quarta-feira, 9 de abril de 2008

O despertar do elefante.

The Elephant Awakes: The Remarkable Rise of India

Fellow Investor,

Winston Churchill once famously described India as a mere "geographical expression" -- a land that was "no more a united nation than the Equator" -- with more than 35 languages and each language spoken by at least one million people. Churchill would be surprised to find that India has emerged as one of the top growth stories in the 21st century global economy. Today, India has more than 4,500 listed companies -- a stock picker's paradise -- and according to Goldman Sachs, by 2030, India could leapfrog the United Kingdom, France, and Italy to become the world's fifth-largest economy.

That's quite a switch from only a few years ago. And as Indian stock market expert Deepak Lalwani pointed out at last week's London Junto, India has a long way to go to reclaim its former glory on the global economic stage. In 1600, India was responsible for 22.5% of the world's GDP. In 1700, India's per capita GDP was equal to that of Europe. But by 1900, India was reduced to the epitome of a Third World nation -- a symbol of famine, poverty and deprivation.

India's shift from economic basket case to emerging economic power began with market-oriented reforms introduced in 1991. By all outward indications, these reforms have been a spectacular success. India's GDP growth last year touched 9.4% to make the country the second-fastest growing economy in Asia, after China. India today already ranks as the world's fourth-largest economy (in purchasing power parity terms). The recent market correction notwithstanding, India's stock market also has gone up more than fivefold during the last five years, with the index rising from 3,126 in March of 2003 to close at 15,757 yesterday.

The Elephant Awakes: The Secret Is Mindset

There are plenty of reasons to think that the recent correction in India's stock market is just a blip in its inexorable trend upward. This is all thanks to what Lalwani argues was the real reason for India's success: the country's new mindset.

First, the Indian government remains firmly committed to the 15-year-old process of economic reforms. Yes, India's chaotic democracy means that the road to reform will have its bumps and that Indian city skylines are unlikely to rival those of Shanghai anytime soon. But with its high savings rate and young population, India's Planning Commission's estimate that the economy will grow by 9% during the 11th five-year plan period (2008-2012) seems as attainable as ever.

Second, it's hard not to be impressed by Indians' strong work ethic and emphasis on Anglo Saxon-style education. Thanks to the legacy of the English language left by the British, Indians now can cross the globe and integrate with ease into the world of global commerce. Combine this motivation with common law-based legal traditions and institutions, and this gives the country's elite a tremendous advantage over other Asian rivals such as China. These factors oil the wheels of commerce in ways that don't show up in economics textbooks. It's no surprise then that India has the most billionaires of any Asian country -- with 36 collectively worth $191 billion. Fourteen Indians were new to last year's Forbes' annual list of the world's mega-rich.

Third, the spate of cross-border takeovers during the past few years by Indian companies confirms that they have transformed themselves into global players virtually overnight. Tata Steel's $11 billion acquisition of Corus, the Anglo-Dutch steel group, and Vodafone's $11 billion purchase of a controlling interest in Hutchison Essar, the fourth-largest Indian mobile operator, have been among the biggest M&A deals of 2007. And last month's acquisition of two of the most famous brands in the car business -- Jaguar and Land Rover -- by Tata Motors from Ford would have been unthinkable only a decade ago. Indians also are rightfully proud of the achievements of Indian expatriate Lakshmi Mittal who has cobbled together the world's first $120 billion-plus steel company, joining the ranks of the world's top five wealthiest men in the process.

The Elephant Awakes: Cautious in Short Term, Bullish Long Term

Not that India doesn't have its challenges. The government's budget deficit -- once state deficits are included -- approaches 6.5% of GDP. That leaves India in the worst fiscal shape among its emerging market rivals. India's 10-million strong civil service is a huge barrier to growth. Lant Pritchett, an academic at Harvard, calls it "one of the world's top ten biggest problems -- of the order of AIDS and climate change." Soaring labor costs also mean that India is losing its edge as the Saudi Arabia of outsourcing. Duke University professor Arie Lewin estimates that the benefit of cheap labor in Bangalore, India, will be history in three to four years.

In real terms, India's economy today still is an economic minnow -- just about the size of Florida. Close to 300 million people -- approximately the size of the entire U.S. population -- each live on less than $1 a day. Even if income and spending levels triple by 2025, India barely will have caught up with present day Egypt. What about India's much vaunted "middle class" of 300 million? A narrower definition -- families making more than $4,400 per year -- puts that figure at just 58 million. The child malnutrition rate is higher than sub-Saharan Africa. Half of Mumbai's population of 14 million live in slums and lack sanitary drinking water facilities. And India's socialist past still weighs heavily on its economy.

The overall verdict of the London Junto panel? Cautious in the near term, but bullish in the long term on both the Indian stock market and the Indian economy. The recent correction in the market may offer some historic opportunities. Consider that a leading bank in Greece (population 10.7 million) has a market capitalization that is 50% higher than its counterpart in India (population 1.1 billion). That is a discrepancy that is unlikely to last long. India's openness to technology, favorable demography, tradition of democracy, and high-caliber top leadership may yet allow it to displace China as the #1 economic growth story of the 21st century.


Nicholas A. Vardy
Editor, The Global Guru

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