It is difficult to find a person who is bullish on India these days – high inflation and a policy paralysis combined with poor recent industrial growth numbers have taken the sheen off the long term India story and most investors are viewing the economy with apathy and disinterest. At this point, it makes sense to step back and take a slightly longer term view.
India has the best demographics of all the countries of any size in the world today. India is one of the few countries above $1 trillion in GDP which will continue to see its working age population increase into the next decade. The ageing population of the West is one of the reasons why they face serious issues of managing the healthcare and social security costs into the next decade or two. As HDFC’s Keki Mistry says ’60% of India’s population is below 30 years of age and the average age of our borrower is 35 – so we expect demand for home loans to continue to grow at about 20% p.a. for the next decade’ India is thus expected to reap a huge demographic dividend which should ensure that growth rates over the long term will stay reasonably robust.
High Savings Rate
The one characteristic that India shares with the East Asian Tigers is the high savings rate which averaged above 30% for the last decade. One of the reasons for the high rate of savings is the frugal nature of our middle class, aided by the high profitability ratios of Indian corporates. The high savings rate translates into a high rate of investment aided by foreign capital inflows. Dependence on foreign inflows is cited as a major weakness for India. While it is true that if India needs to grow at 8% plus, it does need a big chunk of foreign inflows to bridge its current account deficit, the high savings rate implies that India can grow at a steady 6% p.a. without needing any inflows. In the current economic environment where there looms the threat of a serious slowdown in foreign inflows, it must be remembered that there are very few countries which are growing at above 6%. In the new normal, 6% growth is likely to be viewed as fairly good and will in turn attract the capital that India needs to grow at a higher rate, once the dust settles on the crisis facing the Western World.
Low Consumer Debt
The corollary to the high savings rate of Indian households is that the Indian consumer is not very leveraged. Total outstanding consumer debt stands at 16% of GDP and mortgage debt as a percentage of GDP is about 10%. When one compares this with US household’s debt to GDP of roughly 90%, one appreciates why India can continue to grow at a high rate of growth over the next decade. It is no wonder that HDFC receives 25% of its loans outstanding as repayments and pre-payments every year. Compare this with tales of houses being used as ATM machines by the US consumer.
The other important characteristic of India as a country is that its dependence on exports is low. With an economy which is more than 80% driven by domestic factors, the Indian economy is relatively insulated from the problems that different parts of the world face from having too much debt.
Diverse businesses to choose from
Yes – it is true that India faces multiple problems which include a high fiscal deficit, a high current account deficit and a political class which is unable to deliver the leadership that India needs to march ahead, but this is balanced by all the factors above along with a spirit of entrepreneurship that has ensured that Indian corporates are among the most profitable among all their Asian peers. The Indian stock market also offers a breadth which is second only to the US in terms of the variety of businesses on offer. With about 1500 actively traded stocks, which include subsidiaries of a large number of multinationals and successful home grown companies which have flourished despite all the impediments put up by government over the years, the Indian stock market offers the kind of breadth that even developed countries find difficult to match. An investor in India can choose between local commodities and global commodities, utilities and internet companies, consumer staples to consumer discretionary, pharma, IT services and IT products and so on. For us, it means that we are able to build a portfolio of quality stocks with a fair degree of diversification.