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Expat Investor : April 2008
expatinvestor.com 24 EXPAT INVESTOR ? April 2008 FIRST PERSON India – why the party is just getting started For the past decade, investors will have been aware of the incredible transformations that have taken place since the collapse of the License Raj in 1991. A formidable combination of the world’s biggest democracy, favourable demographic trends, a large and educated workforce and rising household incomes, have resulted in phenomenal domestic consumption and accelerated GDP growth. A quick glance at stock market returns (Sensex versus MSCI Asia) over the last two years tells us that the story is gathering momentum. Looking forward, the key question is whether the proverbial punchbowl is in danger of being taken away, or is the party just getting started? In search of an answer, I recently embarked on a two-month tour of the country, travelling to major hubs, meeting dozens of companies and contacts, and engaging with management. Several incidents during the trip highlighted some of the paradoxes inherent in the current growth dynamic, but also the opportunities they offer from an investment perspective. Having done a reasonable amount of travelling around Asia I had prepared myself for the ‘shock- factor’, yet Mumbai knocked me sideways. Of the city’s total residential area, 60% is populated by slums (including Asia’s largest by area), providing a stark reminder of the glaring disparities between the rich and poor. The midnight drive in from the airport involved a 45 minute wait for my transfer, a 30 man brawl in the middle of the motorway and swerving to avoid bodies asleep on the road, all before I was overcharged on the fare. A huge corporate capital expenditure cycle began in 2003, and the government focus on infrastructure has increased substantially in response to the multitude of bottlenecks. Whilst this is to be applauded, the speed of execution is still not satisfactory. The city of Pune (an up-and-coming IT and manufacturing hub) demonstrated that, despite the best laid plans, there is still much work to be done. On the surface, the city certainly appeared cleaner than Mumbai in terms of overt signs of poverty and open garbage pits, whilst properties only a stone’s throw from the typically manic main road conjured up images of American suburbia. Billboards everywhere were advertising high-end apartments and housing, as real estate developers begin to capitalise on the ‘clean living’ phenomena by building self- sufficient mini-cities. However, the drive down to Pune aptly demonstrated the afflictions of decades of underinvestment. The carriageway could easily have been increased to six lanes and still have struggled to contain the traffic, whilst oversized potholes, chippings and a general disregard for all traffic laws were abundant. However, I managed to arrive in one piece, despite whiplash and a nasty ringing in my ears from the incessant horn- beeping. As for the journey back, the heavens opened and visibility was reduced to about 20 feet, although this didn’t deter my driver one iota. Road-markings were non-existent and the cats’ eyes were allergic to water, which made avoiding traffic difficult. I found myself in deep prayer as we passed lorry upon lorry that had aquaplaned into the sidewall. I then flew to Kolkata (Calcutta), capital of the communist-led state of West Bengal – internal flights between cities were extremely impressive; minimal check-in time with every passenger on board having plenty of legroom, a television and excellent food and service. Having done only a little reading on the city, my expectations were modest. The metropolitan area (where I spent the majority of my time) is characterised by acute geographic, social and ethnic disparities that threaten health, the urban environment and social harmony. A third of the population is deprived of even basic amenities in highly congested and degraded slums. Infant mortality rates here are obscenely high, due to the continuing reliance of millions of people on contaminated water sources and inadequate sanitation. My long and arduous bus-tour of the city proved to be little more than a series of cursory glances at immaculately maintained government buildings, whilst many of the temples and places of interest were inaccessible due to the sheer volume of beggars and pickpockets. With the temperature outside a stifling 37 degrees, no air conditioning on the bus and the seating inexplicably covered with carpet material, I decided to opt out and made my getaway. All in all, a rather unproductive journey. Nandigram in West Bengal provided a prime example of the ongoing political turbulence that rears its ugly head from time to time. The city won national recognition by successfully opposing the communist state government plans to set up industry on farming land. However, violent protests resulted, leaving innocent people, including women and children, murdered. The violence escalated to Kolkata, where protests and strikes left the city at a standstill for several days. This type of activity makes the possibility of attracting corporate investment and initiating reform very difficult indeed. The key message here is that, whilst the potential of India is not in doubt, several challenges must be met if she is to become the superpower that research predicts by the middle of this century she could be. More importantly for us, time spent on the ground has demonstrated how early we are into this growth story, certainly when you consider what has been achieved in the last decade. Much of the growth has been driven by a narrow segment of the economy, and whilst we are very comfortable with corporate India’s ability to execute and deliver, overcoming these structural issues is the key to multi- decade sustainability. There is undoubtedly enough innovation and private sector interest within the country to deliver, and potentially propel India to a higher growth trajectory. I have returned more bullish than ever on the market’s long-term prospects. For more information from Ashburton, enquire through the fast facts number below. Craig Farely, Investment Manager with Ashburton, provides this personal assessment of the opportunities India is currently presenting investors. Fast Facts 44480 MORE INFORMATION? Enter the Fast Facts number into the Reader Reply Service coupon on page 20 or go to www.expatinvestor.com “The key message here is that whilst the potential of India is not in doubt, several challenges must be met if she is to become the superpower that research predicts by the middle of this century she could be. ” “Billboards everywhere were advertising high-end apartments and housing, as real estate developers begin to capitalise on the ‘clean living’ phenomena by building self- sufficient mini-cities. ”
May June 2008