 India
- Now What?
Chris Mayer
Apr 2, 2007
The Daily Reckoning PRESENTS: The emergence of India as an economic
force, along with China, is one of the biggest stories on the
investment landscape in recent times. And like China, India's
success has come despite massive head winds. But is now the time
to invest? Chris Mayer explores...
I recently finished a good
book on India, one of the best I've read about the country. Edward
Luce is the author of In Spite of the Gods: The Strange Rise
of Modern India. He was the South Asia bureau chief for the Financial
Times, living in New Delhi from 2001- 2006.
It seems Luce traveled everywhere
in India, meeting with local officials, business people, journalists
and more. This is the kind of research I put a high value on.
There are things you learn by being in a place that you simply
can't from afar.
The portrait that emerges from
Luce's work is one of incredible complexity, color and contradiction.
Many of the stereotypes you might have about India only deepen,
while others explode in the face of contrary evidence.
For an example of deepening
stereotypes, take the tangled and corrupt Indian bureaucracy.
Its army of workers is immune to dismissal. Corruption is rampant
and widely accepted in a way strange to Western eyes. This leads
to some absurd circumstances. The highway department in India,
for instance, employs 1.25 people per mile of road, the highest
number in the world. The government pays them more than
three times the market rate for such labor. "Many of these
employees do not bother showing up for work," Luce writes,
"because they cannot be sacked."
Many of India's roads are terrible.
Seldom can you go more than 40 miles an hour, even on highways.
Traffic switches lanes unpredictably and absurdly. Luce writes
of driving in a highway lane and having other cars come at him
from the opposite direction. Then there are the ox carts and
bicycles and the traffic laws that no one enforces.
The Indian bureaucracy is as
expensive as it is useless. Much of the government's spending
is tied up in paying itself. Salaries for its bloated payroll
soak up money that could have gone to building better roads,
power systems and water and wastewater plants. Of course, all
of these government employees have cushy pensions.
The legal system is also a
mess. Widespread corruption is one issue. It is so open that
some judges have a menu of fixed prices. Luce writes: "You
pay x thousand rupees to get bail if you are standing trial for
a narcotics offense, y thousand for manslaughter..." Then
there are lots of vacancies and the fact that judges don't work
much - maybe from 10 to 3, with at least an hour for lunch. "Perhaps
the biggest problem," Luce writes, "is the gigantic
backlog of suits in India, which in 2006 amounted to 27 million
cases. At the current rate at which India's courts wade through
proceedings, it would take more than 300 years to clear the judicial
backlog." By some estimates, 10% of the economy's capital
is tied up in legal disputes.
Suffice to say, this is a deep-rooted
problem. I can only imagine the frustration of trying to
do business there. (One memorable quote from the head of Proctor
& Gamble's India operations: "In my 30 years in active
business in India, I did not meet a single bureaucrat who really
understood my business, yet he had the power to ruin it.")
The social problems chronicled
in the book are alarming, too. This is another area where stereotypes
deepen by reading the book. The old caste system is depressing
in its inhumanity. You'll also see the violence of religious
strife and stark portraits of extreme poverty.
But the book also explodes
stereotypes of India. The big one here is the economy itself,
which is peculiar and complex and not what most investors think
of when they think of India.
When thinking of India's economy,
most investors probably associate it with its outsourcing companies
- India as the world's back office, with call centers and armies
of computer programmers and engineers. But as Luce makes clear,
this part of the economy is still tiny, and much of India's strange
economy is poor and backward.
"Fewer than 1 million
- that is, less than a quarter of 1% of India's total labor pool
- are employed in information technology, software, back-office
processing and call centers," Luce writes. Most Indians
work in an unorganized and primitive economy, working on farms,
running small shops or street stalls, driving rickshaws, working
as servants, serving as seasonal laborers and other tasks. More
people work for the government (21 million) than in India's private
organized sector (14 million).
There is a long way to go in
India... which is, oddly enough, part of its great appeal to
investors and businesses.
The Indian "middle class,"
depending on how it is measured, is between 50-300 million people
- which alone is larger than the populations of entire Western
countries. Then there is brisk economic growth - 9% last year.
For these reasons, a long list of companies continues to try
to crack the market. AIG, Citibank, Pepsi and many others have
already become market leaders in their segments in India. Many
more are trying to gain a foothold.
"During my time in India,"
Luce reflects, "I have often been amused by the foreign
executives I have met who spend years occupying the same hotel
rooms while they await the green light for their company to invest
in India so they can set up a permanent office."
If you're interested in more
on-the-ground reportage on India, I recommend Luce's book. Since
the book's publication, a couple of events stand out as interesting
landfalls marking India's continued ascent.
There is, for one, India regaining
investment-grade status after a 15-year hiatus as the big ratings
agencies removed the speculative tag from India's debt. This
is important, as it will lower the cost of borrowing for many
Indian companies.
Then, probably more importantly,
there is Tata Steel's big acquisition of Corus, its Anglo-Dutch
peer - the first large acquisition by an Indian company. It has
brought out a certain boldness in India's corporate culture.
As one leading Indian commentator put it: "I look forward
to the day when ICICI Bank takes over Citibank; when Infosys
acquires IBM; when Reliance takes over Exxon; and Tata Motors
takes over General Motors." Will the Tata Steel acquisition
be something future historians muse over as a harbinger of
a new trend, or will it be but a footnote?
Plenty of head winds remain.
According to the World Bank, the average Indian manufacturing
firm loses 8% of sales per year due to power outages. Roads are
still lousy. India, like China, is a voracious consumer of energy
and raw materials.
Yet such head winds also create
opportunity. The daunting prospect of feeding India's economy
bodes well for investors in energy and in all of the components
of infrastructure. India currently imports 70% of its oil needs,
for example, compared with only 30% a year ago.
So should we buy today?
One day, India will be cheap
again - and worth a bet. Don't forget last year's nasty sell-
off in May and June, when India's markets lost a third of their
value. In retrospect, that was a great buying opportunity.
Regards,
P.S. No market rises without
hitting these air pockets along the way. There will be plenty
of opportunities like that again. If we're patient, we'll get
the opportunity we want at a price we'll happily pay. In the
meantime, keep learning and watching, like a Bengal tiger lying
in the shade of the mangroves of the Sundarbans...or, if you
want to take a more 'hand's on' approach, join Addison and Mt.
Vernon Research Investment Director, Karim Rahemtulla on The
Asian Tiger Investment Tour of India.
This tour, which will take
place October 25 - 27, will take you through the major business
hubs in India - Mumbai, Hyderabad, Bangalore...and more. You'll
travel with your experienced hosts in first-class style, staying
at the finest hotels and enjoying some of the best food India
has to offer - all the while learning how to position yourself
to profit in Asia.
Secure your seat now - call
Agora Travel at 800-926-6575, or email at info@agoratravel.com
The above essay was taken from
the latest issue of Capital & Crisis. To read more, see here:
Capital & Crisis
http://www.isecureonline.com/Reports/FST/EFSTGC27
Mar 30, 2007
Chris Mayer
for
The
Daily Reckoning
Christopher W.
Mayer is a veteran of the banking industry, specifically in the
area of corporate lending. A financial writer since 1998, Christopher's
essays have appeared in a wide variety of publications, from the
Mises.org Daily Article series to The Daily Reckoning. He is also
the editor of the Fleet Street Letter.
321gold Ltd
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