Investment in India: the obstacles to growth

In a recent article - Three great ways to invest in the emerging power of India - we highlighted the opportunities for investment in the country. In this article we hear from leading fund managers in India about the potential obstacles to its progress.

Jobs for the masses

Sashi Reddy is co-manager of the First State Indian Subcontinent fund, one of the top performers in the sector. Despite his fund's success, he has reservations about the speed at which India's economy can grow. 

'In principle I agree with the long-term growth story but the problem I have with it is that getting 500 million people into the workforce is an uphill struggle. It’s a huge task in terms of job creation.'

'There is a chance that this won’t happen in ten years. It is also a huge issue for the country in terms of risk which could manifest itself in many forms including social unrest.'

Mumbai-based Manish Shah of Sunman Investment Advisors, an adviser for the Comgest Growth India fund, is also sceptical on the job prospects for India’s aspiring middle class.

'The population has to be employable, they have to have skills. At the moment the schools are quite poor. It starts with education, then it is about creating jobs for them.'

The government has allocated spending to the education sector but Shah says that this is happening at an ‘Indian pace’, which he says is 'a lot slower than many investors would expect.'

Vibrant job market

Adrian Lim, senior investment manager for the Asia Pacific (ex Japan) equity team at Aberdeen Asset Management is more upbeat on the issue, describing the job market as ‘vibrant’.

According to Lim most young people enter into the services industries such as banking and insurance. The more traditional manufacturing and relatively new software engineering routes are also popular choices.

Deficit fears

Daniel Tenengauzer, co-head of global emerging markets fixed income strategy and economics at BofA Merrill Lynch Global Research, is not convinced by the buzz surrounding India. 'Compared to the rest of Asia, India is not the best story.'

'My problem with the Indian story is fiscal. The government spends a lot of money which has increased the country’s current account deficit. The fiscal deficit for this year is -10.6% - China’s is half of that.'

Infrastructure

Infrastructure is also a major stumbling block for growth in India. The Indian government has often been accused of ignoring its infrastructure shortcoming, and some fund managers think its failure to act has been identified as one of the major barriers for larger investors in the country.