"india is catching the chinese dragon"

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    February 06, 2005

    India is catching the Chinese dragon

    By Kathryn Cooper

    Investors are being urged to move their cash to India, which is poised to become the world's fastest growing economy

    THE Indian stock market is close to record highs as the country challenges China’s position as the fastest-growing of the world’s big economies — and therefore as the focus for investors searching for the most potent emerging market.
    The Indian economy expanded by 8.2% in 2004, only slightly behind China’s growth of 9.5% and nearly triple Britain’s rate of 2.8%.

    Growth in India could actually exceed that in China by 2015, according to Goldman Sachs, the investment bank.

    Dominic Wilson at Goldman Sachs said: “India has the potential to deliver the fastest growth over the next 50 years with an average rate of more than 5% a year for the entire period. China’s growth is projected to drop below 5% around 2020.”

    The bank predicts that India will overtake Britain in 2022 and Japan in 2032 to become the third-biggest economy in the world after China and America.

    Strong economic growth is expected to translate into robust stock-market returns as company profits increase and foreign investment floods in.

    The Indian stock market could deliver an average return of 10% a year over the next 50 years, according to research by Standard Life Investments.

    Richard Batty, global investment strategist at Standard Life, said: “The balance of economic power in the world is set to shift dramatically over the next 50 years, presenting a great opportunity for investors, particularly in India and China.”

    The Mumbai Sensex 30, India’s blue-chip index, has leapt by nearly 18% over the past 12 months and 90% over three years.

    The index hit an all-time high at the start of January, capping a rally that started in the summer as investors warmed to the newly elected Congress party. There had been fears that the party would limit the country’s economic development, but the appointment of the pro- business Manmohan Singh as prime minister in June has assuaged concerns.

    Aberdeen Asset Management said that India is its favourite country in Asia at present, ahead of China.

    Andrew Gillan, one of the managers of Aberdeen’s Far East Emerging Economies fund, said: “It can be difficult to find decent investments in China because the state still owns big stakes in many enterprises and there is often a lack of transparency.

    “India, by contrast, has some exceptionally well-run companies. Indian firms provide investors with a higher return on equity that any other emerging market in the Asian region.”

    India’s growth is being driven by its population of more than one billion people. They offer a huge pool of educated but cheap labour for international companies — the average wage in India is about £300 a year compared with more than £20,000 in Britain.

    Companies such as Lloyds TSB and Prudential have outsourced some of their operations to India to take advantage of the cost savings. Lloyds TSB now employs 1,300 people at call centres in India.

    The Indian information- technology sector has been one of the main beneficiaries of outsourcing. More than 75% of IT services outside America are now sourced from India, according to IBM. Indian IT companies such as Tata Consultancy Services and Infosys now count firms such as BT and British Airways among their clients, and the sector is growing by about 30% a year.
    But there is more to India than outsourcing. Allan Conway of Schroders, a fund manager, said: “Emerging markets such as India have to rely on international trade in the initial stages of their development, but as employment grows and people get wealthier, they become a rich source of domestic demand that can sustain the economy.”

    India already has a middle class of 200m people and this is set to get even bigger — and richer. Average incomes have already soared by 60% over the past decade and they are expected to grow further, from $559 at present to $1,149 in 10 years’ time and $17,366 by 2050, according to Goldman Sachs.

    As the middle classes get wealthier, they will spend more on consumer goods. Telephone ownership has already exploded, rising from just 5m in 1990 to more than 75m today, according to Fidelity Investments. About 2m telephones are added to the network each month.

    Gillan said: “There is money to be made from companies that will supply the middle classes. We particularly like banks such as ICICI because demand for home loans and other financial services is soaring.”

    The government is expected to liberalise the banking sector, following changes to the telecoms sector this year. The maximum that foreigners can invest in telecoms companies has just been raised from 49% to 70%.

    However, India carries risks. Conway said: “In the short term, we are negative on India because the market has had a very strong run and it will be hard-pressed to deliver strong returns this year.”

    Despite recent market reforms, there are still problems. Gillan said: “The country’s fiscal deficit, which is 4.8% of gross domestic product, needs addressing.

    “Another perennial problem is red tape. Large sections of the economy are still closed to investment by high tariffs and other restrictions. India has also lagged behind China in developing its infrastructure. Over the long term, however, there are great opportunities.”



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