Once a shining jewel, India 's sparkle has dimmed in recent months.
Foreigners withdrew an estimated $3bn from the stock market in the first quarter. Despite a bounce in March, the MSCI India index is down 25 per cent this year in US dollar terms, the worst-performing, along with Shanghai, of the larger emerging markets.
Disenchantment has several sources.
At the simplest level, the market was ripe for a setback, having appreciated sevenfold in four years. But unlike other markets, the catalyst has been more domestic than credit-implosion led. With growth having topped 9 per cent three years running, the economy was reaching its limits in terms of spare capacity, causing inflationary pressures.
The central bank's response has been orthodox. The RBI has tightened policy aggressively by raising cash reserve ratios, while real interest rates remain positive, unlike in many other emerging markets. Consequently, growth is expected to slow to a still robust 7-7.5 per cent this fiscal year.
Critics of India are also exercised about its chronic underinvestment in roads, ports and energy. Delhi's fiscal profligacy means there is nothing left in the kitty, so we are unlikely to see significant improvements soon.
For some investors, the loss of momentum and infrastructure difficulties are proof that for now at least, India 's story is over.
I disagree.
While India produces little in the way of commodities and has lagged China in attracting foreign investment, it is not a disaster. Rather, its companies embrace a variety of sectors, from IT, pharmaceuticals and general manufacturing to banks and property. No other emerging market has such breadth.
Many of these companies are engaged primarily in selling to the large domestic market, where rising spending has enabled reinvestment - a virtuous circle only recently checked by escalating costs such as steep salary hikes for IT engineers.
And although many companies had become overvalued in the last leg of the run-up, valuations now look less out of kilter. The stock market stands on a more reasonable 14 times 2009 earnings, though I expect to see downward earnings revisions in the months ahead as the slowdown feeds through.
That said, throughout the boom, companies consistently reported results ahead of consensus expectations. This was not a case of downplaying prospects so much as being sensible with costs.
Most Indian enterprises have been around longer than recent economic achievements, and have learnt to confront and navigate a full business cycle. The best ones are naturally conservative. Maintaining cash flow and keeping debts low is second nature. I do not expect them to be blown off course now.
A case in point: although companies such as Satyam Computer and Infosys are down about 5 and 10 per cent respectively from their peaks, results for the quarter just ended were satisfactory. Quarterly pre-tax profits at Infosys and Satyam rose 24.6 per cent and 20 per cent respectively and both provided upbeat guidance for the year ahead.
These companies represent the future for India . They are skill-based and globally competitive. Over the long term, programming the world's computers and networks will be much more value-accretive than, say, digging up iron ore and selling it.
Granted, unlike some of its Asian cousins, India will remain a frustrating place for investors, as sensible policies one week are followed by emotional, knee-jerk decisions the next. But India has never really been a top down story, and anyway, the corporate world has learnt to deal with such vacillation.
Investors should focus on areas that are not dependent on reforms to come but those that have benefited from achievements attained. In essence, these are the general embrace of capitalism over the past fifteen years and the state's change of focus, from monopolising wealth creation to a focus on its redistribution.
Indian companies have on the whole risen above the meanderings of government, and in so doing have provided a platform for their shares to do likewise.
The writer is managing director, Aberdeen Asset Management Asia
