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Investors and India

February 22nd, 2004 · No Comments

WSJ writes about how international investors are discovering India:

New Delhi is forecasting Indian economic growth of about 8% for the fiscal year ending next month — on par with China’s official growth forecast for 2004 — and it has emerged as the world leader for outsourcing and call centers.

Some economists say India may be entering a period of rapid growth reminiscent of China’s powerful economic expansion of the 1990s, enabling India to evolve over the next few years from a fringe to a more mainstream emerging market. Investors have been encouraged to see the government running on a market-reform platform ahead of the April parliamentary elections and anticipate an acceleration in reform measures after the elections.

“India looks like it is at the beginning of a multiyear upswing,” says Mark Madden, who manages the Pioneer Emerging Markets Fund and counts India as one of his three top country picks this year, along with Brazil and Turkey.

Foreigners invested a record $7 billion in Indian stocks last year, which helped the rupee appreciate 5% against the U.S. dollar in 2003 as the Bombay Sensex Index jumped 82% in dollar terms. (So far this year, the Sensex is up 3.2%.) Foreign fund mangers raised their stakes in India’s 10 biggest companies by 7.3 percentage points to 35.2% of shares outstanding, according to Morgan Stanley.

And even if the optimistic forecasts come true, India still poses plenty of risks. While there has been a recent thaw in tension between India and Pakistan, any future conflict could weigh on the market.

In the U.S., a political backlash against the outsourcing of jobs to India has been gaining momentum. Recently, the Senate passed an amendment restricting companies from using offshore workers for government-contract work. State legislators in New Jersey and Indiana have passed similar measures, sparking an angry response from New Delhi and raising concerns about a potential trade war. Both the Democrats and Republicans are already making this a campaign issue.

In India, the ruling coalition could face increasing populist opposition to market overhauls if the economic gains aren’t seen as equitably distributed and India’s widespread poverty doesn’t ease. Also, poor infrastructure — from roads and highways to ports and power supply — must be improved to cut transportation costs and boost gross domestic product.

Even if India’s economy does achieve a higher level of sustained economic growth, that alone doesn’t make it a wise investment. “Investors commonly fall into the trap of equating fast economic growth with strong stock-market performances,” says Andrew Milligan, head of global strategy for Standard Life Investments in Edinburgh, Scotland. “That need not be the case.”

Tags: Emerging Markets

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