Although India is a confirmed member of the BRIC club of top emerging markets nations, its economy is significantly different to Brazil, Russia and China. India has established itself as a strong domestic consumption story and this is why it represents a significant opportunity for foreign companies looking to establish themselves on the sub-continent.

True, there are still major challenges for those operating in India, not least of all stalled economic reforms which would make it easier for foreign companies to invest into the country and establish themselves there. But unlike companies who have established themselves in China as a base for low cost manufacturing for export elsewhere, companies establishing themselves in India have huge opportunities to establish long term businesses within the burgeoning domestic economy.

Currently India is the second most populous country in the world and its soaring birth rate means that within 15 years it will surpass China. And this ‘demographic dividend’, with more than half the population under the age of 25, is where much of the opportunity lies. For all its rapid growth, averaging 7 per cent plus over the past decade, India remains at an early stage of urbanisation. Around two thirds of its population is still rural and many still have no access to electricity.

But the country is rapidly urbanising, and its middle class is growing fast. This creates huge opportunities in industries such as construction, infrastructure, energy and telecommunications. Companies who are already active in India, such as Welsh engineering and construction consultants Cintec Worldwide, are likely to benefit from the boom in construction in India. Furthermore, engineering companies who can provide specialist products to the energy and resources industries  that will power the next stage of India’s growth will also find significant opportunities.  This week’s embarrassing black outs which left half the Indian population without power merely highlighted the urgent need for further significant investment in India’s power infrastructure.

The next stage of India’s development will also include growth in other areas such as telecommunications, which offers opportunities to companies like Nextgen Venturi.  Also, as the middle class grows and its spending power improves with it, demand for more aspirational products such as motor cars, electrical goods and even consumables such as top brand fragrances and alcohol. Other options are also opening up including services. The irony is that India, the country which cornered the world in outsourced services such as business process outsourcing, is now importing expertise in other services such as facilities management.

In the short term, challenges remain. The Reserve Bank of India has reduced its forecast for GDP growth for the current year to 6.5 per cent from its previous estimate of 7.3 per cent. It is not helped by stubbornly high inflation, forecast to be around 7 per cent in the year to March 2013. This has meant the interest rate has had to be kept at a relatively high level of 8 per cent, which acts as a drag on growth. There is also the current fear that the monsoon rains are failing which could add further pressure to inflation.

But these are short term concerns which will abate in the future. On a longer term view, which any company looking to establish itself in India has to take, the Indian domestic economy remains very promising. Significant drivers of demand such as urbanisation and a growing middle class will power Indian demand for the next decade and beyond. Confidence in the Indian economy is illustrated by the pick up in foreign inward investment in the opening half of this year, which has totalled $10.1bn and this is before further expected reforms that will encourage further inward investment.

 

Graeme Davies is News Editor of Investors Chronicle. He has more than a decade of experience writing about finance, first with Citywire and most recently with Investors Chronicle, part of the FT Group. His specialisms include emerging markets, smaller companies and renewable energy.

 

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