India has already come a long way as a rapidly-growing economy with a large number of high net worth individuals. In the first in a series of articles, WealthBriefing looks at what is driving the market for serving HNW individuals.

With the emergence of the BRIC (Brazil, Russia, India and China) block of emerging market economies, perhaps the most promising market for wealth professionals is

India.

CapGemeni/Merrill Lynch’s latest World Wealth report provide the reason why: “In 2007 India led the world in high net worth individual population growth, rocketing ahead 22.7 per cent and exceeding gains of 20.5 per cent in 2006. Boosted by market capitalization of 118 per cent and real GDP growth of 7.9 per cent HNWI sector gains recorded all time highs.”

But wealth professionals should not get carried away. The year 2006 to 2007 might have seen the HNWI sector growing from 100,000 to 123,000 but it remains a drop in the ocean compared to

Germany’s 826,000. The rate of wealth growth is bound to fall with Indian stock markets experiencing a turbulent year. Even in the Asia Pacific region,

India is not leading the way. Its estimated $440 billion of aggregate high net wealth is considerably smaller than that of

Japan’s.

There are, however, extremely lucrative side markets. Outside domestic Indian wealth, NRIs and second generation immigrant Indian communities have shown that they share the same entrepreneurial skills.  The number of US Indian millionaires is reckoned by one estimate to be as high as 200,000. The IT sector has proven particularly lucrative.
Silicon Valley is littered with Indian success stories. 

Even amongst the affluent,

India remains unequal. Average HNWI wealth per person is $3.6 million – but that statistic alone hides significant gaps. The top four Indian billionaires (three industrialists and one real estate baron) hold more cumulative wealth than the remaining forty. These top four even broke into Forbes’ 2008  top ten richest men in the world list, making

India the most represented country. Lakshmi Mittal, the two Ambani brothers and Kushal Singh now own more combined than the forty richest men in

China.

The Chinese and Indian markets are ripe for comparison. There are certainly more than superficial similarities between the two countries. Both have an emerging HNWI market, many of whom who are involved in manufacturing. The two Asian neighbours share the sharpest HNWI growth rate in the world yet both have low absolute numbers of HNWIs.

Again the economies are fairly similar – the nouveau riche are a super wealthy minority who stand at the top of billion plus populations with stark levels of poverty. Until now however

China has enjoyed the greater attention of wealth management. This is to be expected, its offshore centre
Hong Kong attracted talent earlier and remains more developed. Yet, in the wake of world shifts, there remain compelling reasons for wealth managers to consider refocusing.

Compared to its neighbour,

India remains a far more accessible market. As a stable democracy with a free media and a strong rule of law, the country is more than capable of attracting outside wealth talent.
India also has historic ties with the

United Kingdom.

The legacy of the Raj has left behind English as a natural second language with the middle class upwards being fluent. Again those ties have helped attract investment away from the Asia Pacific. Indians are particularly fond of

London – Mr Mittal has relocated to the city and bought a stake in QPR football club.

While many of the emerging rich in
China and

India have profited off the plentiful labour force, the long-term situation is likely to change. With

China’s one child per family policy, not only will the countries growth rate be stunted but, additionally, Chinese resources will be clogged up, devoted to looking after an aging population.

India, on the other hand, is bound by no such restrictions and will retain a young population keen to earn. In 2050,
India’s population is likely to overtake that of

China’s. Numbers are important because in both countries it is the poor who work and earn money for the rich. Finally

India celebrates wealth inequality whilst Communist China, at least ideologically, is opposed to it. Though

China has moved towards opening itself up, sustainable government support for wealth creation is more likely to be forthcoming from her neighbour.

Even emerging market analysts such as Merrill Lynch’s chief global emerging markets equity strategist, Michael Hartnett, who are more cautious about edging
India over

China remain optimistic. He predicts growth to remain "a thrilling story" over the next 5-7 years.  As
India has suffered over the year with tightening credit and significant stock and real estate losses since January,

China may look preferable.  Yet Hartnett remains confident that the momentum will be regained. “Longer term it is tough to argue that they are not going to go up and down together,” he said.

So why is the Indian wealth market only emerging now? The answers can be found in the macro-economic and political history of the country. For the first forty years of existence, since birth in 1947 the economy remained virtually anti-wealth.

The country’s spiritual father Ghandi had favoured that the new nation be built around communal village life and manual labour, and remained suspicious of technological advances. His ascetic frame of mind objected to the pursuit of wealth. The first Prime Minister, Nehru, was more pragmatic. He was keen to bring industrialization into the country but only on his terms. Distrustful of foreign advice and outside technology he dreamed of achieving economic self-sufficiency.

India came to be founded on socialist principles and massive nationalisation programmes were enacted, embracing steel, mining, electricity and telecommunications industries. The country remained impressed by Soviet strength. Yet the plans were unsuccessful. The economy remained closed, tariffs were high and export not encouraged. Two phrases came into existence. “The Hindu rate of growth” was a disparaging term used by the former President of the world bank Robert McNamara for

India’s low GDP growth rate.

Another term, “The License Raj”, referred to the massive bureaucracy that was stifling the country. Some reform began to happen in the eighties. However

India had to wait for the turn of the next decade to see wealth opportunities. Following the fall of the Soviet Union and oil pressures involved in the first Gulf war,

India was forced to ask the IMF for a loan.

The terms forced the country to open up and liberalise. The country became more amenable to privatization and the government was more willing for a hands-off approach. The brains behind the reforms was the then finance minister Manmohan Singh who has since risen to being Prime Minister of the country.

Which sectors have given rise to this new influx of wealth? Despite the growth the sectors still remain fairly narrow.

India is emerging as a manufacturing powerhouse as the industrialists have been lucratively rewarded for providing direction to the market. IT flourished in the absence of Government intervention. These areas are where wealth creation is – though they exist at considerable distance from

India’s main populace, two thirds of whom work in the agricultural sector.

India is working hard to tailor its banking needs to both rich and poor. Microfinance is providing low end families with a lifeline while at the top end of the market wealth solutions are beginning to emerge. Such solutions often involve a tie-up such as that between UBI and

Belgium based KBC this year. 2008 also saw Credit Suisse and Barclays Wealth moving into

India’s wealth management market. Good fundamentals are seeing wealth managers remain optimistic in spite of a volatile year.