Monday, September 21, 2009

India - The Trillion-Dollar Opportunity

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Why does India sell one million motorcycles in a month? Why does the demand for cars in the country grow by 30 per cent and the same for Maggie noodles rise by 25 per cent annually?

And, why has India become the fastest-growing cellphone market in the world? This is because India is moving from being a trillion-dollar economy to a two trillion-dollar one in the next six years.

In 1950-51, India's GDP stood at Rs 10,000 crore (Rs 100 billion), which translated into a per capita income of Rs 285 when distributed among a population of 350 million.

For 2008-09, the country's GDP stood at Rs 54 lakh crore (Rs 54 trillion), translating into a per capita income of Rs 48,450, thus resulting in a compounded annual per capita income growth rate of 9.25 per cent during 1951-2009.

India achieved its first trillion-dollar GDP in 2007. It took India 60 long years after Independence to move up to a Rs 42-lakh crore (Rs 42 trillion) GDP. As per current estimates, we should touch a nominal GDP of Rs 100 lakh crore (Rs 100 trillion)by 2015, and if the rupee-dollar exchange rate remains stable, the next trillion-dollar economy will be born in seven-eight years.

The journey doesn't stop here, rather it picks up further momentum. The next doubler comes in after another seven-eight years, thus elevating India's GDP to $4 trillion (roughly Rs 193 lakh crore or Rs 1.93 trillion) before 2025. The significance of this transition lies in understanding how this linear event will impact businesses.

The structural change that will be witnessed during this journey is that the basic needs of human life will be taken care of by the initial $600-700 of income. At present, with a savings rate of over 35 per cent, the discretionary spending in the economy is $100 per person.

However, as India's per capita income rises to $2,000 and the country moves from the category of 'low-income' to 'middle-income' nations, the discretionary expenditure in the economy would experience an exponential growth.

For instance, if we analyse the consumption pattern of 70 different economies and segment them into low-income, middle-income and high-income brackets, we will observe that consumer spendings on food, beverages and clothing & footwear account for 47 per cent, 34 per cent and 22 per cent of their total consumer expenditures, respectively.

On the contrary, consumer expenditures of the three categories of countries on discretionary items, including cultural and recreational activities, account for 13 per cent, 19 per cent and 28 per cent of their total consumer spends, respectively. This implies that discretionary spending by the Indian consumer will grow manifold in the next five years.

Indian consumption of durable as well as non-durable items has been just a fraction of the consumption average of emerging markets.

This is purely an affordability issue. As and when affordability catches up with the prices of consumer goods, the pent-up demand gets released. And, such demand keeps growing for many years.

This change can be engineered even by reducing product prices. However, in the absence of product price deflation, affordability will take its own time to increase.

The emergence of the next trillion-dollar economy will dramatically change people's income level, resulting in steep acceleration in demand for many goods and services. We have seen telecom penetration rising from 4 per cent in 2001 to 40 per cent in 2009. This quantum jump could come about due to increased affordability in wireless telephony.

The corporate sector -- automobiles, processed food, fashion clothes, advanced communication, healthcare, transport, entertainment and financial services among others -- is not there to provide the basic needs of the economy. It is there to provide value-added goods and services to the people at large.

In fact, financial services will be one of the biggest success stories out of India. The savings rate has climbed to 37 per cent of GDP in 2007-08. In India, credit is not directed towards boosting consumption, but is channelised towards funding government deficits.

This has kept the private sector credit-to-GDP ratio in the economy at a lower level of 52 per cent compared to 100 per cent for China, 300 per cent for the US, 200 per cent for the UK, 145 per cent for Europe, 166 per cent for Japan [ Images ] and 140 per cent for Australia [ Images ] (2008 figures).

We are likely to witness many changes in government policies over the foreseeable future. These changes may include encouraging consumption in order to hold the savings rate at not higher than 40 per cent. Even at this rate, India is going to emerge as one of the largest saving nations among the developing countries with a saving of about $1 trillion per annum before 2020. So, the opportunity for savings deployment is going to be gigantic.

At present, physical infrastructure (roads, ports, housing, etc.) deficit is immense. As affordability increases, spends on personal and public infrastructure will boom. Demand for cement, steel, automobiles etcetera will grow at a pace not seen in the last 20-30 years.

The government's own projection pertaining to infrastructure spending in the 11th Plan period is staggering. The intention is clearly to accelerate infrastructure spend matching with the GDP growth aspiration.

There is a lot of gap between the current infrastructure spend and the desired level of expenditure in order to meet the aspirational level of GDP growth. The catch-up game in the next five-six years will mean a 15-20 per cent growth in every aspect of construction activity.

Analysts and economists have been drawing their own conclusions on how consumers and the economy responded when the economy was at half-to-a third of its current GDP size. But how they will respond in the next five-ten years requires a very different kind of thinking by everyone.

Politicians should tailor policies keeping this development in mind. And, for investors, it is probably one of the biggest macro-opportunity. A perfect setup for long-term investing.

The author is the co-founder and director of Motilal Oswal Financial Services Ltd. The views expressed are his own.

Raamdeo Agrawal


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