India - Now What?

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 tryingto 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.


Chris Mayer
for The Daily Reckoning
March 27, 2007

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

Editor’s Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Daily Article series to here in The Daily Reckoning. He is the editor of Mayer’s Special Situations and Capital and Crisis – formerly the Fleet Street Letter.

We have come to the heart of Normandy for a conference. But the Internet is everywhere now. Wherever you go, not only are you there…so is the Internet…and so is your work.

It has become almost impossible to leave your troubles behind you. Wherever you go there you are. And if there is an Internet connection, your worries go with you. (In two weeks, we are going to try to escape the Internet – in the far outback of the Andes Mountains…stay tuned.)

Of course, here at the Daily Reckoning, we have no worries. We are sans soucis…happy to wait, watch and wonder what is going on.

Today, we wonder – briefly – about the big things…the big trends. Let’s recall our Five Big E’s and see if we’re still on track.

Energy – Our guess is that energy is generally becoming more expensive. Not that we have any inside information about it. We’re just putting two and two together. The modern world runs on oil, and every year that passes brings more of the modern world and less of the ancient fossil fuel that powers it. Absent of some breakthrough in energy production…or some major break in the trend towards economic development worldwide…expect to pay more for juice.

Experimental Money – Money makes the world go round…but what makes money go round? In theory, it has to be limited in supply so that it mirrors the supplies of goods and services that it is used to buy. Historically, gold was used to insure that the supply of ‘money’ did not outstrip the supplies of goods and services. But since 1971, gold has been out of the system. People only have their faith that the people who control paper will control it well. Yet, history also shows that they never do. The temptation to create too much ‘money’ has always been irresistible…which leads to a trend; paper money loses its value. Since the quantity of “money” is now increasing so rapidly, we expect this trend to accelerate. This is not to say there couldn’t be a period of deflation…in which currency actually gains value, for a time. But a deflationary period would probably only increase pressure on the financial authorities to increase the supply of currency. We would be surprised to see this experimental system survive for another 20 years.

Exodus – Economic power is shifting from West to East. Just look at the Forbes list of billionaires…just read the papers…just look at where your cars and gadgets were made. Most of the economies of Asia are growing two to three times faster than those of the United States.

Last week, we met with our new partners from India. One thing that surprised us was the Indian labor market:

“Yes…there are more than a billion people in India…” said our partner, “but just go and try to find someone. The labor market is very tight. People who have been to business school – if they’ve been to a good one – can get a job anywhere. Not just in India, but almost anywhere in the world. So they’re salaries are up at world levels. If you want someone to sweep your driveway…yes, that will be very cheap. But if you want someone to do the kind of work we do…well, you will pay almost as much as you would in America. Salaries are rising fast.”

This from Associated Press:

“An annual survey by Hewitt Associates revealed that Indian salaries are likely to rise an average 14.5 percent in 2007, with banks and financial services companies offering the biggest hikes.

“The Philippines is expected to come a distant second with salary increases averaging 8.3 percent, and in China, salaries are likely to rise 8.1 percent, the survey showed.

“While pay hikes are expected to moderate in most Asian countries during 2007, India will see an acceleration from last year’s average increase of 14 percent.

“‘The war for talent is becoming increasingly fierce in India,’ said Sharad Vishvanath, a Hewitt executive involved with the survey. ‘As a result, compensation plays an increasingly fundamental role in attracting talent and ensuring ongoing employee engagement.’

“Indian paychecks are expected to eventually reach the same levels as developed Asian economies like Japan and Singapore, said the survey which looked at 1,500 Asian companies of which 580 are in India.”

Why should this trend come to an end? Why, in a globalized world, should a man’s labor in Chennai be worth less than a man’s labor in Detroit? Is the man in Detroit smarter? There is no reason to think so. Has he better tools? More information? More capital? Maybe in the past he did. But now no country has a locked-in advantage. The same Internet that makes it possible for us to write to thousands of Daily Reckoning readers all over the world also eliminates much of the local advantage that the West used to have. That and shipping containers…and trade agreements…and low-cost air travel…and the rise of English as a world trade language.

Our guess is that this trend is likely to continue. Asia is probably going to get rich. China already has the biggest single pile of money put together since Midas – more than $1 trillion.

Naturally, as the Asians get rich, it is going to push the other trends along – they’re going to use vastly more energy. And they’re going to want to eat more meat…and drive more cars on more highways…

…and they’re probably also going to want to throw their weight around militarily. Nations mind their own business until they are big enough to begin minding other peoples’ business. Eventually, the Asians will begin spending their money on weapons…and start to flex their muscles. Our advice to U.S. leaders: Be nice to the Asians.

More of the Big E trends tomorrow…

[Ed. Note: Our advice to you, dear reader: Invest in the Far East. A rare confluence of politics, business, globalization and the age-old forces of supply and demand could make Asia the profit opportunity of a lifetime. And because of this, we’ve titled this year’s Agora Financial Investment Symposium, “Rim of Fire: Crisis and Opportunity in the New Asian Era.”

The Symposium is taking place at the Fairmont Hotel in Vancouver, British Columbia, July 24-27. Secure your spot now, and receive $200 off the regular price of admission. Call Agora Travel at 800-926-6575 to be added to the list right away.]

First, the news…


Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis…

“Adding to the mortgage problems, there will be a massive amount of adjustable rate mortgage resets coming in the next few years. More than $2.28 trillion worth of ARMs were originated in 2004, 2005, and 2006, at the peak of the housing boom.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


And now, more thoughts…

*** New homes sales came in disappointingly low in February…again. They were at levels not seen for nearly seven years.

And Florida has become the foreclosure capital of the United States. The Sunshine State has already gone from boom to bust many times. In the ’20s, speculators bought and sold lots until they went broke in the ’30s.

“You can get a house in wood…you can get brick…you can get stucco,” said Groucho Marx, playing a shyster land developer, in the movie, Coconuts, “…boy, can you get stucco.” Many people have gotten stucco in Florida property in the last few years.

“There’s something about Florida residential real estate that attracts speculators like an alligator to an easy meal,” says an AP story.

“As the market stalled, buyers were scarce and expenses rose, and they were forced to sell… There are for-sale signs on almost every other property on the most desirable road that embraces the graceful, white-sand beaches of the Gulf of Mexico. Local newspapers carry four or more sections of real- estate advertising.

“Like so many formerly torrid markets, southwest Florida home prices are in retreat. Prices fell 2 percent in the fourth quarter of last year in the Naples area and more than 1 percent in Fort Myers after more than doubling in value over a five-year period, according to the Office of Federal Housing Enterprise Oversight, the watchdog agency for the mortgage companies Freddie Mac and Fannie Mae.

“[A] combination of slower sales, higher mortgage rates, large inventories and cash-strapped flippers being forced to sell is tilting the balance to buyers now.”

The Daily Reckoning