India suffered its second power failure in two days, depriving over 600 million people of electricity in one of the world’s biggest blackouts ever. The first power grid collapse occurred on Monday affecting more than 350 million people in northern India.
The blackouts have raised major concerns over India’s outdated infrastructure and inability to meet the population’s growing electricity demands as the country becomes an economic superpower. The current situation has highlighted the severity of Prime Minister Manmohan Singh’s effort to attract $400 billion in investment to address electricity deficit concerns that holds back economic growth in Asia’s 3rd largest economy.
“Government investment in infrastructure is desperately needed meaning many local companies will stand to benefit. Today one third of India households do not even have electricity to power a light bulb as they are not yet connected to the grid. The cumulative overall investment in infrastructure in the country’s 12th Plan is targeted at around USD$1 trillion over the next five years alone.” said David Kunselman, a portfolio manager with Excel Funds Management.
In recent times, the Indian government has been very accommodating to foreign investors and has shown willingness to change policies in order to improve economic growth. The power outage will push the government to take active steps in improving India’s infrastructure which has been a limitation on the economy. Improved infrastructure will remove hurdles constraining growth and make India a much more competitive economy.
The Prime Minister is seeking to secure $400 billion in investments for the power industry in the next 5 years for a target of 76,000 megawatts in generation by 2017. India has failed to meet every annual target to add electricity production since 1951. India’s demand for electricity has soared along with its growing middle class in recent years but India’s Central Electricity Authority has reported power deficits of more than 8% in recent months. The World Economic Forum says that India’s infrastructure is a major obstacle in doing business in that region. Infrastructure improvement is amongst the Prime Minister’s toughest challenges as he bids to revive expansion in India’s economy.
The Reserve Bank of India which had previously blamed infrastructure bottlenecks among other factors for contributing to the nation’s price pressures, has refrained from cutting interest rates today even as growth in the $1.8 trillion economy cooled to a 9 year low in the first quarter.
David Kunselman of Excel Funds Management stated 3 reasons why investors should remain bullish on the Indian economy.
- India is a growing emerging market with the most promise thanks to its rapidly growing middle class. Today India is a decade behind China and is only 30% urbanized versus China at 50%. India GDP per capita is amongst the lowest in the world and growing quickly.
- Today the average equity security in India is attractively priced trading below its historical mean multiple on a price to earnings basis or price to book.
- Today investors can benefit from the window of opportunity taking place in India and invest alongside its demographic dividend. India’s economy has one of the youngest and largest populations and it’s just in its beginning stages of realizing the benefits of urbanization.