Growing Importance of India For Investors (ie, India is the next China) - Essay Example

Growing Importance of India for Investors (i.e., India Is the Next China) Table of Contents Overview 3 Growth of Indian Economy 3 Obstacles to India’s Growth 4Reasons for Investing In Indian Market 6References 8OverviewIndia as an emerging economy has great prospects for investors. The economy is growing at a rapid pace with a GDP growth of about 8.5%. According to Tanvi Gupta and Chetan Ahya of Morgan Stanley, India’s growth will soon surpass China’s growth. Growth of Indian EconomyIndia can boast of young population.

According to UN reports, Indians under the age group of 15 years and over 64 years has declined from 69% in 1995 to 56% in 2010. According to a Morgan Stanley report India’s working population is expected to increase by 136million by 2020 (The Economist, “A Bumpier but Freer Road”). (The Economist, “A Bumpier but Freer Road”).The economic reforms introduced in early 1990s have boosted the economy’s growth. Tariff barriers were brought down. Foreign players could enter and thus the private firms had to compete with the best.

Exports rose up. Indian firms are rapidly becoming global like Bharti Airtel has entered African market. Unlike China, India’s growth cannot be attributed to just the public sector. There are about 45m entrepreneurs in India. India’s informal sector is also doing well. Indian businesses majorly cater to the need of their domestic consumers and also export various services. Indian firms successfully satisfy the needs of money conscious customers in India who love low priced goods. Tata Filters for example manufactures a water filter that can provide safe drinking water at a meager charge of rupees 30 a month.

Indian firms are coming up with new products as well as new business models. HCL technologies improve the IT system of their clients on the condition that they will charge only if their clients gain. Moon B. Shin of LG electronics sees immense opportunity in the Indian market. They are manufacturing low priced goods and goods suited to the liking of Indians.Obstacles to India’s GrowthThe infrastructure in India is poor. Roads are bad and traffic conditions do not depict a rosy picture either.

Power shortage is another problem. McKinsey predicts that Indian growth will be five fold in the next 20 years. India will have to spend $1.2trillion on infrastructure in future. India lacks in skilled workforce. There are only 16 Indian Institute of technology in India. Universities do not impart useful knowledge and companies have to spend a lot for their training. India’s adult literacy rate is 66% compared to 99% of China. Corruption exists everywhere. Instability in the form of Naxalite movement is affecting mining and logging firms.

Populism whereby politicians discourage businesses for their own interests is a major obstruction to growth. The government is making efforts to address these issues. The literacy rate is increasing, skills are being developed, reforms like national sales tax and land reforms for simplifying land sale for factories are certain improvements in this direction. China and India both have grown after economic reforms (The Economist, “A Bumpier but Freer Road”). (The Economist, “A Bumpier but Freer Road”).

Reasons for Investing In Indian MarketMarket and economies pass through cycles of about 6-10 years. The economic cycle has a growth phase which encourages investment. Investors make profits and money filters into the economy. Then they re-invest in risky ventures and when they face failure they pull out their money. After that they slowly start investing again. Thus this cycle continues. The world has seen an end to the recessionary phase and has gone into the growth phase. The circles in the figure represent the global recessions (Huffman, “Why Now is a Good Time to Invest”).

(Huffman, “Why Now is a Good Time to Invest”). Economic CycleThe difference between market performance in the growth phase and the recessionary phase is more prominent if the recessionary period was considered to have started a few months earlier than it had actually started and ended before it actually ended. The investor would produce annual returns that would be much greater in the growth period than in the recessionary period if he invested a few months before the end of the cycle and held cash until a few months before recession ended.

Global growth in 2010 will be driven by emerging markets.In efficient market stocks are cheap at the end of the growth cycle and expensive at the bottom of the cycle. But after recession stocks become cheap because people fear investing. Stocks are cheap based on P/E ratios. Earnings in emerging markets will be about 28% this year (Huffman, “Why Now is a Good Time to Invest”).ReferencesHuffman, Chris. “Why Now is a Good Time to Invest“. November 30, 2010. Innovators in the Markets of Tomorrow, 2010.

The Economist. “A Bumpier but Freer Road”. November 30, 2010. Business in India, 2010.