Indian Economy to Grow Fastest

India to Be the Fastest-Growing Economy in 2010

The World Bank has projected (in its Global Development Finance Report) that the Indian economy will grow at 8% in 2010, which would make it the fastest-growing economy in the world for the first time, surpassing China, which is projected to grow at 7.7% rate. Please read Dirk Van Dijk's blog  for the World Bank's forecast on the global economy.

For the current year, the Indian economy is projected to grow at 5.1%, revised up from an earlier projection of 4%. It may be added that India has consistently outperformed World Bank's forecasts in the past.

The slow pace of reforms in critical areas had affected India's growth in the past years. However, the re-elected Government has promised to bring about desired reforms in infrastructure, social sector and financial sector. Among other reforms in the pipeline are opening up of retail, insurance and banking sectors to more foreign investment and reducing Government ownership in  refineries, banks and fertilizer companies.

Prospects for strong economic growth have resulted in the recent surge in prices of Indian ETFs such as PowerShares India (PIN). While ETFs are good vehicles for exposure to the country, investors may also look at specific sectors, which are poised for higher growth than others.

The Indian mobile industry has now moved out of its hyper-growth mode, but is expected to continue to grow at double-digit rates in coming years as operators focus on rural parts of the country. Mobile market penetration has been projected to increase from about 40% currently to about 65% in 2013. Companies like Vodafone (VOD - Analyst Report) are expected to benefit.

India's retail sector (the fifth largest in the world) is expected to grow at a 10% rate. Consumer demand has remained strong and is growing as the young population is booming. The next phase of retail expansion is expected to come from the rural areas.

The financial sector is currently on the rebound with improvement in the macroeconomic environment. However, deterioration in the asset quality still remains an issue, particularly for banks like ICICI Bank (IBN - Analyst Report), which have had massive expansion in last few years.

The Indian IT sector has been hurt by the global slowdown as most of its revenues have come from clients in US and UK. Outsourcing competitiveness is also declining as other low cost centers are emerging in Eastern Europe and Asia. Top IT companies like Infosys (INFY - Analyst Report) and Wipro (WIT - Analyst Report), which saw 20-25% revenue growth in the past, now project near flat growth. These companies will benefit once the global economy recovers.

There are some areas for concern, though. Due to its deteriorating fiscal position, the government is not in a position to offer a large stimulus package in the budget slated for release in July.

Further, although the government now has a healthy majority in parliament now, strong political will is required (which has been lacking so far) to cut popular subsidies and modernize labor laws.