India could become an investment magnet among emerging markets if economic reforms are put into effect and if the new coalition government finds way to fix the country's crumbling infrastructure, experts interviewed by CNBC said.
"The only way to get the real economy up and working again in terms of lower agricultural output is by building infrastructure," Aadil Ebrahim, director at Bazargate Consultants said.
The government should focus on energy and road development, experts said. But a hurdle for the country is raising funding for the infrastructure development, which has up until now been very slow, they added.
"There's no doubt that India's got huge potential," Chris Wyllie, partner, head of portfolio management at Iveagh, said. "The concern I always come up against with India, however, is not whether or not an infrastructure binge is required — it certainly is — and it could have a transformation effect on the Indian economy. The problem is how it is going to be financed?"
Wyllie added that the country's twin deficits were also problematic from an investor's perspective.
Sharon Bamford, CEO of UK India Business Council, agreed with Wyllie, saying: "Some innovative financing models have to be used to get investment into India. It's recognized now that it's needed, it cannot sustain growth without infrastructure."
Bamford is confident the government's ministers will adhere to their mandate.
Open up to Foreign Investors
The government's infrastructure spending that has been planned for the next five years will keep the country's momentum of growth sustained to 2011 and 2012, Sanjay Sinha, CEO of DBS Chola Mandalam Asset Management, said.
If you have to look at India as an investment destination, you should be looking at the execution numbers on the infrastructure development to give you a better clue as to how the country is doing as an investment destination, Sinha said.
Investors also hope India will ultimately push through measures that will open the insurance, banking and retail sectors to overseas players and bring in labor reforms to help companies.
Aside from infrastructure, another driver of growth for India is consumer demand, and the integration of rural and urban will provide jobs on the consumer demand side, Ebrahim said.
India's growing population, increasing wealth classes and "emerging cities" contribute to the country's attractiveness as an investment prospect, Bamford told CNBC, adding that its "huge domestic market" has sustained it in the current economic slowdown.
India's benchmark market has almost doubled in the last five months. According to analysts, there is still liquidity flowing into the Bombay Sensex index to support shares and that long-term investors should look to buy on the market dips.
Poor Rain Threatens Growth
The Indian market has recently undergone a slight correction, with directors like Ebrahim predicting the region's stocks to fall another 4-5 percent, before "some long-only funds begin putting money back into the market."
Investors have been nervous of the season's meager monsoon rains which have pushed India onto the brink of drought, putting pressure on food prices and energy supplies, and thereby causing concerns about the country's economic growth.
But Indian government officials assure that wheat and rice stocks will provide a buffer against a poor harvest.
Finance Minister Pranab Mukherjee recently said he expected growth in 2009/10 to be over 6 percent, in line with the central bank's forecasts, despite the monsoon shortfall. Monsoon rains have been 29 percent below averages so far this year, according to Reuters.
Economists told Reuters the poor rains could trim economic growth by as much as 2 percentage points in the fiscal year ending in March.
Earlier this week, Citigroup scaled back its estimate for Indian growth in 2009/10 to 5.8 percent from 6.8 percent, because of the downturn in the agriculture sector. Citi analysts said higher food prices were likely to raise India's inflation rate to 6 percent at the end of the fiscal year, above an earlier prediction of 4 percent.
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