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The Indian economy is amongst the largest emerging market economies (US$ 1 trillion) and, we believe, amongst the most attractive growth opportunities globally. According to a Goldman Sachs report – BRICs and beyond, January 2007 India’s GDP (in USD terms) is expected to surpass that of the US before 2050, making it the world’s second largest economy.
Around 85% of India’s aggregate economic demand is domestically driven. India’s large investment program and the demographic dividend of a growing young and educated middle class will likely drive strong domestic demand.
The sectoral mix by way of economic activity also helps cushion the impact on overall growth from the vagaries of monsoons. The contribution of the industries and services sector is well above 80% of the total economic output and has been increasing over time (Source: Central Statistical Organization, 2007-2008)
We believe that India’s growth will likely be driven by the following structural themes –
- Infrastructure – The need for significant infrastructure improvement in India to facilitate continued economic growth. Population growth and migration from rural areas to towns and cities has led to significant infrastructure investments in electricity, transport, telecommunications, irrigation and water supply; investment we expect to continue in years to come.
- Urbanisation – The industry and service sectors are growing faster than India’s GDP, generating significant employment potential, primarily for urban populations. Migration to cities and towns is being fuelled by the movement of a young working population with a new disposable income. Meanwhile, rural India is likely to benefit from urbanisation as new income streams from industries such as construction support farm income.
- Financial Services, an important sector of the Indian economy – The current low penetration of banking services is where a lot of the opportunity lies. The central government intends to expand the depth of the domestic financial market. The preliminary forays for policy reforms in insurance, banking, and pension funds are an indication of that intent.
- Finally, the Indian outsourcing model, in our opinion, is now increasingly being recognised as the model for global firms. The slowdown in the US economy poses potential challenges for this sector. However, India’s exports are now more diversified across the globe – reducing its reliance on the US – and outsourcing has diversified into engineering, pharmaceutical, petrochemical and auto-ancillary exports.
It should be noted that investments in India are subject to the normal risks associated with emerging markets, including but not limited to risk of losing some or all of the capital invested, high volatility, variable liquidity, geopolitical risks (including political instability), exchange rate fluctuations and restrictions on foreign investors. Investments in India should, therefore, be considered only as part of a well diversified portfolio.