III

Over the last two articles of this series, we have seen the positives and negatives of the Indian economy. In the current one, we analyse the different themes that support India's long term growth story.

Consumption: Inspite of concerns of global economic slowdown, rising commodity prices and higher interest rates impacting consumption, the latent demand of a large section of young Indian population is here to stay. Thus the domestic consumption theme continues to hold ground. Apart from FMCG sector, the consumption story also covers sectors like retailing, media, telecom, tourism and housing amongst others. Across most of the categories, the penetration level in India is below the global average. With rising income and aspirations, this is set to increase.

Per capita penetration

CategoryAll India (%)
Deodorants 2.1
Toothpaste 48.6
Skin Cream 22.0
Shampoo 38.0
Instant Coffee 6.6
Mobile 26.0
Internet 2.9
Auto (vehicles per 1000) 8.5
(Source : Equitymaster)

Not only the urban areas, but also the rural areas are going to be the new drives of consumption. Today, agriculture contributes 20% of India's GDP, provides employment to two-thirds of the population and accounts for over 50% of total consumption. Rising agri commodity prices and migrants sending money home will improve the purchasing power in villages. The rural economy is expected to witness structural changes led by the investment push from the government and increasing importance given by the private companies. The government's renewed focus has also turn resulted in a wave of corporate forays in the rural segment.

Urbanisation: The urbanisation of India is taking place at a faster rate than in the rest of the world. As per United Nations' 'State of the World Population 2007' report, by 2030, 40.8% of India's population will be living in urban areas compared to about 28.4% in 2007. This will lead to a rise in demand of better houses, physical and social infrastructure. Utilities like power, water, sewage and infrastructure like schools, hospitals, malls etc will witness greater demand. To achieve the Planning Commission's Eleventh 5 Year plan target, which envisages infrastructure investment equivalent of 9% of GDP by 2012, infrastructure investment will need to increase by nearly 1% of GDP each year between 2008 and 2012.

Housing Demand Estimation (m units)20072011E
Estimated Housing Stock 255 286
Estimated housing Shortage 25 30
(Source : HDFC presentation)

Further in order to bridge the rural-urban divide, infrastructure, health, education and rural development would need greater focus. Building physical infrastructure remains a top priority for the government.

Outsourcing hub: India has been a pioneer in providing wide range of outsourcing services to countries across the globe. Today, India is called the world's back office. It is home to six of the world's top eight outsourcing hubs. Outsourced jobs are undertaken not only in the IT space, but also textile, auto and FMCG segments. India is becoming a major hub for design and production outsourcing for Western companies. The Indian companies which have already reached a dominant position in the offshoring and application management space have now made the logical move up the value chain.
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India's large, educated, trained and technically skilled manpower provides cost-effective services without compromising on quality. As per the 'Economist', 23% of the global workforce addition over the next five years will be from India. As per software industry body Nasscom, the skilled labour shortage in the US expected to touch 5.6 m by 2010 will result in 1.3 m jobs being outsourced. Of this, nearly 50% would be outsourced to India, mainly in the areas of ITES, health and some high-end knowledge services.

Nuclear opportunities: With US senators having passed the much-awaited Indo US nuclear cooperation accord, the gates of nuclear trade for India have opened. India gets around 3% of its energy from nuclear power. By 2032, the government plans to quadruple total generating capacity, to 700 gigawatts, with nuclear energy accounting for 63,000 megawatts. As per the US-India Business Council, India will spend at least US$ 175 bn on nuclear power in the next 30 years.

Thus a huge potential is awaiting to be unleashed in several areas, which can unlock superior growth opportunities for Indian corporates. These will provide new opportunities facilitate robust growth of the economy.

In our next article we shall highlight some of the risks that the Indian economy can be subject to.

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