INDIA’S GROWTH

THREATS TO INDIA GROWTH STORY

Motilal Oswal

The Economic Times, December 22, 2010

The GDP growth of 8.9% in 2QFY11 is a resounding validation of the India growth story. India has effectively endured a global crisis and the worst drought in 30 years. It continues to be one of the fastest growing economies - its GDP is likely to grow at ~9% in FY11 and well into FY12.

With nominal GDP growth of 14-15%, at constant exchange rates, India's next trillion dollars (NTD) will come in just five-seven years. We juxtapose the NTD idea with the GDP growth of China to arrive at India's GDP of almost $5 trillion by 2020. India's current gross domestic saving is at 34% of GDP. In line with the long-term trend, we expect this to rise to 40% by 2020. This translates to cumulative decadal saving of over $10 trillion, compared with $2.7 trillion during the current decade. The large savings pool presents a huge opportunity for many businesses.

India enjoys a special demographic advantage. With over 200 million households, India is not only a huge consumer market but also an attractive investment destination. However, the journey is unlikely to be smooth - a number of speed-breakers and roadblocks will be encountered along the way. The fallout of the lack of radical reforms has shown up in high consumer inflation which, though trending down, continues to persist. The rising global commodity prices are adding further fuel to the fire. Interest rates are headed up. The speed with which the reforms process is progressing is less than desirable. Macroeconomic and business headwinds apart, markets have reason to be concerned about the serious and relentless issues of corporate and political governance, which India is currently embroiled in.

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