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Web-only Exclusives November 30, 2000 From Our Correspondent: Hirohito and the War A conversation with biographer Herbert Bix From Our Correspondent: A Rough Road Ahead Bad news for the Philippines - and some others From Our Correspondent: Making Enemies Indonesia needs friends. So why is it picking fights? |
DECEMBER 24, 1999 VOL. 25 NO. 51
Better Than You Thought
But caution is still the best approach to India
photo: Munshi Ahmed for Asiaweek |
India has always been seen as a peripheral market in Asia. Is it time that India was re-rated and given better weightings in the MSCI and other global indices?
India's stock market capitalization is [nearly] $190 billion, which is roughly the same as Singapore and about 40% bigger than Malaysia. The capitalization, however, is spread over a significantly larger number of companies - 5,843 in India compared with 300 in Singapore and 700 in Malaysia. While a re-rating may be justified on the basis of market capitalization, there are other factors [to consider]. First, the investable share of the total market is limited. Only foreign institutional investors (FIIs), not individuals, may invest in the market, and they are limited to 30% of a company's share capital. Also, a single FII is not allowed to own more than 10% of a company's share capital. Finally, the market's performance during the last three or four years has been mixed. It is only in 1999 that the market has climbed sharply.
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It is now apparent that the Indian economy has moved to a higher growth plateau compared with its pre-1991 and pre-economic-reforms performance. GDP growth has averaged a very respectable 6.8% during the last five years ending March 1999 - a major step up from the so-called Hindu growth rate of 3.5%, which the economy experienced in the 1970s and 1980s. Industrial production increased by 7.6% in September 1999 compared with 2.8% in the same month a year ago. Exports climbed by almost 22% in U.S.-dollar terms in October 1999. Given these trends, overall GDP growth of 5.5% to 6% in the fiscal year that ends March 31, 2000 appears fairly likely. GDP growth will probably accelerate to over 6% in the following year.
Until the recent elections, some foreigners have been reluctant to make big bets on India because of revolving-door politics. Do you think the results of the last ballot will change perceptions?
Increasingly, there is a separation between economics and politics. We have seen this trend in other countries and it now appears to be unfolding in India. More than politics per se, it is policies that matter - and for most purposes, economic policies have continued to liberalize regardless of which party is in office. The opening of the insurance sector to foreign investment is a clear example of the present government's commitment to liberalization. Foreign investors need to look beyond the usual hurly-burly of politics and focus on overall direction.
Are we going to see a wave of privatization and increased liberalization from this BJP government?
It is certainly helpful for any government to have a large majority in parliament, which it can use to push through policies. Having said this, one must keep in mind that privatization has been politically difficult in most countries around the world. It is no different in India - maybe more difficult given that it has a truly democratic political system which must represent varied interest groups. Also bear in mind that for any privatization to be successful there must be interested buyers with appropriate financial muscle. I am not certain if the private sector is currently flush with funds to an extent that it can easily take over the units to be privatized.
How much upside is there in Indian stocks? What are the risks that foreign investors should be aware of?
Given the market's more-than-50% rally [this year], it is fair to assume that there will be a consolidation in the next three-to-six months. Underlying fundamentals, especially corporate profits, need to catch up. Longer-term, I can see the [Bombay Sensitive Index] rising close to 6,000 in 12 months' time.
What sectors are looking good and why?
With the exception of consumer non-durables, most other industries this year have grown significantly faster than in 1998. Consumer durables have shown a sharp turnaround, and capital goods and intermediate goods industries [grew at] nearly double-digit levels during the first half of the current fiscal year. Steel, cement, sugar, paper, aluminum, industrial machinery, television sets, and autos and commercial vehicles have been [strong]. The laggards have been synthetic fibers, pharmaceuticals, machine tools, some electrical machinery like generators and electric motors, and two-wheelers.
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