India: "Superpower-in-Training"

11/25/2005 12:00 am EST

Focus:

Lawrence Edelson

Editor, Real Wealth Report

"Until recently, India's economic boom lagged behind China's, allowing Beijing to hog the economic spotlight on the global stage," says Larry Edelson in Real Wealth. "But we view India as a superpower-in-training, with exciting opportunities." Here’s his review.

"India's economic awakening is only now catching up to where China was five, ten years ago. It has a lot of ground to make up. And that offers exciting investment opportunities. But in the decades ahead, India could even surpass China as the world's second great economic superpower behind the US. India's emerging hunger for stuff—practically every kind of goods and services available in the modern world—makes it potentially a bigger consumer market than China.

"Yet most of the world has little clue what modern India is all about. Movie clichés of veiled sari-clad women, bare-chested mahouts prodding their elephants to work in the fields and jungles, and richly costumed maharajahs in their resplendent palaces persist as stereotypical images of the country. But today's India is far different. Modern India is emerging as a technological leader, with educated, talented people. Its population is 1.1 billion and the country spans nearly 1.3 million square miles.

"The latest analysis by The Economist Intelligence Unit projects the Indian economy, Asia's fourth largest, to hum along at 7.3% GDP growth for fiscal 2005-06, more than twice the US rate, and to ease back only slightly in fiscal 2006-07 to 6.8%. Inflation remains relatively mild at 3.16% (as of September 2005), though it will likely become more problematic as the economic expansion continues to heat up.

"But India's robust economic growth rate doesn't mean that it's a rich country. Though it is picking up steam, India has ample headroom to expand economically. More than one-fourth of India's people live below the poverty line, including the vast masses in rural areas, despite the fact that the poverty rate has been halved over the last two decades. GDP per capita for India is $538, just a little less than half of China's $1,162 per capita. Per capita income has improved steadily over the last five years, increasing from 6% in 2000-01 to a double-digit 10.7% increase by 2004-05.

"India's central bank reserves of $30 billion are only about 4% of China's $700 billion in reserves. India's economy is not yet efficient in utilizing its labor force of more than 480 million. About 67% of India's workforce is in agriculture, which produces only 25% of the GDP. Industry employs 17% of the workers, and services employ 23%. That's not to say India's economy is stagnant. Far from it. As of the latest reporting at the end of June, India's economy expanded at the fastest pace in three quarters, gaining 7% over the same period a year ago.

"Government spending on highway infrastructure zoomed by 75% over the previous fiscal year. Small car sales zip along at a 17% growth rate, while luxury car sales rose at a 28% rate. The ballooning Indian middle class—330 million and growing—fuels surging consumerism. Telecommunications offers a huge potential for growth. India's steel industry stands poised for massive expansion driven by surging domestic demand. The construction boom for highways, bridges, and hotels in and around key cities such as New Delhi, Mumbai (Bombay), and Bangalore keeps the steelmakers hopping to keep up. The pace promises to quicken as India pumps $15 billion into overhauling its decrepit infrastructure over the next few years.

"Gradually, India is succeeding in diversifying its economic base, excelling in areas such as jewelry fabrication (India is the world's largest gold buyer), technology (software, technical support, cell phones), pharmaceuticals, auto production, and movie making. India will consume an estimated 600 tonnes (19.3 million troy ounces) of gold this year. In 2004, India's gold demand surged 17% from the previous year.

"Like China, India is rapidly opening up to free market ideas. Over the next several years, India will join China as one of the most exciting emerging markets in the world. Let's put on a longer-term core position to profit from India's accelerated growth. With that in mind, I have two recommendations, both mutual funds that give you diversified exposure to India. First, buy the Morgan Stanley India Investment Fund (IIF NYSE). The fund's objective is long-term capital appreciation, and its holdings run the gamut from energy to agriculture, to mining, pharmaceuticals, telecommunications, building materials and more. This is a no-load fund, and its overall fees run about 1.4% per annum, less than the sector's 1.9% average. Also buy the India Fund (IFN NYSE), another well-diversified fund covering India, and for long-term capital appreciation. Total fees are about 1.64%."

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