Serious Money:India has featured regularly in the media of late following racist slurs hurled at one of the country's elite on a reality TV show. The slurs echoed the sentiments of Winston Churchill, who once described the subcontinent as a "beastly country", writes Charlie Fell
Nothing could be further from the truth, but the reality would surely be lost on today's artificial celebrities. Almost 150 years since the Indian mutiny of 1857 was suppressed by the British and 60 years since the "jewel in the crown" became the first colony to gain independence in 1947, India is enjoying vibrant economic growth and has produced a stable of leading companies that are the envy of the world. The Asian elephant's "tryst with destiny" has arrived.
From the arrival of the British at Madras in 1602 to independence in 1947, India's income per capita stagnated. Independence did little to improve the lot of the ordinary citizen. The country's first prime minister, Jawaharlal Nehru failed to produce a meaningful increase in living standards and his daughter, Indira Gandhi, did little better.
Their achievements gave birth to the accusation that the country was restrained by the "Hindu" rate of growth - a term that emphasised the religion's focus on the hereafter. Indira Gandhi was assassinated in 1984 and her son, Rajiv, began to unravel the "licence raj" put in place by his grandfather. His pro-business reforms lifted economic growth but profligate government spending led to a painful currency crisis in 1991.
Wide-ranging economic reforms have since been adopted and economic growth has accelerated to above 8 per cent per annum in recent years. Indeed, growth in income per capita doubled from less than 2 per cent a year during the 1950s and 1960s to almost 4 per cent a year during the 1980s and 1990s, and has increased by almost 7 per cent per annum in each of the last three years as compared with zero growth under 350 years of British rule.
Economic development in this unusual country has progressed along unusual lines. As its powerful neighbour across the Himalayas embraces industrialisation, India's growth has been predicated on its world-class services sector. Over the last 50 years the share of services in GDP has doubled to 54 per cent, while agriculture and industry combined have commanded a declining share.
Unfortunately, India's services growth has not translated into employment growth. The country's annual supply of roughly 200,000 engineers, 300,000 non-engineering technicians and 9,000 PhD graduates from its respected universities has ensured high levels of productivity. This is an unusual outcome given that labour productivity typically falls as services increases as a share of GDP.
The rise of the country's services sector has led to a steady increase in trend growth, from 4 per cent in the 1960s and 1970s to 6.5 per cent today. Additionally, the volatility of growth has dropped significantly and the economy has not experienced a single year of economic contraction since 1979.
India is addressing its lack of industrialisation. It is true that the country's infrastructure leaves much to be desired. Its airports, roads and railroads appear to be from a different age. Nehru's "licence raj" hindered industrial growth due to the high levels of bureaucracy and the protection afforded small companies. However, the government has announced ambitious plans to develop special economic zones and has approved a substantial number of private investments.
The government needs to move prudently as the consolidated fiscal deficit already amounts to 7.5 per cent of GDP. Further privatisations are necessary in order to avoid a serious deterioration of the fiscal position. Additionally, it needs to boost the paltry level of foreign direct investment (FDI). Encouragingly, India ranked as the second most attractive destination for FDI in AT Kearney's confidence index for 2006, placing it above the US for the first time.
India needs to improve conditions in its agricultural sector, which employs almost two-thirds of the workforce but produces less than one-fifth of GDP. Yields have slipped in recent years due to inadequate investment in water availability and management.
Despite the many challenges facing India, the Asian elephant will continue to move forward in its chaotic and unplanned manner. Its corporate sector will continue to deliver world-class companies despite government bureaucracy. Indeed, the sector is already extraordinarily profitable, with a handful of companies such as Infosys and Wipro earning returns on equity of close to 40 per cent.
The fundamentals have not been lost on investors, who have propelled stock prices to all-time highs. However, valuation ratios are three standard deviations above world averages and, although this can be partially explained by the high levels of profitability and the low volatility of growth, the premium looks excessive. Its highly skilled people work hard and are eager to succeed and, consequently, the corporate sector will continue to deliver. Buy India on a pullback.
Charlie Fell is an independent consultant and lectures in finance and investment at UCD and the Institute of Bankers in Ireland
