Published:
February 7, 2009
Prime Minister Benjamin Disraeli
of Britain was the first to call India the jewel in the imperial crown.
And he had good reason; The U.K.'s trade with India generated enormous
wealth for Great Britain.
In the 19th century, roughly 20,000 British troops and officials
controlled India's population of 300 million. Then as now, India's vast
population was a great asset; Britain set up factories in the
sub-continent to take advantage of the labor pool. And it's estimated
that as much as 20% of Britain's exports were ultimately destined for
its Indian colonies.
Trade flowed both ways -- India exported tea, spices and other valuable
commodities back to the U.K., much of it for re-export elsewhere in
Europe. In fact, India was so important to the British that many see its
independence in the 20th century as the death knell of the empire that
once appeared so invincible.
Today a thriving, independent India still
generates enormous wealth for well-placed investors. India's nearly 1.3
billion people represent a huge, low-cost labor pool. Even better,
around 300 million Indians are part of a fast-expanding middle class of
educated, skilled workers. This invaluable human resource has allowed
India to become a world leader in industries as diverse as generic drugs
and software.
India is also the world's most populous
democracy and has an effective legal system, much of its based on
British traditions. And there's another invaluable vestige of the
empire: For many Indians, English is a second language, helping to ease
communications and trade with the West.
The country's high-tech sector has been one of the growth leaders of
India's expansion. According to data from the National Association of
Software and Services, India's information technology (IT) sector grew
at a +28% annualized pace in the fiscal year ended March 2008. In this
fiscal year, growth is likely to top +15% despite the sharp slowdown in
the global economy.
But that's not to say that India is a totally export-driven economy. The
country's burgeoning middle class is now generating enough disposable
income to kick-start domestic demand. Just as in developed nations,
India's middle class is buying automobiles and homes, as well as
spending on family holidays within India and abroad. For the first time
ever, Indian banks are offering credit to consumers in the form of home
and automobile loans -- credit growth has helped to fuel domestic
spending.
The combination of strong growth in exports and emerging domestic demand
has powered India's economy over the past few years, with growth
hovering near +9%, as you can see from the chart. Of course, like all
countries, India has seen the impact of the global credit crunch and the
most severe slowdown in the global economy in more than 20 years.
 But
it still offers one of the highest growth rates in the world, and
despite that, investors have sold off Indian stocks, leading to
attractive valuations.
According to data from the Reserve Bank of India, foreign institutional
investors (FIIs) pulled some $13 billion out of India in 2008, the first
outflow of foreign capital in 11 years. This contributed to a severe
sell-off in India's benchmark SENSEX Index last year.
In the short-term, two other factors have pushed India's market lower.
First, the recent terrorist attacks in Mumbai, India has strained
relations between the nation and neighboring Pakistan. Secondly, the
discovery of a major fraud at IT firm Satyam (NYSE: SAY) has shaken
confidence.
But fraud is certainly nothing unique to India -- the cases of Enron and
WorldCom suggest that the U.S. is also vulnerable to these problems.
Meanwhile, India-Pakistan relations have calmed somewhat since last
year's terror incident.
There are reasons for optimism; in fact, India is in a better position
than most emerging nations to weather the current economic tsunami and
generate strong growth. Consensus estimates suggest the Indian economy
will begin to re-accelerate as early as the third quarter of this year.
Even better, some of India's best-placed stocks are trading at bargain
valuations, offering investors an outstanding opportunity to buy into
the stellar long-term growth potential of India at an attractive price.
With these points in mind, I believe now is an excellent time to take
advantage of short-term weakness and buy into the Indian growth story.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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Paul Tracy co-founded StreetAuthority.com and became the firm's
Chief Investment Strategist in 2001. He also co-founded TopStockAnalysts.com in
2006. Prior to that he spent several years as Managing Editor at a multi-million
dollar financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also responsible
for equity research and managing a team of seasoned professional financial
writers, researchers and market commentators.
Paul's previous experience includes a position at Robert W. Baird & Co.'s
full-service brokerage operations as well as economic research work on a Money
and Banking project funded by the National Bureau of Economic Research. He has
also spent time doing outside consulting and research for the University of
Virginia, has appeared as a guest expert on several prominent financial radio
shows, and has been a featured speaker at various investment conferences across
the U.S.
Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
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