India - Still a Good Investment?\r\n\r\nBy Nancy Zambell, Staff Writer, Big Idea Investor \r\n\r\nOutsourcing Prowess and Demographics will keep India on top \r\n\r\nIndia, the fourth largest country in the world in terms of purchasing power parity, has single-handedly turned the global outsourcing industry inside out, as the country has propelled itself into THE place to go for companies seeking to reduce expenses by sourcing human resources outside of their borders. \r\n\r\nAccording to market research firm Gartner, India has been doubling its outsourcing services for each of the past four years and now commands some 85% of the business process outsourcing (BPO) industry. In 2004, more than 250,000 employees in India earned greater than $2 billion from outsourcing, a figure forecast to grow to $13.8 billion by 2007. \r\n\r\nBy 2010, the National Association of Software and Service Companies (NASSCOM) projects that Indian companies engaged in information technology (IT) and BPO, together could earn $60 billion, expanding at 25% annually and employing 2.3 million people directly, and 6.5 million indirectly. \r\n\r\nSounds fabulous, doesn''t it? It is, but there are a couple of possible flies in the ointment for U.S. companies: forecasted labor shortages and rising wages. \r\n\r\nAlthough Indians are becoming more widely educated, with a 64.8% overall literacy rate, just 25% of tech grads are suitable for IT and only 10%-15% have the necessary requirements for BPO employment. Wages for a typical call center employee have jumped 30%-50% in the last few years - increases that have not been passed through to the U.S. companies who contract with the Indian outsourcers. \r\n\r\nThe result? Competition from countries with lower cost structures is beginning to heat up. Pundits advise that more than 50 other countries, including the Philippines, Vietnam, Malaysia, Hungary and Poland are sneaking up behind India to challenge its outsourcing supremacy. \r\n\r\nYet businesses including Microsoft and British insurer Aviva PLC continue to place their bets on India, with both of them planning to increase employment by more than 3,000 workers in the next few years. And forecasters estimate that India will not be left behind. This is why: \r\nIndia''s middle class population - the source of many outsourcing workers, is growing. This segment of the population is now believed to be somewhere between 250 and 500 million people, who are consistently opting for higher education, which is creating a more sophisticated and trainable workforce. And while 25% of India''s engineers have the skills needed to make the grade globally, just 10% of Chinese tech pros can say the same. Annually, the country is turning out 2.5 million mostly English-speaking graduates, ready to enter the workforce. \r\n \r\nThe country''s population - unlike its oft-mentioned competition, China - is very young. More than one-half of its 1.2 billion population is under the age of 25, portending many viable and productive working years ahead. And its population is forecasted to surpass China''s by 2035. \r\n \r\nIndia''s businesses - known for their knowledge base, rather than manufacturing base - will simply upgrade their product offerings and services, beyond the capabilities of the competition breathing down their necks. \r\n\r\nThere is still plenty of room left for outsourcing growth in India. But the question remains, how does this success turn into investment gains?\r\n \r\n\r\nInvesting in India is in its infancy \r\n\r\nAccording to the National Intelligence Council, India is a global power in-waiting, ready to take a leadership position as early as 2020. Some experts have even gone out on a limb, claiming that India could become the world''s largest economy within the next half century. It''s no wonder that President Bush recently came-a-courtin'', hoping to turn New Delhi into a steadfast new ally, at the risk of offending Pakistan, a long-favored friend. \r\n\r\nThe country''s exports - if they meet India''s realistic target of $150 billion - will create 13.6 million jobs by 2009-2010. If, however, they grow to the government''s more aggressive target of $165 billion, it is estimated that a whopping 21 million jobs will be created. More jobs means greater innovation and additional product and service offerings, a winning combination for Indians, as well as their customers and investors. \r\n\r\nAdditionally, India has two important advantages that will boost the expansion of its investing climate: \r\n \r\n\r\nThe country''s democratic government is pro-business \r\n\r\nIndia''s democratic government is well-established and its business climate is favorable to business, entrepreneurs and innovation, who keep a keen eye on cost containment and return on investment \r\n\r\nThe Indian economy has grown at an average 6% annual rate for the past few years, helped along by a couple of major government moves including the tax reform of the 1990s that boosted disposable consumer incomes and increased the purchasing power of the middle class. And the government''s repeal of the hated value-added-tax last year further spurred spending and investing.\r\n\r\n\r\nIndia''s financial sector is poised for expansion \r\n\r\nThe country''s banking and financial institutions are stable and market-focused, and India''s banks are actively wooing customers. To date, Indians own more than 12 million credit cards and finance 80% of their auto purchases through banks, evidence of rising confidence in the financial system, and a great indicator for future opportunities in the financial sector. \r\n\r\nThe investment arena in India is heating up too. 2004''s M&A activity more than doubled - to 316 deals, worth greater than $9 billion. And the 2003 & 2004 IPO markets raked in $53 billion in deals, while private equity investments totaled $420 million. \r\n\r\nAnd although institutional and foreign investment activity is soaring, individual investors are not being left out. More than 20 million Indians own shares in the country''s 9,000+ public companies, more than any other country outside of the US and Japan. Shares trade via 23 stock exchanges in India, and total returns have averaged 34% and 41% respectively, for the past couple of years. \r\n\r\nThose are pretty impressive numbers for an investing climate just beginning to emerge, spelling great opportunities for investors. \r\n\r\nWe see several sectors that may offer tremendous prospects for astute investors: \r\n\r\n· Global services are information or technology-based, rather than manufacturing-centered, requiring less capital investment, thereby opening the door for rapid expansion \r\n\r\n· The telecom industry is booming, with cell phone usage climbing 53.5% in just 18 months, just the beginning of the coming surge\r\n\r\n· The country has a housing shortfall of 80 million homes, a huge opportunity for growth in the building industry\r\n\r\n· Obsolete infrastructure is due for significant upgrades\r\n\r\n· New FDA office may portend an influx of generic drug manufacturing as hundreds of American drugs come off patent\r\n\r\n· The retail industry is beginning to shine. As evidence, India is Wal-Mart''s second largest sourcing market, providing $1.4 billion worth of textile, leather and jewelry - and quickly expanding \r\n\r\nYet, currently, Indian stocks are still trading cheaply and the country''s rate of investment is less than 25%; Simply put, this creates a ripe investment climate ready to explode. \r\n\r\nThe biggest problem facing investors is that investing by foreigners has typically been confined to a few mutual funds and multi-nationals doing business in India. But the climate is changing. Investing in individual Indian companies is getting easier, as well as investing in Indian-related venture capital funds. \r\n\r\nIndia will soon be ripe for the picking, and you won''t want to miss out on the opportunities that will accompany its global resurrection. We will tackle this new investing climate in subsequent articles, with helpful tips to assist you in building your Indian investment portfolio.