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As anyone who has spent anytime there would know, India is a crazy, chaotic, but strangely alluring place. Between the extremes of poverty and great wealth, there’s an amazing resilience and resourcefulness that, given the opportunity, translates into admirable entrepreneurship. I remember one market stall in an Indian city that was stgoted entirely to restoring umbrellas that we would have tossed into a bin.

What may be a surprise however for many Australians is the idea that the Indian sharemarket might be a worthy destination for a long term investment. Sure it’s had a few remarkable years – growing roughly 30% a year for the past five years. But that only contributes to the sense of it as a sharemarket best approached with caution – at any moment it could head south. It’s not that long since the hopes and dreams of the Asian Tigers, crashed and burned in the Asian crisis of 1997.

Indeed the Indian sharemarket’s fall of 4 per cent, along with the rest of the global sharemarket, looked to many like the first stumblings of a market that has overreached itself. The Bombay Stock Exchange Sensex index is trading at a PE ratio of 20 times, and even Indian investors are becoming sceptical as to whether there’s more upside after that kind of performance.

But there’s a good argument that the India sharemarket may still have further to run, and that instead of a speculative punt, it could actually in time become a solid growth story. Stuart James of Aberdeen Asset Management, for one, likes India as a long term investment better than China, with which it is often lumped. “It has a good business and legal infrastructure and a conservative banking system,” he says. Companies are conservatively managed and moderately geared, and earnings growth is very strong, with estimates of more than 30% for 2007, compared to just 7% for the US.

While India’s surging sharemarket owes as much to the enthusiasm of domestic shareholders as to the strength of the nation’s economic growth story, it is not based purely on short-term euphoria, James argues. India’s sharemarket is more sophisticated than China, even if it is not as broadly based. “Many investors in China have this sense that investing in a the sharemarket is a bit of a gamble, whereas in India there is an understanding that this is a long term investment.” Indians are more prepared to take up rights issues, for instance, understanding that companies use the sharemarket to raise capital to grow their businesses.

Unlike China, India’s economic and business growth has been driven not so much by the government, but by Indians themselves. While China’s government has thrown millions of dollars into building infrastructure and stgeloping its manufacturing sector, India’s government has been relatively hands-off in terms of dictating how businesses should grow. Indians have had to be more entrepreneurial, tapping into their knowledge and expertise and their English language skills. The service sector has been India’s big success story. It’s not just the call centres that plague us here at dinner times, Indians are also running remote IT systems for overseas companies, carrying out business processing and data-base management, and conducting legal work for legal firms in the US and the UK at a fraction of the cost.

All this is pumping millions of dollars into India’s economy. But if the economy was just relying on the health of the global economy it’d be on shakier ground. The fastest growing companies are those catering to domestic demand from a burgeoning monied population. Personal disposable income grew by 12% last year, compared to just 4.7% for Australia. That’s driving the growth of companies like Reliance Industries, which are in the process of rolling out 2000 hypermarkets and 2000 supermarket; Hero Honda, which produces two-wheelers to a newly mobile population and HDFC Bank, which is ready to cater to a very under-geared populace keen to buy their first home.

“The Indian economy is relatively closed – making it less vulnerable to a weakening global economy,” says Jan Wim Derks, the director of Emerging Markets Equities at ING Investment Management. Given the strength in domestic demand, ING-IM is overweight India, even though Derks believes the Indian stock market is currently expensive.

With 6500 companies listed on the Indian sharemarket, James says though it’s essential to be selective. After a series of heady years, there are few bargains to be had so the trick now is to find companies that are going to deliver strong steady growth over the long term. “Don’t buy a company just because it is cheap,” he says. Aberdeen’s Indian Fund, which is based in the UK, and makes up a portion of its Asian Opportunity and its Emerging Opportunity Funds here in Australia, invests in just 40 shares.

And there are bound to be plenty of hiccups along the way. Much of India is still desperately poor and ill-educated, and that makes it vulnerable to political and social upheaval. Lack of government investment in infrastructure like transport is holding back stgelopment in many areas, as is the endless red tape that put India 116th in a 2006 World Bank survey of 155 countries on the ease of doing business 2 places below Iraq and 25 places below China.

* You can invest in India through:

– Abderdeen Funds, Fidelity’s India Fund, available via platforms

– the Macquarie-Globalis BRIC Advantage Fund, which also invests in Brazil, Russia and China

– the India Equities Fund, listed on the ASX.