Wednesday, June 6, 2007

India: Not Always Investors Best Friend


Here's an interesting take on India and why it will definitely have some growing pains. I think something not mentioned in the article is the disgustingly rampant corruption that pervades most levels of life in that country.
A Shot in the Dark: Why Indias Growth May Get Short-Circuited
There are many reasons to be bullish on India in the long-run. This rapidly developing emerging market (the I in BRIC) boasts a well-educated population over one billion strong.
The country also enjoys a booming economy, with annual GDP growth close to 9% at the end of 2006. Thats just a shade behind Chinas blistering pace of 11%. Whats more, Indias industrial production is expanding at the robust rate of nearly 13% year over year, compared to just 2.3% in the U.S.
These are all very positive signs pointing toward a bright future for India. But its too bad that so many of its citizens and businesses are being left in the dark.
It seems that growth in Indias infrastructure -- particularly the electric utility sector -- cant keep up with the overall economy. And that spells trouble for India going forward. In fact, according to a recent article in the New York Times , roughly half of Indias population are OFF the electric grid altogether.
In the suburbs of New Delhi, for instance, a quick glance at the rooftops of buildings shows evidence of this disconnect in stark relief. What youll notice are multiple smokestacks huffing and puffing black diesel exhaust into the humid air.
The chronic electricity shortages throughout India are a painful reality of modern life, despite the fact that Indians are very frugal consumers of energy. Each Indian person uses up just 600 units of power each year on average -- equivalent to just 20% of the juice burned up by a typical American.
But if India desires sustainable growth at its current rate of nearly 9% -- or anywhere close to that level -- it certainly must solve its power outage problems first.
As far as practical solutions go, India has stepped up generation in recent years at the pace of about 6% a year, according to the Times article, but thats merely a drop in the bucket compared with what neighboring China adds each year and in any case insufficient to keep up with Indias galloping demand.
One resident of suburban New Delhi, who suffered through a recent 11 hour power outage, says: Were living in the Dark Ages.
In a more distant suburb of town, where new construction proceeds at a rapid clip, an 800-unit complex of new row houses and apartments curiously named Nirvana Country promises air-conditioning in all rooms. Nirvana is still under construction, but 20% of units are already occupied, and yet the complex hasnt even been connected to the electric grid yet.
Residents are forced to burn 6,000 gallons of diesel fuel each week to power their generators. Call it a snapshot of modern middleclass life in fast-growing India.
For global investors who have been busy pouring money into Indias stock market, this story should serve as a cautionary tale dont let your portfolio get short-circuited by Indias infrastructure shortcomings.

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