The economic tide seems to have turned, inflation notwithstanding. This fiscal’s GDP percentage should easily be a goodish 7.2, as asserted by the Indian Government, the number’s impact only moderated by the relatively lightweight size of our one trillion dollar official economy. Next year the percentage is slated to go to 9, and the year after that could see the beginning of double-digit growth for the first time in India.
The rupee is strengthening steadily, and Foreign Institutional investment into the stock market is streaming in. We have received over USD 4.5 billion in the first quarter of 2010. But we might have attracted much more if our economy were larger, giving it the capacity to absorb larger inflows without overheating or creating bubbles.
Also, we can do better if our Debt Market were to be modernised to facilitate easy trading in debt instruments. Right now, it is largely illiquid in the absence of a sizeable secondary market. Consequently, even though the debt market is not particularly volatile, it only attracts foreign investment seeking to park; and as a hedge to equity investment; albeit in the positive backdrop of a rising rupee.
In addition, there is the steady inflow of Foreign Direct Investment that goes towards setting up new services and manufacturing facilities, as well as to increase capacity in existing establishments. India’s growth, principally driven by domestic demand is a more or less unique and compelling phenomenon.
Indian industry is borrowing well once again and getting on with bold organic growth and Mergers & Acquisitions based inorganic growth. These include foreign acquisitions; illustrated by the recent Bharti purchase of the UAE based Zain Telecom’s African assets. It is noteworthy that the billions of dollars involved were raised domestically by the Telecom major in under a month!
Our export numbers, including those from the most important IT software seem to be picking up nicely despite the persistent slowdown and weakness in the Western economies.
In addition, there is a renewed realisation that infrastructure development must keep pace if it is not to choke off further growth. This emphasis on infrastructure development with big-ticket investment in roads, highways, power, ports, airports, and so on in the civilian domain, plus military upgrades for our security needs, also feeds rather nicely into the GDP growth story.
The social sector moves, in continuation of the rich electoral dividend paying initiatives taken in UPA I, particularly in health and education lately, and the renewed emphasis on reaching the poorest of the poor at the most elemental level, are also, because of the expenditure (consumption) involved, good growth drivers. Millions of people at the bottom of the pyramid, variously estimated at between 300 and 650 million people, will gain from this along with the nation’s GDP numbers.
Meanwhile, even as we begin on a new census, and start recording the identities of our billion plus population via the Nandan Nilekani led UID (Unique Identification Scheme); the Indian GDP numbers are, fortunately, slated to rise four-fold from the 2006 figure of Rs. 41 lakh crore to Rs. 177 lakh crores in 2019-20, (Money Today- April 2010).
And therein lies a massive opportunity for the middle class. But there is a barrier of incomprehension that needs to be overcome first. After all, it seems unfair that so many educated and intelligent people should toil on without benefit of a respectable second income that their investments could afford them.
Nevertheless, “Investment”, says the Oracle of Omaha, Mr.Warren Buffet, hailed as the world’s most successful and consistent Value-Investor: “must be rational. If you don’t understand it, don’t do it”.
It is apparent, since only a miniscule 8 million Indians invest in shares and mutual funds, that most of the 300 million plus middle class are indeed clueless, afraid, or negatively influenced by stories of people ruined by their “greed”.
While this is true enough, most victims of this type gamble their all on speculative and volatile Day Trades and Futures and Options positions taken on a highly leveraged basis, because it is possible to trade on margin monies amounting to just 10 or 20 per cent of the total.
This kind of investment can be money for jam when the going is good but an unqualified disaster if things go wrong. But why should such rash fiscal behaviour put off the prudent investor? What benefit from savings languishing in bank deposits, postal savings accounts and the like, earning meagre returns eroded further by inflation?
Such people could aspire to double-digit returns year-on-year instead, at an average of about 15% over the medium to long-term, with investment horizons of five years or more. This underwritten by the fortunate historical circumstance of a rising GDP graph over the next many years. But this time will never come back once the economy matures.
In Warren Buffet’s America, nearly 50 per cent of the population in a 15 trillion dollar economy; does invest in the financial market directly. And an even higher percentage do so indirectly, via massive Pension, Hedge and Mutual Funds, some of which are active in India too.
While it is true that the American investor has lost money in the recent melt-down, the circumstance has much to do with risky instruments such as badly conceived derivatives,
unscrupulously foisted on the unsuspecting; combined with, once again, greedy or gullible people punching much above their weights.
Warren Buffet’s investors however, have done alright. Those who invested in his flagship Berkshire Hathaway and related funds have survived intact, protected from most of the financial turmoil due to his conservative investment style.
As it stands, most Indians with the wherewithal buy jewellery, and if better heeled, property; but very few, except for folks from Gujarat, buy stocks. This despite a near tax free scenario without limit for those who care to take the plunge.
Stocks are also much more liquid than gold or property and can be complementary to such investments. The statistics are tantalising. Domestic savings, good even now at 14% of GDP will grow to 16% of the much bigger economy in 10 years time. This will add a further Rs. 29.28 lakh crores to our investible kitty. More of us should seriously consider investing a proportion of this money in well-chosen Indian equity, through good mutual funds if not directly.
(1,049 words)
April 3rd, 2010
Gautam Mukherjee
Published as Leader Edit on Edit Page of The Pioneer on 7th April 2010 with same title. Also published online at http://www.dailypioneer.com/ and is archived there under Columnists.
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