India on the road to becoming financial world powerhouse

Published on Friday 28 August 2009 19:23

WHEN economists talk about developed and developing countries we should remember that, not so long ago from our perspective, the US was a developing country.

There were no highways in the US until President Eisenhower decided that an inter-state highway system should be built. By 1962, 14,000 miles were completed and three years later, highway miles increased 50 per cent. The rest, of course, is history.

When governments decide to invest substantially in a nation's infrastructure, it creates investment opportunities for the canny investor. Around 50 years ago, as the US highway system gathered momentum, opportunities sprung up for car manufacturers to produce more vehicles and increase profits.

Anybody investing in General Motors stock in 1962 doubled their money inside three years. But even better than that was when Ford introduced the model T in the first decade of the 20th century, when stockholders doubled their money in just over one year.

Today there's a developing country which has announced an initial spending programme of $88 billion on highways. No, not China – it's India.

In 2003, Goldman Sachs predicted the Indian economy would be larger than that of the UK by 2020. It also estimated that by 2040 it would be the world's third largest economy. But India is in fact ahead of these forecasts.

Right now it's the second largest growing economy in the world and the largest democracy, with the recent elections creating more economic and political stability. The chances are that in not too many years to come, investors will view it as a developed economy.

In the past 20 years, the Indian economy has quadrupled in size. But the announced spending spree on highways is just the beginning – there are also plans to spend a total of $500 billion over the next five years on housing, airports, power stations, ports as well as road infrastructure. And with roads come vehicles. Over the next few years it's expected that car sales in rural communities alone will increase fivefold.

But perhaps the main reason why the future looks so bright for India is favourable demographics. Already 60 per cent of the population is of working age and this will continue to rise over the next ten years. Productivity is soaring, thanks to the highly intelligent young workforce at ease with technology.

On the recent Forbes' list of the richest people in the world, the highest ranking Chinese billionaire was 390th. The highest ranking Indian billionaire is fifth. Measured in US dollars, China has 20 billionaires but India already has 36, half of whom are richer than the richest Chinese billionaire.

Of the 36 Indian billionaires, 14 became billionaires last year alone. And new millionaires are being created at the rate of 47 a day. Interestingly, within the past couple of years of imploding and volatile stockmarkets, developing countries or emerging markets have represented a safer haven for investors.

How many of us have a significant amount of investment in emerging markets, never mind India? So perhaps it's time to increase investment into one of the fastest growing world economies.

A few bob in the direction of India would be a good start down the road to better investment returns.

&#149 Alan Steel is chairman of Alan Steel Asset Management in Linlithgow.