India goes for gold in 2010

The upcoming Commonwealth Games this year will help put a spotlight on the Indian economic growth, and boost infrastructure investment plans, says Nitin Jain, principal fund manager, Kotak Mahindra (UK).

Last year was the best year for Indian equities since 1991, despite the country being faced with a combination of the credit crisis and a poor monsoon season. Between July and September ‘09, GDP growth was recorded at 7.9%. The newly elected government brought a renewed focus on key areas such as infrastructure and the rural economy; and with continued buoyancy in the services sector and other areas of the economy, growth in GDP is expected to be around 8% in 2010-11.

Backed heavily by government legislation and plans to spend an estimated $500 billion over the next five years, it is expected that infrastructure developments will progress at a faster rate than ever before. The 2010 Commonwealth Games, to be hosted in New Delhi this summer, is a perfect opportunity for India to showcase the result of this investment with close to $344million being invested by the Indian government and privately funded projects. Whilst there are challenges associated with staging such an important event, initiatives such as part-privately funded infrastructure projects are expected to help to deliver this infrastructure.

Government policy is expected to also maintain attention on agriculture in 2010. The planned reforms in agricultural production, distribution and logistics through infrastructure investments will benefit agricultural communities. This will in turn help to boost GDP, as about 60% of India’s workforce is employed in the agriculture and related sectors, thus boosting the development of infrastructure and growth in the consumption of consumer goods.

Liquidity has always been a very important driver for equity markets and this hangs in balance. While we expect strong flows from both domestic investors (mainly insurance flows) and also continued allocations from the foreign investors, a large part of this will be absorbed by fresh equity issuances driven by the government’s divestment programme. A successful disinvestment programme could well be a trigger for a longer-term fiscal deficit management. For India, the disinvestment programme is a three year objective aimed at withdrawing state funds from the economy, used to boost liquidity during the recent financial crisis.

There is much debate on the effects of the fall of global trade on Asian economies, many of which have an export led model. India, however, does not conform to this generalisation as more than 65% of the country’s GDP comes from domestic consumption. Meanwhile India’s strength in terms of skills and cost arbitrage across many global growth industries, for example IT and healthcare, means that it is in prime position to benefit from the increasing market stability. The increased focus of developed economies and multi-national pharmaceutical companies on cutting healthcare cost will see India become an important player in generic pharmaceuticals.

Overall, 2010 is set to be a year of consolidation and is expected to lay the foundation for faster economic growth in years to come. A large part of the infrastructure spend is expected to start paying dividends between 2011-2013 and benefits of large domestic oil and gas finds is likely to fully accrue as well. February’s budget is likely to bring a reduction in fiscal deficit as the government plans to exit the stimulus measures, though in a calibrated way, and also aims to push forward its disinvestment programme with the effect of encouraging fresh equity issuances. Revenues by themselves are likely to pick up and credit availability and cost are likely to remain benign.

In summary, we believe that a bulk of global growth in coming years is likely to come from Asia, and India is expected to be a large contributor to this growth. In that context, investors should consider increasing their exposure to Indian equities and aim to benefit from the likely transformation of the Indian economy – from an Elephant, to an Asian Tiger.

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.