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Dale Jackson

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Opportunities in India

Dale Jackson

TORONTO (GlobeinvestorGOLD) — One of India’s most popular exports are the horror stories passed on by westerners trying to do business in a country that is trying to get all its economic cylinders firing. Most centre around the nation’s underdeveloped infrastructure — specifically the unpredictable power supply. Rough estimates say up to a third of India’s electricity is obtained for free by illegal hookups to the overburdened power grid.

Bhim Asdhir says many of those horror stories are either exaggerated or outdated. As president and CEO of Excel Funds he manages the $50-million Excel India Fund. “The power supply situation has greatly improved since the Indian government privatized electricity” he says. In his frequent trips to India he says he has found that the free market has allowed entrepreneurs to crack down on those who don’t pay for electricity and improve service for those who do.

That’s not to imply the infrastructure horror stories aren’t true. Basic education and health care are unattainable for many Indians and there’s no denying the transportation and communication systems are unreliable by western standards. But change is taking place quickly and Mr. Asdhir, a 41-year old native of New Delhi who came to Canada in 1980, sees a light at the end of the tunnel. “India has made a lot of progress. The current process will take a generation but they are half-way through…they need to build a new India” he says.

And then there’s the government: smothered in bureaucratic red tape and corruption with a dash of paranoia. As an example, foreign resource companies have expressed frustration at the inability to obtain aerial geophysical surveys. Government officials say aerial photographs are banned for “security reasons” which stem from ongoing territorial disputes with neighbouring Pakistan.

Still, Indian Finance Minister P. Chidambaram announced this month that his United Progressive Alliance government would oversee 7-per-cent growth this year. Strong growth has fuelled unprecedented demand from India for crude oil and base metals, straining India’s trade deficit to nearly $24-billion. Fortunately for the Indian economy, that deficit is being partly offset by a $4-billion inflow of foreign funds so far this year, almost half of the record $8.5-billion in all of 2004.

For Canadian investors looking to expand their foreign holdings, Mr. Asdhir sees the greatest opportunity in the emerging Indian middle-class. Over half of India’s population is under 25 years old. Young families are borrowing money, which makes banking stocks a good buy. They’re using that money to buy consumer items, which creates investment opportunities in sectors such as the auto industry. Pharmaceuticals are a growing sector as more and more money flows into research and development.

And of course, there’s the IT sector, which has flourished from outsourced jobs from the United States. Operating costs are between 50 per cent and 70 per cent lower than developed countries. Responding to the flow of jobs from overseas, India-based ICICI OneSource is setting up banking operations in Canada and the United States to serve clients with outsourced business functions.

The banking sector has a large weighting in the Excel India fund. Nearly 9 per cent is invested in the State Bank of India. Other major holdings include Bharti Tele-Ventures, a telecom giant with 11.5 million subscribers. Nearly 11 million customers subscribe to a cell phone service, almost eliminating the need for a land-line infrastructure.

The performance of the Excel India fund reflects the risk of doing business in India. Over the past three years the fund has posted an annual average return of 34.3 per cent. But over the past five years it has lost nearly 5 per cent annually. To get a better idea of the volatility that comes with Indian equities look at the graph below showing performance since the fund’s inception in April 1998. From early 1999 the fund shot up from five dollars a unit to nearly $18 in February 2000. It’s descent was just as rapid, falling back to under six dollars by spring of 2001.

Excel India’s performance since inception

India’s emergence on the global equity scene is often compared to that of China — and for good reason. Both are experiencing a prolonged growth spurt thanks to an emerging middle class. Demand for base metals and natural resources from both countries are boosting global commodity prices. But India and China are very different politically. China is a state-controlled, planned economy. India is a democratic, free-market economy.

Mr. Asdhir says a free market economy will give India an advantage because growth is being driven by domestic business and not foreign multinationals. “Change will come from the top down to a limit. Beyond that the system has to work on its own,” he says.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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