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The Indian subcontinent has been anything but subpar for investors over the past two years. Stocks on the Bombay exchange have more than doubled since January 2003, a period in which the world finally witnessed the economic potential of the world's second-most-populous country.

Despite the success of India's economic coming-out party, many analysts are unsure if Indian stocks can extend their gains through 2005. Samir Mehta, portfolio manager for the $94 million

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Eaton Vance Greater India fund, sees the Indian economy growing at slightly close to 6%, a more than reasonable clip and close to double the expected U.S. growth rate. Nevertheless, he expects the flood of foreign capital into Indian stocks -- mostly from investors seeking to profit from a declining dollar -- to moderate in the year ahead, thus removing a strong base of support for Indian securities.

Mehta's investors would obviously be thrilled if his fund matched its 2003 and 2004 returns of 114% and 18%, respectively. But while those numbers may be out of reach in 2005, Mehta told

in an interview that India still offers a great deal of opportunity, even if investors may have to wait for it.

India has been a fantastic place to invest over the past two years. Will 2005 be a third strong year in a row?

We believe that India is an excellent destination for long-term investments. However, as you mention, the past two years have delivered spectacular stock market returns, which makes us a bit more cautious in the near term. We still think the economy will grow at around 5.5% to 6% per annum, and earnings growth in general could be around 12% to 15% for the coming year, which makes it a good environment for equities.

Nevertheless, the tremendous amounts of liquidity that have gone to emerging markets in general and India in particular, combined with close to fair valuations for the market as a whole, make us circumspect on the markets. Besides, almost 60% to 70% of the earnings growth for the market as a whole this year has been derived from oil, steel and petrochemical-related cyclical companies, which may not be repeated next year.

Parts of India were hit by the recent tsunami. Will this affect their economy?

The tsunami was a tragedy for loss of human life in quite a few areas of southern India. The government and relief agencies are trying to provide aid to those affected. It is difficult to realistically assess the full extent of the damage, but initial chats we have had with companies operating in the region is that economic activity might be marginally affected for a month or so. So we think this tragedy will not have any lasting damage.

U.S. companies outsourcing jobs to India has obviously become a sensitive issue here. How is this affecting the Indian economy?

Outsourcing to India, be it in software services or pharmaceuticals or auto ancillaries, has an extremely beneficial impact on the economy. It is driving companies to get globally competitive from both a capacity and cost perspective. It is leading to job creation in various parts of the economy and raising income levels. It is also responsible in an indirect way for the government to improve infrastructure to cater for this demand.

With more American jobs moving overseas, is there a possibility of a backlash against India in the form of tariffs or trade legislation?

If the global economy were to slow, we have no doubt that trade friction would increase. Whether or not India will be part of this is difficult to predict, but as investors, it is safe and prudent to assume that it might. However, our sense is that these issues will, in the long run, not be a major hindrance as globalization continues to gain traction.

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How is the current political state of India with regard to its neighbors?

Political relations with all its neighbors are cordial and friendly. Post-September 2001, relations with Pakistan have improved.

What is India's relationship with China, another rising emerging-markets star?

The relationship between India and China has never been better. Trade and investment flows are growing rapidly. Indian companies are looking at China as a source to manufacture or buy high-quality products at competitive prices, but they are also looking to China as an export destination for high value-added goods and services.

You own a lot of oil companies in your portfolio, like Hindustan Petroleum and Bharat Petroleum. Is India an energy exporter?

India is a net oil importer. As a percentage of GDP, it is roughly about 3.5%, and close to 65% to 70% of India's oil needs are imported. The reason we own a lot of oil companies is because they are cheap with high dividend yields and are well-managed. And most of them are refineries with a huge marketing and distribution network.

What is the current state of domestic growth? Can the Indian consumer start replacing the weary American consumer?

The domestic economy is in good shape and the consumer in India is enjoying the benefits of a phenomenal increase in the availability of personal credit. Mortgage and personal lending is growing rapidly, and as aspiration levels and income levels rise, the consumer side of the economy is strong.

As to whether the Indian consumer can start replacing the "weary American consumer": Our view is we are years, if not a decade, away from such a scenario.

What stocks do you like the most? Why?

We like companies that can compete globally and address end markets that are a multiple of the domestic market.

United Phosphorous

, an agrochemical producer, is now replicating what pharmaceutical companies from India have done before, which is addressing a huge generic market opportunity with a cost base that is extremely competitive.

We like electric power equipment manufacturers like


and engineering companies like

Larsen & Toubro

that cater to the huge infrastructure demand in India. We also like pharmaceutical companies such as

Dishman Pharmaceuticals


Ind-Swift Laboratories

that cater to the generic and active pharmaceutical ingredients market.


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is also one of our larger holdings.

How is the weak dollar affecting India?

The weak U.S. dollar, in our view, has had the biggest impact on India from a fund inflow perspective. As you know, when the U.S. dollar weakens, all emerging markets do well. The past two years, China and India in the Asian region have been disproportionate beneficiaries of such inflows.

For companies, it is a mixed blessing, but our positive view of a strengthening Indian rupee vis-a-vis the U.S. dollar is that exporters have to get even more competitive to remain as profitable. For the economy, it has helped in two main ways: First, the inflow of capital has driven down long bond yields, and lower interest rates have helped ignite a retail credit boom. Second, it has helped mitigate a bit of the imported price inflation.

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