India reaps rewards

Investors flock to a more liberalized economy

The Indian market is on a bull run. Year-to-date Sept. 30, it was the second-best-performing emerging market on the Morgan Stanley Capital International Index, behind Malaysia, with a return of 63.5% in U.S. dollars.

Market growth is being fuelled by economic liberalization and corporate restructuring initiatives, which initially began in the early 1990s, but picked up steam about two years ago. Since 1994, India’s GDP growth has averaged 6.7% a year and is set to remain above 5% heading into the new millennium.

Economic liberalization led to the dismantling of the country’s licensing regime and a dramatic reduction in tariffs. These measures removed barriers of entry to the Indian market and were subsequently supported by the relaxation of foreign ownership restrictions. Tariffs were reduced from an average of about 130% in 1990 to 34% today, while the foreign ownership threshold was raised to 51% from 40% in 1991 and is now higher in selected sectors. Currently, the entire Indian market is open to foreign investors, except defence and other strategic areas.

As a result, more foreign investors have entered the Indian market in a wide range of industries, including electronics, engineering, chemicals, finance and consumer products. Foreign direct investment has grown to more than US$3 billion in 1998 from less than US$100 million. Market reforms also spurred increased competition among domestic businesses, causing corporate restructuring and improved governance.

The regulatory environment, in an attempt to help stock market investors, was dramatically improved in the financial sector. As well, measures were introduced to allow greater participation in the country’s equity and mutual fund markets. Foreign investors can now invest in the once government-dominated mutual fund industry, a move that has led to a sharp increase in the number of mutual funds. Removing government control over the issuance of new shares has raised the number of equity issues.

22 stock exchanges
India currently has 22 stock exchanges, with more than 8,000 listed companies. The Bombay Ex-change is by far the largest, followed by the National Stock Exchange. In terms of listed companies, it is second to the United States and has the third-largest market capitalization in Asia.

Canada maintains strong trade ties with India. Two-way trade amounted to $1.3 billion last year, with India enjoying a favourable trade balance of $509 million. Canada’s department of Foreign Affairs and International Trade sees good opportunities for Canadian businesses in India in advanced technology and systems, agriculture and food products, as well as environmental products and services, mining, power, oil and gas, and transportation systems. Several large Canadian corporations, among them Bank of Nova Scotia, Toronto-Dominion Bank, Seagram’s, Newbridge Networks, and Quebecor, now operate in India. Canada is currently engaged in negotiating a foreign investment protection agreement with India that will address aspects such as transfer of funds, transparency, ownership and control, taxation and dispute settlement mechanisms.

Two specialty Indian mutual funds operate in Canada: Excel India Fund and AGF 20/20 India Fund. At the end of the third quarter, the Excel India Fund was up 93.1% year-to-date, while the AGF 20/20 Fund returned 62.7%.

One of the key advantages of investing in India is its weak correlation with the U.S. and other major Asian markets. During the 1997 Asian slump, India was one of only three markets (the other two being Pakistan and Sri Lanka) to emerge relatively unscathed and produce positive returns for the year. Still, as India’s dependency on exports and foreign investments increases, it is likely to experience the impact of cyclical downturns in its major trading partners.

As the world’s second most populous nation, India has one of the largest pools of skilled but cheap labour. The country’s growing middle class of 300 million represents a huge opportunity for the consumer goods sector and also represents one of the world’s largest investor bases. These factors bode well for India.

India has come a long way from its corrupt and bureaucratic past. Investor confidence has improved significantly with greater accountability and improved regulatory controls. Sustaining the country’s growth will require continued policy reforms to eliminate excess capacity stemming from corporate restructuring and liberalization initiatives, enhance productivity and consolidate efficiency gains in sectors in which it has developed a competitive advantage.

Politically, the country now has a majority government (elected last month). But a military coup in neighbouring Pakistan, also last month, could spell trouble for India. Historically, domestic tensions have not had a significant impact on the market, but this could change if there is open conflict with Pakistan.

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

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