Monday, November 19, 2007

India's economic muscle power growing

India is basking in the success of economic reform. Its GDP growth hit 9.4% for the fiscal year ending March 2007. Signs of its rapid growth are visible on India's streets, from new cars to new houses. A new middle class has sprung up, eager to indulge themselves in modern-day conveniences such as mobile phones and computers.

But most experts don't think the country can sustain this kind of growth. Goldman Sachs analyst Tushar Poddar suggests growth is around 8%, driven mostly by gains in productivity. Other analysts say it is closer to 6.5% because of infrastructure problems the country faces.

But don't tell this to India's government officials. The central bank's deputy governor, Rakesh Mohan, said the growth trend of the past few years indicates the economy has entered a new phase of stronger expansion.

"Most importantly, the current growth is not a flash in the pan and is exhibiting signs of sustainability along with financial stability, notwithstanding the pressures from unforeseen external shocks," Mohan said.

India’s Planning Commission is targeting annual growth of 9% over the next five years. That's a big jump and would move the economy's momentum closer to neighboring China, which is sustaining growth of about 9-10%.

India’s head of the Planning Commission, Montek Singh Ahluwalia, says, "We are currently projecting an average growth rate of 9 percent for the next five years. Many people think that's a bit under ambitious, given it was 9.4 percent last year."

India does indeed face some tough problems if it wants to sustain the 9% growth rate Planning Commissioner Ahulwalia says can happen. Lack of infrastructure tops the list of concerns it has to overcome.

When India’s economy was growing at 6-6.5%, infrastructure was less evident. But at 9% growth, the country will need to increase the amount of money needed for communications, rail and roadways from 5% spent in 2006-07 to around 9% by the end of the five-year period.

But the money won’t entirely come from the government. It simply can’t mobilize resources fast enough and on such a large-scale effort.

So the country is relying on the funds to come from their newly developed public-private partnerships. In fact, about three-quarters of the increase will be privately funded. Getting that kind of money from the private sector is not easy.

Historically, industrialized countries fund their infrastructure needs through the public sector. For example, China relies on public-sector banks.

India is encouraging its growing business sector to take some of the risk in funding infrastructure projects whenever possible. It’s already happened with the country’s telecommunications industry. When constraints were relaxed, a huge amount of money came in and was used very efficiently.

The same thing happened with Mumbai International and Delhi International Airports. Both were modernized with public- and private-sector funding.

Another driving factor in India’s five-year growth plan is the country’s rising middle class. The middle class currently numbers some 50 million people, but by 2025, that number will expand dramatically to 583 million people -- some 41% of the population.

India’ s middle class includes young college graduates to mid-level government officials, traders and business people. They enjoy a lifestyle that most of the world would recognize as middle class. They typically own a television, a refrigerator, a mobile phone and perhaps even a scooter or a car.

The upper end of the middle-class segment includes senior government officials, managers of large businesses, professionals and rich farmers. Successful and upwardly mobile, they are brand-conscious, buying the latest foreign-made cars and electronic gadgets. They are likely to indulge in an annual vacation, usually somewhere in India.

Both segments of the middle class are demanding more from the government, including better education and healthcare.

And the country is responding. For example, drive down Bannerghatta Road in Bangalore, the heart of India’s Silicon Valley, and you'll see big-name American institutions such as Baltimore's Johns Hopkins and Boston’s Tufts University Medical School.

While experts argue whether India will sustain 6.5% or 9% growth a year, one thing is certain: India will continue its run as a growing economic power bringing with it dozens of potentially rewarding investment opportunities.

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