I would like to present here both the bearish arguments and bullish arguments regarding the country. I am only focusing on Macro conditions and not discussing stock valuations or individual Indian equities.
India is the world’s second most populous country with 1.1 billion people and an emerging middle class that has more buying power. This is one of the important keys to the India’s economic future.
Another factor in India’s economic favor is the country’s recently passed Fiscal Year 2011 budget anticipates reducing India’s deficit by 5.5% in 2011 and 4.8 in FY 2012. The budget also provides incentives for growth in three key areas: real estate, infrastructure and agriculture. The General Sales Tax has also been revised and streamlined to more efficiently collect tax revenue.
The Indian economy is poised for continued growth and the strong possibility of passing China’s economy eventually. The economy’s growth has been phenomenal at a time when other countries have struggled with recession. The Sensex, India’s stock market, has risen 115.6% over the past year. Part of this success is due to reliance in India’s domestic market over exporting goods. The economy is also increasingly diverse and offers investors who choose to be patient favorable investment opportunities. The economy is growing at a remarkable rate of 8.5% a year.
The biggest factor in India’s future success is its young workforce at a median age of 26 years old. However, this young work force comes with disparities and breaks down into two groups – a highly educated professional and technology group, and an unskilled and highly illiterate group (40%). Bringing the second group up to speed as a competent workforce will be a challenge. At the same time, India’s businesses are becoming more efficient and adept at coming up with practical problem solving solutions.
While poor infrastructure is considered to be the biggest impediment to continued economic progress, another major need for continued growth in India’s economy is to push for change. In many respects India’s government administration is largely a carryover from the days of British rule – very bureaucratic and layered with too many steps, people and paperwork requirements to get anything done. It is also estimated that as many as 30% of government officials are involved in some form of corruption. Continuing change is essential for the growth of any country.
In addition, India faces massive problems from the Maoist insurgency in the East. The insurgency has been going on for decades, and the intensity has only been increasing recently. According to the Economist:
About 200 of India’s 588 districts are affected by a Maoist insurgency called the Naxalite movement. The rebels hide in India’s great forests, which are also where much of the country’s mineral wealth is buried. So mining and logging firms are seriously affected.
In the west, India has constant problems with its arch enemy Pakistan. The countries have fought several wars, in addition to many near wars. However, now both countries have large nuclear stockpiles and a war would be an utter disaster for both countries. Any future terrorist attack, or inadvertent border skrimish, has the potential to lead to an all out nuclear war.
So while India has many positive aspects as the world's largest democracy continues to grow the country faces serious challenges.
What is your take?