India's economy: The tiger that's actually an elephant
April 30, 2012
Investors have been disappointed by India's slowing growth, and even more sheen came off last week courtesy of S&P's downgrade. Panelists at this Global Conference session on India (full video available here) agreed that the move was justified by the macro picture.

But the speed bumps might have a silver lining, according to the panelists at this Global Conference session on India. They may serve as a wake-up call to the government, which needs to act more thoughtfully and decisively to build the institutions, infrastructure and policy reforms that will underpin long-term growth. British hedge fund TCI's recent lawsuit against Coal India is starting a broad debate about corporate governance, one that needs to happen as the nation's markets evolve and mature.

India's coalition politics may slow reforms, said Apollo's Sanjay Patel, especially since many poor voters are not educated. "Tiger is the wrong word," he said, arguing that a lumbering elephant is a better analogy. Growth will be constrained by the complexities of its democracy.

Having the world's largest young population is a great asset, but it can be a great liability, said educator Ryan Pinto. Lack of access to education - and the quality of education - is still an issue that impacts India's workforce.

Gaurav Dalmia of GTI Capital concurred, noting that a shortage of trained talent is a big problem in India aEUR" one that's causing many companies to resort to spending millions on building their own in-house training programs or industry-specific training institutes.

Education is just one aspect of social and physical infrastructure that is inadequate to India's population and growth trajectory. A lack of logistics keeps food prices high, and there is significant difficulty in moving goods. China is addressing infrastructure more effectively, Patel said.

Despite India's current growing pains, economist Ragurham Rajan cautioned against losing sight of its long-term potential. Its dependency ratios and growth in investment and productivity are at precisely the point at which other Asian economies took off. "There is plenty of low-hanging fruit still to be plucked," he said, pointing to the big impact on productivity that is achieved as low-wage agricultural workers move into rural industry and other services.

India is a 20-year growth story, and because it is largely built around domestic demand, this can translate into good news three to five years from now if India can provide supply and create the right business environment. In addition, trade between India and China is exploding, creating economic integration that may enhance geopolitical stability.

While many investors have lost their euphoria about India, the country's current slowdown may provide an entry point for contrarians. Back in 2007, when the market was bullish on India, Dalmia recalled quoting Yogi Berra's line that "no one goes there anymore - it's too crowded." But today valuations are more reasonable, and there's better upside. Patel took a similar view, arguing that "if you believe in India's long-term potential, now's a good time to buy." Solid companies are going at attractive prices.

Residential real estate is a particularly booming area, given the vast demand for decent housing among such a huge population. And that doesn't necessarily spell the presence of a bubble. India has a very conservative banking sector that came through the financial crisis in good shape, said Patel, and banks don't lend to the real estate sector. There may be localized bubbles in the biggest cities, but the broad demand is real.

Despite the current pessimism in the markets, Pinto insisted that there's great optimism on the ground in India. Economic growth is a work in progress. Every office in Mumbai has a buzz that's infectious, and every poor farmer is pushing for his child to have a better life. India's great sense of aspiration, he said, is ultimately the force that will push the economy forward.