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Investing In India: A Passage To Profitability

Taj_Mahal_(Edited).jpegIt is time for investors to consider an investment in India. The big impetus for change arrived with the election of Narendra Modi in May of 2014. The new Prime Minister Modi had put forth a business friendly agenda that went much further than the initial moves put in place during the last two years of the political opposition. Many multinationals are now considering an investment in India as a passage to profitability there is now a possibility. The year 2015 will see a surge in foreign investment. The country has a relatively young population, and although it is considered poor, the GDP (Gross Domestic Product) is supposed to double by 2021.

Investing in India is a challenge to be sure. There are more hurdles to doing business than in most other emerging markets. The World Bank for example, lists India near last in the ease of doing business at 142. This is because it is difficult to enforce contracts due to numerous permits, licenses and regulatory approvals. Rampant corruption only makes the situation even more difficult. Internationally, bribery and fraud have become accepted part of the cost of doing business in India.

In 2014, more than two thirds of all foreign investment in India has gone to the service sector. Less than 20% went to industry and just under 14% was invested in business associated with agriculture.220px-Ploughing_with_cattle_in_West_Bengal (1)

One of the impediments in doing business in India is that Foreign Direct Investment (FDI) is capped across key sectors of the economy.

A easier path to entry and profitability in the Indian market is to partner with a domestic business. This does not always work. The most widely publicized case recently, was the ending of the joint venture between the American company Walmart and Bharti Enterprises. Although the law allows big retailers to open operations in metropolitan areas of over 1 million inhabitants, local politicians can nix a deal regardless. The organized opposition against a large retailer like Walmart was impressive. Many local businesses in India did not welcome this new competition, so they moved to stop it. In the long run however, this kind of maneuver will become more difficult as the national government hungry for investment, will increasingly overrule local authorities. Change of course despite the rhetoric of the central government will take time.

$1 Trillion USD To Be Invested In Transportation In The Next 5 Years. Half Will Come From Private Investment

$1 Trillion USD To Be Invested In Transportation In The Next 5 Years. Half Will Come From Private Investment

The question for many investors is where to place an investment in the country? The critical need in India right now and one the new government has promised to address is infrastructure. It is particularly the case in transportation. The writer can personally testify to this fact, having traveled around parts of India during 2012 and 2013.

The promise of fewer deterrents on business should also help recharge the economy, as the rising Indian consumer class makes greater demands on the economy and the government. Economic growth stalled in 2013, to just 4.7%. It was about half the rate that had existed in 2011. Forecasts for expansion are looking for a rise to 6.5% by 2016, which is almost equal to the rate of growth in China.

Foreign investment in the banking sector has been particularly acute over the last three years as more local banks become increasingly commercialized. However, one must be aware that foreign ownership is capped at 74% in all private banking. The same type of cap exists in the Indian defense contract sector. In this industry, foreign ownership is limited to just 49% allowing Indian businessmen majority control.

This restriction in ownership is across various sectors of the economy that are deemed of critical nature to the welfare of the country at large. These include mining, public transportation, and energy. An easier way to enter the Indian market is through what is called GDR (Global Depository Receipt). This is a device used by Indian industries to raise capital for investment overseas. This allows the investor a financial claim to the profits the company produces.220px-India_(orthographic_projection).svg

The recent governmental changes to foreign investment allow more expedient approval, if the money to be invested is in a industry that the government considers a priority. There are fortunately, a total of 35 such sectors identified.

India at present compares favorably when compared to projected slowing growth rates in Brazil, China, Russia and South Africa. Collectively along with India, they are known as the BRICS.

As growth quickens in India it is likely that the present $25 billion USD (United States Dollar) that comes to the country on an annual basis through equity investment, will be maintained or even expanded.

It is important to note that India is less dependent on exports to drive economic growth. There is a huge internal market that is just waiting to be tapped as the wealth of a rising consumer class expands.

Prime Minister Modi With Russian President Putin At BRICS Summit

Prime Minister Modi With Russian President Putin At BRICS Summit

The hope under the new Indian government of Prime Minister Modi is that the new investment made with public funds, will kick start new opportunities in the private sector. The large governmental projects will provide new income to countless Indians who will spend this money in the domestic economy, which it is hoped will propel further growth and investment. Higher demand will induce domestic businesses to pay the inputs necessary for expanding production.

India is likely as the rest of the world has mostly done, that is to continue to lower the rate of interest to facilitate more borrowing and therefore greater investment. In anticipation of further easing by the Central Bank, local banks are already lowering rates on customer deposits. The lowering rates of interest are more feasible now, with the lowering cost of living increases. Inflation for 2014 averaged just 6.65%, which is lower than the above 9% rate from the preceding 2 years.   This will assist the corporate bottom line in India for revenues and profits. This rise in corporate earnings will in turn attract even more foreign investment. It makes Indian companies more valuable, especially in a market where stocks in many companies are still relatively cheap.

Indian GDP Trends By Sector

Indian GDP Trends By Sector

India is the 10th largest economy in the world and the 3rd largest in PPP (Purchasing Power Parity). The GDP in 2014 is nominally just over $2 trillion USD. In PPP it exceeds $7 trillion USD. GDP growth in 2014 averaged 5.5% for the year and it is predicted to rise in the upcoming year.

The population of India is in excess of 1.264 billion making it the second largest after China in the world. It comprises 17.5% of the total global population. The problem for India is the low GDP per capita both nominally and in PPP at $1,625.00 USD and $5,777 USD respectively. Statistically it puts India at the 130th and 127th rank in these categories world-wide. In other words, India as a whole is a poor country. The World Bank puts 179.6 million Indians below the poverty line. The Reserve Bank of India has an even higher level of 22% of the population in poverty.

The GDP by sector is 64.8% of the population is presently engaged in services, industry is 21.5% and agriculture comprises the rest at 13.7%. The labor force is in excess of 487 million. Of this huge number 49% are engaged in agriculture. The rest of the working population is engaged in industry with 20% of the total and services with 31%. Unemployment although hard to monitor and measure is estimated to be 3% in the urban areas and 2% in the countryside.

April_2013_to_March_2014_Export_commodities_from_India,_by_percent_value_in_US$ (1)The main industries of the country consist of agriculture, cement, chemicals, construction, machinery, mining, petroleum products, pharmaceuticals, software, steel, textiles and transportation equipment.

India is among the top 20 global traders in the world. The country is the 19th largest merchandise and 6th largest services exporter in the world. Services is the fastest growing part of the economy in recent years.

If one is looking to enter the Indian market it is important to know that Mumbai is the trade and financial capital of the country, with the state of Maharashtra contributing to the highest amount among all the states, towards the GDP of the country.

Total exports as of 2013 were listed at $464.2 billion USD. Of these $313.2 billion was merchandise the rest at over $150 billion USD were in services.

Major export partners are the European Union at 16.7% of the total trade followed by the United States at 12.5%. The United Arab Emirates is 3rd at 10.1%, China with 4.9% and Singapore coming in at 4.2%.April_2013_to_March_2014_Import_commodities_from_India,_by_percent_value_in_US$

Total imports equal the equivalent of $590 billion USD. Of that, $466 billion USD is in merchandizing the rest comprises services.

Major import partners are comprised of China with 11.1% of the total. This is followed by the European Union at 10.6% and Saudi Arabia with 7.9%. The United Arab Emirates and Switzerland come next at 7.1% and 5.3% respectively.

As one can clearly see India is running a sizable trade deficit.

Mumbai India

Mumbai India

Foreign Direst Investment is now in excess of $150 billion USD. Foreign Reserves stand at $320 billion USD and the credit rating of the country is in the BBB- range. The outlook for the country is rated stable.

An investment in India at this time makes sense if one is eying the potential of future growth in a huge domestic market that is largely untapped for many consumer goods. If one has a knowledge of the needs and tastes of the Indian consumer, there is a good profit potential in the next few years. In short, India will become wealthier in the decades ahead, with many new consumers demanding both domestic and international goods at an expanding rate.

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