"IF WE ONLY HAVE GREAT COMPANIES, WE WILL MERELY HAVE A PROSPEROUS SOCIETY, NOT A GREAT ONE. ECONOMIC GROWTH AND POWER ARE THE MEANS, NOT THE DEFINITION, OF A GREAT NATION.
– Jim Collins"
At an executive program at Harvard Business School (HBS) back in February 2006, I remember Professor Vietor talking about the India opportunity. As we discussed the HBS case study of 2003, “India on the move”, many scoffed. But I knew that India’s time had come. You do not have to go to Harvard or to their Executive Education program to see that if you had invested in India or the Indian markets (SENSEX) since February 1, 2006, you would have made about 105% by December 31, 2007.
The SENSEX, which is a popularly used barometer to measure the Indian markets, closed at 9,859 on February 1, 2006. OnDecember 31, 2007 the SENSEX closed at 20,286. Alternatively if you had invested in the SENSEX when Professor Vietor’s report was first published in June 2003, you would have made 538% by December 31, 2007.
That was about investing in the Bombay Stock Exchange (BSE) and its index the SENSEX. Though actually the National Stock Exchange of India (NSE), also a Bombay based exchange, is the largest in India. It is also the third largest in the world by the volume of its transactions.
There are many exchanges in the country but the NSE and BSE are the most important where the vast majority of transactions are done. In July 2007 the NSE had a total market capitalization in excess of $1 trillion and that made it the second biggest stock market in South Asia when measured by market capitalization, just behind the BSE. It is also interesting to note that the NSE is larger than any other exchange in India in trading volume. It is also the largest in the world when measured in value for individual stock future trades, whereas the BSE is the world’s largest in terms of number of listed companies – as of October 2007 their were 7,683 listed stocks.
Let’s assume you had invested $100,000 in Reliance Industries (the company with the largest retail shareholder base in India) on July 1, 2003, your investment would be worth approximately $828,000 by December 31, 2007.
No one really pays attention to the opportunities that knock once in a lifetime as they are just little voices in the head. I remember that in class, the biggest debate was as to how the lack of proper infrastructure would prevent this boom from becoming a reality. Other questions, such as how long the existing coalition government would last, or how the problems with Pakistan would derail this process, or how ‘Hindu’ India was not going to progress based on the goings on in Gujarat, were being debated. While these are all valid concerns, every concern in India is also always an opportunity.
I remember back in 2000 at the height of the Internet bubble, the then chairman of Merrill Lynch International, Win Smith, was visiting some clients in Dubai. This was a time when many people had many voices in their head. It was a heady time!!!
I introduced the chairman by telling the story of John. John is a man who hears a voice in his head that says, ‘Sell the house. Sell the car. Liquidate all investments and dump your wife and move to Vegas...’
He takes the advice and lands in Vegas and then the voice comes back and says, ‘Go to the Mirage. Go to the Mirage.’ When he gets to the Mirage the voice comes back again and says, ‘Go to the blackjack table and put all your money on red 36.’
Having come so far and listened to the voice, he puts all his money on red 36. As the wheel spins so does his world and when the wheel stops, with his heart in his mouth, he shuts his eyes and prays and then opens his eyes to see that the ball is on black 17.
In shock, John is now searching deeply and trying to reconnect with the voice but to no avail. In his distraught state, hoping to hear the voice again, he strains his ears until he hears the voice saying, ‘Oh Shucks!’
In those days many people lost all they had listening to the many voices in their heads. With all the clutter and talk about investing in India, it may appear that a similar hype is taking place but I assure you that it is not the case. It is not a voice in the head but a voice of reason. That is why I have put together 12 reasons why you should be looking at India. I want to start by saying this is no bubble and there are no pins around to burst it. India has sound fundamentals and India has changed.
Let’s start with the economy.
It was a cloudy afternoon in New Delhi. Coming out of the airport to the sound of honking cars and the phut -phuts reminded me that I had arrived. The standard greeting of many north Indians was still in fashion and had not changed as I heard a fellow passenger being met with ‘Paaji, ke hal hai’ (elder brother, how are you).
My driver, Satvinder Singh, from the hotel, was there and looked as robust as he always does with a very colorful pink patka (head gear) and twirled moustaches that had turned a shiny brown with many years of applying henna. He had a wry smile on his face. He had something to share and could not wait.
As I got in to the car my driver stated that his grandfather and father had all been soldiers and farmers. Those that did not make the cut for the Fauj (Army) stayed back to farm the land but that was not what he wanted his son to do. He always wanted his son to work for a bank. His son Balvinder had graduated from Hoshiarpur University and had just secured a job with ICICI, India’s largest bank. This bank, according to my driver, was better than all the foreign banks. He proudly shared some statistics and said that it was THE bank to work for. He was proud of the bank and even more of his son’s accomplishments. A lot of the boys from the small village of Chabbewal in Punjab (population 5,000 and made infamous by Ms. Monica Bedi) had now moved from farming to banking.
It is interesting to note that the largest rural to urban migrations in the world are currently taking place in India and China. In the new India there has been a huge shift from the agriculture sector to the services sector. When I left India in 1986 about 65% of workers were in the agriculture sector which contributed to approximately 35% of the GDP. 18% of the population was gainfully employed in the services sector. Today agriculture contributes approximately 20% of the GDP with 60% of the people employed in agriculture and 28% employed in the services sector, with the services sector contributing to approximately 60% of GDP. Times have changed.
As we sat in traffic and rocked to the tunes of Chak de India (India’s new theme song) Satvinder, who was very knowledgeable, began to tell me why Indian banks would also rock. His case was based on the rocking Indian economy.
Getting a hotel room had already been a challenge due to the usual conferences in town and the inflated rate of the room matched the ego of the lobby manager. Business was good.
As I looked around, I could not help but notice the crowded luxury goods store and the restaurant full of vibrant young people enjoying themselves. The new generation is wealthier and more demanding.
It is interesting to note that 54% of the population is in the 15 to 35 age group. India has one of the youngest working populations in the world. A report titled ‘Destination India’ from the Investment Commission of India states that, ‘of the BRIC countries, India, is projected to stay the youngest with its working population estimated to rise to 70% of the total population by 2030 - the largest in the world.’
An investor looking for opportunities to exploit or areas to invest in can scan the globe. No investor can ignore India or China. Both are large countries with large economies and opportunities. I will keep my discussions focused on the India opportunity. Although, I recognize and love the opportunity in China as much as I love Chinese food but do not understand it well enough to comment on. I will focus on the market I understand. Let’s just say that I have local knowledge.
If you look around, the US has averaged about 3% growth and Europe has averaged a little below 2% growth over the last 10 years. You could easily conclude that these are mature markets with saturated or declining opportunities. They are basically high cost and poor in population resources especially if you were looking ahead towards the next decade. India, in contrast, has a population of over 1 billion people, many of them young and this constitutes a huge resource pool. India has experienced phenomenal GDP growth of over 9% for the last three quarters and growth is expected to be at least 8.3% in 2007/08. In fact, GDP growth was at an annualized high of 12.4% from April to June 2006. Dong Tao, chief Asia economist from Credit Suisse, believes that India will overtake China as the world’s fastest growing economy on rising consumer and government spending. Here is an economy or an opportunity that is happening.
India’s Macroeconomic Take-Off
You look at this chart and think that India is growing in the world economic league, but you may also wonder why I am sharing something that is using 2005 GDP data in 2008. That is not much of a puzzle. This chart is drawn from the first BRICS Report out by Goldman Sachs two years ago. Today, India is a $1 trillion GDP economy, and has achieved that number ahead of the prediction in that first BRICS Report.
For those who for many years have been caught up in the romance of India and its snake charmers, there is a lot more than the cobras and the Taj Mahal to look at for the opportunity seekers. Here is a country with a GDP at $4.164 trillion (purchasing power parity), with real GDP growth of over 9.4% in 2006. This is not the old farmer country any more. In fact it is the service sector that now contributes 60% of the GDP while agriculture contributes only 20%.
Times have changed, haven’t they? A lot of people cite a Goldman Sachs report that predicted that India would become the third largest economy by 2035 based on a predicted growth rate of 5.3 to 6.1%. As we know it is currently cruising at over 9%.
I personally predict that it will happen much faster. I believe that the large pool of cheap labor, the intellectual capital, the strong communication system along with a more open and conducive investment climate with less regulations and barriers will allow India to sustain its competitive advantage.
Edward Luce in his book, ‘In Spite of the Gods’, concludes that the 21st century is not the one for India to win but to lose if it does not grasp the vast opportunities at hand. I could not agree more.
“There are always three sets of facts: yours; mine; and the facts,’ said Sanjoy Bhattacharya, a very articulate and charming man whom I met on one of my many trips to Mumbai and this is a comment that simply stuck in my head. So let me give you the facts – not mine or yours – but just the facts!
The facts don’t lie and if you looked at the projected future growth rates you would see why new India now, as the 3rd largest economy of the world, will continue to grow from strength to strength. Built on a solid foundation of its people and their demographics…
It is the reality behind these facts compounded with the extremely high growth rates that are driving this large economy. And I believe it is nothing else. It’s just the economy, stupid!
