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Diversity key to well-managed Indian economy

Can India maintain momentum?

There are two words Jayesh Gandhi wants Canadian investors to remember when they think of India: sustainable growth. Those are the words the fund manager from Mumbai-based Birla Sun Life Asset Management uses when addressing concerns that his country's booming economy is growing too quickly.

"We hope to see India continuing its strong earnings growth and economic growth for the next 10 years," he says.

Mr. Gandhi is travelling across the country to promote his Excel India Fund - one of the best performing mutual funds and the only pure-play Indian equity fund in Canada. Over the past five years Excel India has consistently returned well over 30 per cent annually while the average emerging market equity fund has been pulling in an average 20 per cent a year. Even the benchmark MSCI emerging market index has managed to post a still impressive gain of 18.7 per cent each year.

Since the beginning of this year the Bombay Stock Exchange's 30-member Sensex Index has risen 50 per cent to surpass $1-trillion (U.S.). Economic growth in India has averaged 8.6 per cent annually over the past four years, helping to spur earnings growth as high as 35 per cent. The rupee is currently the best performing currency in Asia.

Mr. Gandhi says there's no reason to believe the good fortune will not continue because India's growth is diversified. His $277-million (Canadian) Excel India portfolio reflects that diversification with a mix of infrastructure, industrial and consumer stocks.

Key holdings in the fund also reflect Corporate India's expansion to the global stage. The country's largest private sector bank, ICICI, accounts for nearly 5 per cent of holdings.

Other large positions include Tata Steel, which has been reported to be a serious contender to acquire Stelco Inc. He says Tata has maintained a low cost structure while boosting quality to the global standard. Other members of the giant Tata Group include Tata Motors Ltd. and Tata Consultancy Services.

One infrastructure play in the fund is Bharat Heavy Electricals Ltd., which designs and builds power plants.

The fund, which has a management expense ratio of 3.4 per cent, also includes a large weighting in India's growing technology sector, including the country's second largest software manufacturer, Infosys Technologies Ltd.

There are, however, signs the fund may have hit a rut. So far this year Excel India has returned less than 2 per cent. Much of the fund's decline occurred earlier this month when fears of rising global interest rates caused steep selloffs on emerging markets, including India. Mr. Gandhi says he's not concerned because the fundamentals of the Indian market remain strong. "After a spectacular four years, six months is not a time frame one should look at," he says. "India's a much longer-term sustainable story."

Mr. Gandhi isn't alone in his optimism. TD Economics has upgraded its forecast for gross domestic product growth in India by half a percentage point a year to at least 8 per cent. "I think India's growth is sustainable because it's balanced," says international economist Richard Kelly.

That balance includes equally vibrant consumer and industrial bases combined with a cooling effect from a series of interest rate hikes by India's central bank. "Interest rates are starting to get in that biting range," says Mr. Kelly.

To make his point he contrasts India with a closely linked emerging market - China. Much of China's growth is in the industrial sector while an increasingly affluent Indian middle-class has been creating demand for consumer goods and fuelling a robust financial services industry. Average annual wage increases over the past five years in India have been as high as 15 per cent.

As a result India is the only emerging market economy running a current account deficit. That means India imports more goods and services than it exports. "You have to have a domestic consumer base to have a balanced economy," he says.

Mr. Kelly also credits India's central bank with taking the necessary measures to regulate growth and encourage diversification. "The economic management of India is doing much better than China," he says.

While he describes his view of India as "extremely optimistic," Mr. Kelly says like China, runaway inflation is the biggest concern in India. He says the first red flag will wave when inflation continues to climb after the central bank raises the benchmark interest rate.

Dale Jackson is a producer at Business News Network.

© 2007 The Globe and Mail. All rights reserved.

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