What 700 Million People in the Dark Says About Investing in India - Outside View by Keith Fitz Gerald

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What 700 Million People in the Dark Says About Investing in India
Aug 8, 2012

For years now I've preferred China over India.

When invariably asked to compare the two as investments, my answer has always been the same.

Somewhat tongue -in-cheek, I'd point out "that India has trouble keeping the lights on from one end of the country to the other."

Little did I know that those comments made in jest would actually become reality.

Earlier this week, a massive power blackout left more than 700 million people without power in India as not one, but three, regional electrical grids failed.

If that isn't a glaring sign that India isn't ready for prime-time I don't know what I can say to make you see the light - pun absolutely intended.

Don't get me wrong. There are clearly a few select Indian companies worth the risk.

But as a whole, the scope of this power failure suggests India has a long way to go before it achieves the global superpower status it seeks and a dominant position in your portfolio.

India Needs to Put its Own House in Order
Not that this will stop India from trying.

It's now the 8th largest military spender in the world, having tripled defense spending in the past 10 years. It's no secret India desperately wants to have a permanent seat on the United Nations Security Council.

And, it's making great strides in international diplomacy that it believes will pay off later in increased foreign recognition and direct investment.

But as this embarrassing power failure demonstrates, India would be better off getting its own house in order first before it steps onto the world stage.

Many investors take issue with these views. They cite the fact that India is the second-largest English-speaking nation in the world, that 58% of its economy is consumption-based, that it has huge numbers of tech-savvy and well-educated people.

I don't dispute any of that.

However, on the other side of the ledger is a laundry list of reasons for investors to be wary.

India's corruption and graft makes China's legendary insider dealings look positively tame. Badly conceived tax policies do nothing to speed up growth. The rupee is a disaster. The caste system robs people of hope. Sanitation is appallingly bad.

And now, India quite literally can't keep the lights on.

Now we're obviously not a paragon of virtue ourselves, so I am not pointing fingers either real or imagined. Our own "house" is an ungodly mess in many ways.

But fixing these problems first could give India a powerful advantage down the road. As noted by the London School of Economics among others, India should focus on its internal socio-political and economic issues before pressing on with its global ambitions.

To me, the question is one of putting governance first, then leveraging change into business development.

In a region torn by war and religious strife for thousands of years this is no small issue. It is the issue and timing is of the essence.

Here's why.

The foreign investors India craves but fails to attract on anything more than a piecemeal basis are losing their patience. Worse, they're losing their vision.

Never mind what India thinks about its future. If foreign investors don't have the same faith, they won't invest because they don't believe in India's potential.

Case in point: Ruchir Sharma, head of Morgan Stanley's emerging market analysis, gave India only a 50% chance of returning to its growth trajectory from a few years back. I'd place the odds at 30%.

Again, it all comes back to meaningful change.

To echo the words voiced by ArcelorMittal Chairman and CEO Lakshmi Mittal, the lack of change potentially damns millions in India to poverty-not to mention literal darkness.

What India Can Learn From China and Japan
What kinds of changes does India need to make, you ask?

India needs to take a cue from China, which closely studied Japan's successful transformation following WWII. This means dramatically engaging the West as a means of increasing technological prowess, global best practices management and foreign direct investment - all of which translate directly into bottom line results needed for healthy capital markets and sustained investment.

In his book "Superpower?" author Raghave Bahl makes a similar case. Bahl notes that while this will lead to huge "terrifying dualities," the changes are a necessity for India's future.

Specifically, he cites the massive imbalances that exist between investment, which represents roughly 50% of China's GDP, and consumption.

At the same time, though, I'd like to submit that what China has done is simply without precedent. There has never been another nation in history that has pulled itself up from poverty to become the world's second largest economy in a matter of decades.

But there could be in India - beginning with a dynamic investment in the country's electrical grids.

So what do you with your money?...

Limit your exposure to India or underweight it if you prefer that term. India is not ready for prime time yet.

Investors can expect more internal trouble to surface. That's going to cool economic growth more rapidly than most experts expect.

What's more, I expect India to receive multiple ratings downgrades in the next twelve months-- not the least of which will cause it to lose its investment grade status.

If you just can't stay away and have deep enough pockets to consider India in a more speculative light, concentrate on what India's blossoming population needs rather than what it wants.

EU, U.S. and Chinese stimulus will eventually flow around the world with some of it winding up in India. Good choices include companies like ICIC Bank (NYSE: IBN) and Tata Motors (NYSE: TTM). Both are beaten down significantly from their 2007 highs, which makes them contrarian plays in the purest sense of the word, given the overall outlook.

There's also the Wisdom Tree India Earnings ETF (NYSE: EPI).

Roughly 30% of the fund is concentrated in industrials, which means you'll have to put up with what could be extreme volatility as India gets back on its feet. You may also have to wait a while.

And finally, investigate the Franklin India Prima Plus (100519.BO). Traded directly on the Bombay exchange, the fund offers a healthy 10.60% yield that may be worth the ups and downs you'll have to endure as India transitions.

For me, I'd just like to see them keep their lights on first.

This article is authored by Money Morning, a leading source of investment news research for the global markets.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "What 700 Million People in the Dark Says About Investing in India"

Naxpar

Aug 18, 2012

Light or no light we indian are facing this problem from long, and than also we progress, if FI/FII is not coming we do not need them.(They will take home all the profit: will ask to change law and policy to favour them all bad techniq in the name of so called well being of india and their defination of progress) what we need is change in inside gaddar like today's politician(main) and non working govt.babus, pl come out of British rule days......... and act like free country, taking its own dicision,planning its own policy, and implimented by its own people ..... we are capable we don't need god father/country.

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Harit Shah

Aug 10, 2012

While a lot of the points made by the author are taken, I would like to point out that as far as China is concerned, we all know how reliable its numbers are and we also know what sort of a country it is, the kind of freedom it gives its citizens. It is definitely NOT a country I would ever want to stay in, for sure! Give me India, any day, with all our flaws! And one area where we must NEVER take cues from Japan is in the massive amounts of debt they have soaked up! Their debt-GDP ratio is amongst the highest in the world (I believe its over 400% or some such ridiculous figure) and they have been on a downward spiral for over 2 decades now! For sure I would hope that we never take such cues from any country! Our RBI governors have been very sensible in not allowing 'easy money' policies, which only leads to raging inflation and unsustainable growth, which will eventually collapse and lead to recession or even stagflation, what we are seeing in major developed countries like the US.

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