Practical analysis for investment professionals
14 January 2014

India and the Road Ahead

With economic growth at a decade low of 5% and a bevy of lagging economic indicators, India has had a rough year, and some analysts are predicting harder times ahead. Is the era of India’s expansive economic growth over? Opinions on the road ahead are divided.

Later this week, such luminaries as Avinash D. Persaud and Fereidun Fesharaki will convene in Mumbai for this year’s India Investment Conference to discuss the short- and long-term outlook. Speaking at last year’s conference, Clint R. Laurent argued that, despite its many advantages, India’s huge population will not automatically translate into any demographic dividend to benefit investors. The underperforming educational system and the threat from automation mean that India needs to work hard to leverage its low-cost labor force in new ways, strategically positioning itself as a global provider of high-quality goods to the affluent. In the coming decades, India is predicted to have a fifth of the world’s working-age population. Despite this advantage, a weak labor market and political impasse means the country may squander this demographic advantage as it neglects to fully develop its middle class.

Particularly mystifying to outside investors is India’s thirst for gold imports which is sufficient to regularly jolt global gold prices. Despite government intervention, Indians continue to hoard gold on an epic scale rather than directing capital to more useful purposes for example entrepreneurial investment, capitalizing their banking system, or enlivening consumer spending multipliers. In an address to a CFA Institute conference titled “The Truth about Gold: Why It Should (or Should Not) Be Part of Your Asset Allocation Strategy,” Fuqua School of Business Professor Campbell R. Harvey, suggests that most arguments for holding gold in a portfolio are not supported by an analysis of the data. Nonetheless, an argument can be made for including gold as a commodity in a well-diversified portfolio, particularly if investors and central banks increase their demand — even moderately — for gold. A series of remarkably popular Enterprising Investor blog posts have explored the topic of gold in some depth over the past year.

Academic research focused on India reflects the scarcity of reliable data on the country, but recent research has evaluated the issues of BRIC-country ethics and the impact of local versus international investors. In one study published in the Journal of Business Ethics, the authors investigate the use of favors to accomplish business goals by firm managers. They argue that the ethicality of the favors should be not be viewed solely from a developed-country perspective but rather by using the moral reasoning of the developing country in question. The giver and the receiver of the favor, as well as network insiders and outsiders, are defined as stakeholders by the study.

In another study by a pair of Australian researchers, the authors conclude that local investors can affect how information is incorporated into stock prices in their own country and that this “local investor information effect” differs in its power by country. High levels of individualism by local investors are associated with overconfidence, self-attribution biases, and a preference for risk, something it could pay international investors to be wary of.

A CFA Institute book review of The Growth Map: Economic Opportunity in the BRICs and Beyond, by British economist Jim O’Neill, notes the author’s prediction that by 2050, the world’s largest economies will not be the G–7 nations but will instead include several countries currently considered emerging markets. India is tipped to grow out of the emerging market investing bucket, yet with such strong prospects, why are emerging markets recently slumping so badly? For India, the answer may well be its relatively weak economy which suffers twin deficits, both current and external. According to a recent piece in the Economist, prospects for a revival of India’s economy are unclear. It appears that the measures being taken by India’s government are geared towards keeping the economy afloat, but deep-rooted reforms will have to wait until after the elections in 2014.

These recent CFA Digest summaries and related resources of interest to readers are summarized below:

  • India’s Opportunities in Tomorrow’s World: India’s rapidly growing population will not automatically translate into a demographic dividend. The country must address its underperforming educational system and the threat of losing unskilled jobs to robotics. India can succeed by leveraging its low-cost labor force and strategically positioning itself as a global provider of high-quality goods to affluent consumers.
  • The Truth about Gold: Why It Should (or Should Not) Be Part of Your Asset Allocation Strategy: Most arguments for holding gold in a portfolio are not supported by an analysis of the data. Nonetheless, an argument can be made for including gold as a commodity in a well-diversified portfolio, particularly if investors and central banks increase their demand — even moderately — for gold.
  • Did the Gold Standard Work? Economics Before and After Fiat Money: In many corners, gold was seen as the cure-all for the weakening dollar. Mark Harrison, CFA, takes a step back from the heated debate to ask: How is a classical gold standard supposed to work? How did it actually work out in the past?
  • Start Me Up: Prospects for a revival of India’s economy are unclear. It appears that the measures being taken by India’s government are geared toward keeping the economy afloat, but deep-rooted reforms will have to wait until after the elections in 2014.
  • India, Education, and Economic Growth: The Indian government’s focus on education reform and economic expansion not only may help the country recognize its potential to become an economic power but also will facilitate the CFA Institute mission in that market.
  • Leading from Behind: With such strong prospects, why are emerging markets slumping so badly?
  • Book Review: The Growth Map: Economic Opportunity in the BRICs and Beyond: The author summarizes past research on the BRICs and other emerging markets and predicts that by 2050, the world’s largest economies will not be the G–7 nations but will instead include several countries currently considered emerging markets.
  • A Stakeholder Approach to the Ethicality of BRIC-Firm Managers’ Use of Favors: The authors investigate the use of favors to accomplish business goals by firm managers in Brazil, Russia, India, and China. They argue that the ethicality of the favors should be determined by the moral reasoning in these countries rather than by using a developed country perspective. The giver and the receiver of the favor, as well as network insiders and outsiders, are defined as stakeholders.
  • India: Summary of Current Shareowner Rights: Standards and practices can differ dramatically throughout the world’s financial markets, and shareowners must know their rights in the markets where they invest. Shareowner Rights across the Markets is designed to provide shareowners a clear understanding of their rights, current practices, recent developments, and legal and regulatory frameworks in 28 jurisdictions around the world.
  • The Information Content of Stock Markets around the World: A Cultural Explanation: The information content of stock markets seems to be higher in countries with investors who are more individualistic and less likely to avoid uncertainty. The authors explore whether these differences in information content are the result of cross-country cultural differences.

If you aren’t able to attend this year’s India Investment Conference, tune in to watch live broadcasts of Avinash D. Persaud’s presentation “The End of Quantitative Easing, the Outlook for Emerging Markets and the Rupee” and Fereidun Fesharaki’s presentation “A Changing Global Energy Landscape — Implications for India.”


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©iStockphoto.com/joeravi

About the Author(s)
Mark Harrison, CFA

Mark Harrison, CFA, is director of journal publications at CFA Institute, where he supports a suite of member publications, including the Financial Analysts Journal, In Practice summaries, and CFA Digest. He has more than 12 years of investment experience as a portfolio manager and securities analyst. Harrison is a graduate of the University of Oxford.

4 thoughts on “India and the Road Ahead”

  1. JM says:

    nice read

  2. bdeora says:

    This is so resourceful. Thanks BD

  3. Nroop Bhavsar, CFA says:

    Political instability and socioeconomic constraints are the biggest roadblocks investors are facing now. And if I am not wrong, this is the usual case about investing in emerging nations. I believe that national election which is taking place in early summer 2014 will play important role. Certainly, GDP growth has been the lowest in decade, but there is no need to panic according to me.

  4. K G Surendran says:

    We will have to wait for the 2014 general elections for a clearer picture to emerge, if a strong government is voted in then the Indian economy can be expected to take off in a couple of years, but if it is a rickety coalition then India and investors are staring at a dark hole of uncertainty. Indians love gold primarily because of the absence of a good social security system, so from time immemorial they leverage their family gold holdings to tide over good and bad situations, besides it personifying wealth. However, what stymies India’s growth story, despite being domestic driven, is its federal structure run by a multi-party polity where ushering in commonsense policy change on the economic and administrative front is a gargantuan task often met with resistance for purely political reasons, since the various political parties are in a 24×7 competitive mode in a marketplace bereft of any rules. However, considering it is a vibrant and noisy democracy, where more often than not rule of law prevails, economic growth will be the winner primarily driven by the education centered entrepreneurial ambitions of its burgeoning population but the road is littered with a series of speed breakers, the kind that we see on Indian roads.

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