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Surging growth expected to remain big investment draw

Surging growth expected to remain big investment draw
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First Published: Tue, Jan 08 2008. 12 18 AM IST
Updated: Tue, Jan 08 2008. 12 18 AM IST
British Prime Minister Gordon Brown’s plane will have barely departed New Delhi’s Indira Gandhi International Airport this month before French President Nicolas Sarkozy’s arrives with another contingent of executives seeking opportunities in India’s rapidly opening markets.
The British prime minister and the French president, who are separately visiting India the week of 20 January, are bringing along commercial delegations including retailers Tesco Plc. and Carrefour SA, attracted by a burgeoning middle class and loosening curbs on foreign ownership in the nation of 1.1 billion people.
Overseas investment in India may double in 2008 for a second straight year to reach $30 billion (Rs1.17 trillion), the government forecasts, as the world’s second fastest growing major economy arrives at what Lehman Brothers Holdings Inc. calls its “take-off” point. That’s when consumer demand and business spending start feeding off one another and drive even more investment.
“India’s growth acceleration is not a flash in the pan,” says Robert Subbaraman, chief economist at Lehman Brothers Asia in Hong Kong. “A middle class is fast emerging, which is spurring demand as consumption and investment interact.”
Like China and South Korea in previous decades, India is benefiting from an increasingly open economy that has already stimulated enough growth to double per capita income since 2000, according to Lehman. The resulting surge in demand for consumer goods has tripled mobile phone use in two years and fueled a 29% jump in sales of microwave ovens in 2007, Subbaraman says.
With the explosion of purchasing power, India’s economy is poised to expand 9% for a third straight year, while the US, Europe and Japan slow to less than 3% growth.
McKinsey and Co., the New York-based consulting firm, estimates that India’s middle class—those with annual disposable incomes between $4,380 and $21,890 in current dollars—will increase more than tenfold to 583 million by 2025. India’s appeal is more than a matter of demographics. Prime Minister Manmohan Singh, who as finance minister in 1991 started dismantling barriers to foreign investment and other Soviet Union-style controls on industry, is preparing to permit overseas companies to build retail chains in the country.
That’s prompting interest from companies including Hertfordshire-based Tesco Plc., Britain’s largest retailer, and Paris-based Carrefour Group, which operates supermarkets on four continents.
Singh’s government is also moving to raise the limit on foreign equity stakes in local insurers to 49% from 26%, and has a roadmap to let foreign banks increase holdings in India’s private banks. Brown’s party will include representatives of Prudential Plc., the UK’s second biggest insurer, and Barclays Plc., the No. 3 British bank, both based in London.
“India has long been noted for its superb ‘micro’—good companies, rule of law, democracy,” says Stephen Roach, chairman of Morgan Stanley in Asia. “What has been missing is the ‘macro’—foreign direct investments, infrastructure. What’s encouraging to me about India now is that the macro is starting to improve and is reinforcing the already positive micro.”
Foreign ownership in telecommunications has helped India become the world’s third largest user of telecom services after China and the US. It’s the world’s fastest growing wireless market.
“India is a country of enormous opportunity; it’s the heart of globalization in a way,” says Ben Verwaayen, chief executive officer of London-based BT Group Plc., the UK’s largest phone company. “You see a growing base for companies from around the globe, being here not just for this region itself, but being here as a kind of base for what they can do in other parts of the world as well.”
San Jose, California-based Cisco Systems Inc., the world’s largest maker of computer-networking equipment, plans to triple its Indian workforce to 10,000 by 2010, chief executive officer John Chambers said in October.
Auto makers including General Motors Corp. (GM) and Suzuki Motor Corp. are spending more than $6.6 billion to build new factories in the country. PricewaterhouseCoopers Llp. says India’s auto output will grow about 17% annually until 2011—the fastest among the 20 largest carmaking nations.
India’s higher profile in the global economy not only makes it a magnet for foreign investment, but also gives its companies a bigger role on the world stage.
Indian companies led by Tata Steel Ltd and Hindalco Industries Ltd, both based in Mumbai, completed a record $39.2 billion of overseas acquisitions in 2007.
Tata’s $12.9 billion purchase of Britain’s Corus Group Plc., the biggest overseas takeover by an Indian company, made it the world’s fifth biggest steelmaker. Buying Novelis Inc. of Atlanta provided Hindalco Industries Ltd, India’s biggest aluminium producer, access to customers such as GM and Coca-Cola Co. The trend is continuing: Tata Motors Ltd of Mumbai, India’s largest truckmaker, last week was selected as the preferred bidder for Ford Motor Co.’s Jaguar and Land Rover units, the US automaker announced.
Brown and Sarkozy are joining a parade of world leaders coming to India with agendas that include closer commercial ties. US treasury secretary Henry Paulson, visiting in October, said US companies will participate in India’s $500 billion programme to modernize roads, ports, power and other infrastructure by 2012. The US will help India transform its financial capital, Mumbai, into an international financial center, he said.
During an August visit, then Japanese prime minister Shinzo Abe said Japan will help plan a $90 billion infrastructure corridor between New Delhi and Mumbai, including freight lines, power stations and improved access to ports and airports.
Such projects may reduce one of the biggest remaining impediments to doing business in India—poor infrastructure. For all the expansion in the Indian market, its foreign direct investment still pales in comparison to what China has received—about $60 billion in each of the past three years.
It takes 24 days for Indian exports to reach the US compared with only 15 days from China and 12 days from Hong Kong, according to Lehman Brothers. “If India doesn’t get its act together on infrastructure urgently, then it can never realize its aim of accelerating growth,” says Vineet Agarwal, executive director of Gurgaon- based Transport Corp. of India Ltd, the nation’s biggest cargo transportation and logistics services company.
Even as India’s economy reaches take-off speed, almost 300 million people continue to live on less than $1 a day, according to the World Bank.
The absolute number of poor in India fell for the first time between 1999 and 2004 after the government’s policies to allow more foreign investment and reduce regulation on industry spurred growth, according to the Paris-based Organization for Economic Cooperation and Development.
“The Chinese take-off began in the 1980s and didn’t show through in terms of increased living standards for the majority for quite some time,” says Howard Davies, director of the London School of Economics and a former chairman of UK’s Financial Services Authority. “Just the same way, India has got the economic take-off but it needs to be sustained for a decade before you really see the place looking different.”
Chris Burns and Carol Massar in New Delhi contributed to this story.
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First Published: Tue, Jan 08 2008. 12 18 AM IST