Special Report: What is India, and what is its Future?

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stable Rupee, and that might be given a boost if the economy starts to recover.

One of the things that, in compiling this special report on India for Inside Investing, one of the things that we heard first from Pradip Shah was that, in his opinion, the Indian Central Bank seems to view its role as protecting the purchasing power of currency now, which is something that, with my dollars in my wallet, I’m not used to hearing about any central bank. But it surely does give cause for optimism, and I guess increased probability of renewed stability.

I want to ask you about the at times unequal effect that this sort of volatility can have on a population that has very wide disparities in wealth. In particular, I saw onion prices were up something like 300 percent over the last couple of months.

In a population where the bottom 50 percent is living on very little money, that can hit very hard. Do you think that that population, that their ability to consume in an economically productive way, is being materially impacted by this currency volatility, this food inflation?

You are right. The food inflation is definitely hitting the bottom rank of the population, because a significant portion of their income goes into spending on food. Having said that, India is a domestic self-reliant economy, we don’t import most of the food we consume. It’s all grown in-house, most of it. To that extent, at least our view won’t be that the movement of Rupee has caused onion prices to go up.

Weather patterns globally have become more erratic. We are definitely seeing impact, whether you call it global warming or increased carbonization, which is causing the weather patterns to change. In India, specifically we’re seeing standard of living going up, and as a result of this, demand for better food is going up. Our view on that, in fact, is a more positive sign, rather than negative.

Yet, in the near term, supply is taking it’s time to keep up pace with demand. But specifically on the equities inside we have seen not only in India, but globally, that higher prices of produce makes the farmers switch from one crop to another, and it is always a very, very short-term phenomena of significantly higher prices in any one commodity, or one produce. Also, we have had one of the best monsoons over the last 20/30 years this time.

The water table is at least 20 to 40 percent higher across India and the world, compared to the 10 year average. We have a very good first indication coming from the Rabi, which is a winter crop plantation, and in the next two or three months, we are definitely hopeful that even the food inflation should start to come off.

But very, very clearly, the currency does have an impact on almost everything, but the impact on the food prices would not be as significant, because most of the food we eat is produced in-house.

I guess you’re dwelling on that bigger population, but departing from the food trend, I want to ask you about the effectiveness of the financial system for those very poor people. It’s common to talk about people who are under banked, or underserved. What are the impediments that stand in front of a broad-based shareholder class in India?

Is there a developing sense that equities are really the place to save your money, or is it still, “I’m going to buy gold, I’m going to buy housing”? Or even, “I don’t have the money to invest. I’m just going to buy food”?

Again, the structure of the Indian population, Indian economy, is very different. We are a 1.2 billion population country. At the same time, we do have a lot of poor people, but we also have the world’s largest population of middle class, and we are also among probably the top 5-10 countries in terms of the super rich.
There is a wide disparity as far as the whole population is concerned. Having said that, we are a country of large savers. We, on an annualized basis, save between 30 to 35 percent. The savings rate has fallen slightly, but it is still a healthy 30 percent, of which 20 percent is the household savings.

With an economy size of $2 trillion, on an average we save $350- to $400 billion as households. Over the last five/seven years, what typically has happened is that a lot of money has gone into hard assets, which is real estate and gold. Largely because those asset classes have been performing very well, and as a result it…in every part of the world, investors normally chase returns.

This is where most of the money has gone into. As far as equity is concerned, we had seen a huge surge in a propensity to invest in equity. It is come down over the last four or five years, largely because the immediate past performance of Indian equity markets has not been that great. But this year we have started to see money not get attracted as much by gold, for sure.

Real estate also, to some extent, is seeing this jump of the use of it. Still, a lot of money is going in real estate, but we are clearly seeing signs of topping out, and money moving into the financial assets. Now, the beginning of this move usually is on the fixed income side, and we have seen huge improvement in flows to our own fixed income mutual funds from retail investors.

Banks certificate deposits are just fine being picked up then, as far as the economy is concerned, have seen record 20 percent less growth in deposit base, and it’s a matter of time before this money selectively starts to move into the equity markets.

We are a young nation, you know, we are only 60 years old. If you see the history of other developed nations, In their formative years, equity as a percentage of the total assets were a very small percentage, and then as the economy matured, as the investors matured, as the investor education and literacy increased, the percentage of equity in a person’s asset base started to increase. We are very sure that in India we will see that, and frankly at Reliance Mutual Fund we are very focused on investor education.

We do believe that investor education is the best way of attracting long-term money. In fact, as we speak, we have launched India’s first five-year lock-in product. It is a close ended product, and investors cannot redeem before five years. It’s very difficult for us to sell, because all investors want liquidity.

However, we have decided to invest a lot of effort and money into promoting this product, and though it might be very small in terms of size, we do believe that this is the best way of getting investors invested in our equities from a longer-term perspective.

To cut it short, we are in a nascent state of the economy in the financial services concern, investors are definitely looking at financial assets. We need our economy and the markets to start to grow, and we also need a lot of effort as far as investor education is concerned, and that would definitely, definitely increase the penetration of equity, which is right now one or two percent of the savings, to at least 10 percent of savings.

I’m mindful of your time. I know I have to let you go in a second, but I would be remiss if I didn’t ask you. This report will go live one week before almost 100,000 people around the world…well, a little short of 100,000 people, but not that short, take the CFA level one exam.

This is an organization that’s changed quite a bit probably since you took the level one exam, and I wonder if you could just sort of hit quickly on what we’re doing in India, and how it’s come to change as a percentage of what we care about as CFA Institute?

Right, see again, I know India that way is a very interesting country, young guys, and I mentioned the demographics because we have a huge young population in India. They are always eager to learn, and focus on education, even from parents, is very, very high. If you see CFA’s own, you can say, progress in India, almost on word-of-mouth, we have grown from maybe 20, 30 students, to almost 30 to 40,000 candidates in different levels.
What it basically demonstrates is that one — yes, the economy itself has grown to among the top five economies in the world. Second — financial services is a very, very key component. In fact, services as a percentage of GDP, and total services, is almost 55 percent in India, so we are a service oriented economy. We are an English-speaking economy…English is a world language, so that also makes it easy.

Most important is that the quality which the CFA Institute is offering is now getting interest from the students who are eager to…or even professionals who are eager to further their careers through the help of an internationally academic course. Things are quite well. In the near-term, obviously the sharp depreciation in currency has made the course a little expensive, but it’s a matter of time before the currency also stabilizes, and you consider prospects also start to recognize that.

As India’s Society, obviously I’m no more associated with them on a day-to-day basis, but the

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