Flying Donkey

Monday, March 13, 2006

India: Miles to Go

Over the last few years, there has been a new found confidence in India, and rightly so. Indian economy has grown at an average rate of 6%+ over the last five years, the per capita is approaching the inflection point of $600, and the world is finally waking up to the Indian economic juggernaut.

In short, in the marathon race of global commerce, India has been running like a true sprinter. Compared to the 70s and the 80s, this is truly amazing. At this rate, India will double its economy about every decade.

But there are some sobering facts that need to be looked at before we start dreaming of the second coming of the golden age of India. The question one should be asking is...is this growth sustainable?

India needs massive investments in infrastructure and some additional help from the gods to sustain this level of growth. Critical areas of development exist that will need to suck up the next wave of investments.

India is woefully lagging in meeting its energy needs. It has about 110 GW of installed capacity. This is about quarter that of China and about tenth that of the US. Indians have 13 MMBTUs of energy available per capita as opposed to 35 of the Chinese. It needs dedicated electricity to power its manufacturing and service industry.

The drinking water availability of India remains a big concern. By 2010, India would have approached the UN defined stress line of per capita availability of water. History tells us that rise and fall of civilazations has been predicated on the availability of water. This is a big concern and has the potential of derailing the economy.

Despite these elephants in the room, the Indian stock market has been behaving like it was the developed market. Indian valuations on a relative basis are approaching all time highs. At the current valuations, Indian companies are starting to become more expensive than companies almost anywhere else in the world.

Whats the drawback you ask? Outflow of investments!

Currently, more than 20% of the capital in the stock markets is from Foreign Institutional Investors (FIIs). There is a surprising unanimity in the the foreign capital markets that India is overpriced. We are looking at a significant pullback of investments and profit-taking. Thus, just when we need the billions and billions of dollars to fund the infrastructure spending, we will be seeing a net outflow of funds.

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