A large young population is a double edged sword
Aug 03 2012, 18:13 | By Forbes India
Chris Barth/Forbes India
Investors waiting for India to become China 2.0 may be disappointed with its path but not its returns
India and China. Western investors love to compare the world's most populous nations as if they were identical economies at different points on the same timeline. After all, both are growth powerhouses. Over the decade ended in 2010, China's GDP grew on average 10.3% per year versus an impressive 7.4% for India.
The big story in India continues to be its demographics. It will overtake China as the largest population in the world by 2030 and has one of the youngest populations among emerging-market nations. Nearly half its citizens are under 25.
"Most developed markets are in decline, especially Japan. China and others are past their peak," says Prashant Khemka, managing director and chief investment officer at Goldman Sachs Asset Management India.
Given its burgeoning population of working-age people, India's biggest opportunity is also its biggest threat. Will its economy be able to provide enough jobs?
Sharat Shroff, manager of the Matthews India Fund, which has returned 10.2% annually since its inception in 2005, points to infrastructure investment as a critical step toward leveraging what he calls India's "demographic dividend".
Economists and analysts say the key will be maintaining GDP growth above 7% or so. The movement of rural Indians to urban life could play a big role in achieving that rate.
"Around 30% of the population in India is urban," notes Khemka. "The movement of labour from agriculture to manufacturing and services can add 1% in growth annually."
Unlike China, India is a net importer. Its domestic economy's health will drive returns.
Simnegar of Fidelity also likes consumer companies with strong brands. "You're going to have more people with more money in their pockets, who like to buy aspirational products."
As with any emerging market, investors in India must be able to stomach risk. For example, India is the fifth-largest oil importer in the world. If a spike in oil price causes GDP growth to falter, India's demographic dividend could very well become a population time bomb.
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