As a member of the BRICs, India's economy (
EPI
,
quote
) has recently received a lot of attention from international
investors. However, before putting money into this South Asian
economy, investors must understand this country in the context of
its economic past and future.
[caption id="attachment_59480" align="alignright" width="300"
caption="Mumbai skyline"]
[/caption]
Throughout most of the post-World War II era, the Indian economy
(
INDY
,
quote
) was a wasteland for international investors. From the '50s to the
'80s, as the result of Communist leanings amongst policymakers, the
economy plodded along, growing on average three percent annually;
the Indian economy's tortoise-like pace was often derided as the
"Hindu growth rate."
However, starting in the early '90s, now-Prime Minister Manmohan
Singh was appointed Finance Minister. During his tenure, Singh
implemented landmark reforms which allowed India's long-dormant
economy to finally blossom.
Since then, India swiftly became a favorite of emerging market
investors. Unfortunately, as a result of both
capricious and myopic economic policy
of recent, as well as poor management of the economy, India faces
formidable hurdles going forward as its structural deficiencies
continue to exacerbate extant problems.
Over the past two years, the Indian government has served as a
significant impediment to economic growth in the country. A
decision to retroactively tax foreign takeovers
has spooked foreign firms
; a demand to telecom firms to pay significant additional fees for
2G licences has peeved the likes of Vodafone (
VOD
,
quote
) and Tata Communications (
TCL
,
quote
); policies based more on populism like maintaining costly fuel
subsidies have
weakened the foundation underneath the country's currency
, the rupee (
INR
,
quote
).
Of late, the country has also proven to be a poor manager of the
economy.
Inflation remains problematic
, and recent interest rate cuts will not ease inflationary
pressure; India's current accounts deficit remains troublesome;
growth is still slowing, which has resulted in a scenario of
potential stagflation going forward.
While the structural integrity of the Indian economy is
questionable, there are still a number of Indian-based companies
that are able to thrive. In particular, companies that derive the
majority of their revenues from abroad are positioned to outperform
other Indian equities over the medium-term. Car manufacturer Tata
Motors (
TTM
,
quote
), especially through its Jaguar-Land Rover division,
is a good example of one such company
. As well,
information technology firms
like Wipro (
WIT
,
quote
) and Infosys (
INFY
,
quote
) that generate much of their revenues from the U.S. and Europe are
less exposed to Indian economic weakness.
On the other hand, firms with large domestic exposure could
underperform. Sectors such as financial firms like ICICI (
IBN
,
quote
) and HDFC (
HDB
,
quote
) will be adversely affected by a rupee that is perpetually
decreasing in value when their ADRs are denominated in a
strengthening dollar. As well, banks are likely to see smaller loan
growth and potentially more defaults if growth continues to slow,
as Goldman Sachs projects.
Telecommunications firms like TCL may suffer both because of
rupee exposure, but also because
the government's interference in the sector has placed these
companies under pressure
.
In sum, investors looking to put money into India must be
mindful of the structural pitfalls plaguing the economy. In order
for India to return to growth, efficient policymaking and effective
economic management must materialize. Until then, investors should
lean towards Indian stocks with significant foreign exposure.
Disclosure: Author's immediate family is long EPI and
TTM
