CHAPTER 2

India

HEAVEN OR HELL?

I ask myself that question each time I visit India. Another former empire nation, India is likely the country with the most potential of any Tier 2 emerging market—if only it could get its act together.

My first visit to the country was in 1997. After stopping in Hong Kong for the handover, I boarded a flight for New Delhi. As I recall, it was one of the scariest flights I have ever been on (besides the Singapore Airlines flight I was on leaving Taipei when I witnessed one of the four engines exploding from the upper deck). The combination of unstable air from the monsoon and the mountain ranges made for a turbulent flight with a spectacular lightning show.

Landing at the airport in Delhi was an interesting experience. Besides the fact that I am the first member of my family in three generations to set foot in the country of my origin, India assaults you the minute you land. Normally, when a plane lands, the vents are opened to let in fresh air from the outside. When landing in India, I would recommend that the pilot not open the vents. The pollution is so bad that all I could do was clutch my throat and reach for a bottle of water in my backpack. Yes, it’s that bad. On my last trip, just a couple of years ago, that part had not changed. I have been to India several times in the past 15 years and the pollution is getting worse each time. That’s not a good sign. I would have to rank it ahead of China in this respect, not a position that the country should be proud of. But, as in almost all emerging markets, there is a high price to pay for progress, and the argument against pollution is not met with friendly ears.

The second thing you notice about Delhi’s airport is that it’s pretty much a dump, like most airports in India that I have had the pleasure of visiting. It was built in the 1970s and looks as if it was painted for a second time in the late 1970s. I’m sure many of the offices still have shag carpeting—the lounges are a joke. A new terminal opened recently—I’m sure it is an improvement.

This is pretty much the case throughout India. It just doesn’t seem to want to move as fast into the twenty-first century as does China. If someone even utters India and China in the same sentence when it comes to growth or any other comparison, they are either lacking in scruples or have never visited both countries. There is no comparison; hence China is a Tier 1 country and India is not. Now, this has absolutely no bearing on the opportunity to make money. In that regard, India may actually be a better long-term bet.

The airport is crowded with very little in the way of order anywhere. There is a lot of security, thin men in berets carrying sub machine guns. It’s a no-smoking terminal, but somehow the whiff of tobacco smoke is omnipresent as are the butts in the corners of the hallways. Once you clear security and head outside, it is different . . . well, at least different from my first visit. Invariably all flights coming into Delhi arrive at 2 a.m. or 4 a.m. It’s really ridiculous to expect anyone to navigate that early. Fortunately, unlike China, everyone here speaks English, some better than folks at home!

On my first visit, I really could not tell where the airport ended and where the street began. Beggars were everywhere, hawkers trying to arrange taxis, random people just staring at you as if you had landed from another planet. It was a zoo. Now, however, there is a little more civility. The madding crowd is no longer congregating at the steps of the airport and that makes exiting a lot easier. Although, I do secretly miss the noisy throng that is representative of the country in general.

Progress

Leaving the airport, I expected a leisurely ride to the Oberoi with Dr. Zakir Hussain Marg. It was anything but. I could not keep from looking out of the windows, at least not in 1997. There were people sleeping on the sidewalks, not in a temporary fashion but in what seemed like bunks, three high. It was a disturbing sight, but they seemed to be quite content. It was a sight I would see over and over again in this country where a person’s lot in life is seemingly graciously accepted. On my last trip, the sidewalks were less occupied to the point of actually being quite empty.

New Delhi

Delhi, pronounced Dilli, is a city that has been destroyed and built over many times. It has been the capital of India many different times as well, usually at the whim of the Moghul emperor in power at the time. Most recently, Delhi became the capital city of India under the British Raj who transferred the capital from Kolkota (Calcutta) in 1911. It officially became the capital in 1947, after India gained independence from the British. It is not the financial capital of India; that title belongs to Mumbai (Bombay), but it is the seat of power in the country and a very different place. It is much like Beijing in terms of seriousness compared with Shanghai in terms of fun.

Delhi has its share of awesome architecture ranging from the Qut’b Minar, a tall tower built in the 1200s to the Edwin Luytens architectural masterpieces that are the capital’s governmental buildings. Delhi, like the rest of India, is teeming with life and home to some of the country’s best universities, one of the reasons I made a visit here in the mid-2000s. My mission was to do some groundwork with a couple of my colleagues regarding opening up an office in India, or at the least hiring some of the homegrown talent we had heard so much about.

My visits to the various universities astounded me. Many were not pretty on the outside, housed as they were in crumbling buildings. Inside it was little different—think old-American-schoolhouse-on-the-prairie type furniture. Some of the technical colleges were housed in more modern facilities. But, in India, looks are deceiving. The real treasures here are the students. They are smart, hardworking, ambitious . . . and cheap.

I met with several placement officials at the universities and what I learned amazed me. The norm was for a graduate, with a graduate degree, to be hired by one of the large IT companies. Many would provide training and housing in addition to a job. The top companies would offer a package worth about $18,000 to $25,000 for a top-level student with an advanced degree. The same person would command close to six figures in the United States. That is why western companies have such big operations in India and why companies like Infosys are so successful. I arrived at the end of the school year and all of the graduates had already been placed. Now, think about that. If the top-ranked graduate students are only pulling down $18,000, think of how little it cost to hire four-year grads from the best schools. This is why the future of places like India and China is so bright. They have a seemingly unlimited supply of extremely well educated, ambitious talent who would jump through hoops for a job twice as hard as one they could find in the United States, for 10 to 20 percent of the money. It’s not hard to figure out who’s going to win this economic battle in the end.

The Short Tour

Personally, I would not recommend spending more than a couple of days in Delhi. Unless you’re up for some serious sightseeing, there are many more exciting places to visit in India. Delhi does have something, though, that is not found anywhere else in India: the Chandni Chowk. Entering this age-old market is an adventure in itself. Think of the worst driving and traffic you’ve ever seen and multiply it ten-fold. It is nothing short of a great buzz navigating your way through the crowds whether in your car or on foot or in a tuk-tuk. On the bumper of every vehicle there is a sticker that reads “Please Honk” and they mean it!

Entering the Chandni Chowk you drive past a street full of barbers cutting hair and shaving men’s beards on the sidewalk. Not just one or two, dozens. In front of you at all times are little kids doing acrobatics and begging for a handout. Once you enter one of the main streets of the market your senses are assaulted by the smells of spices, cooking, and, of course, the body odor. Every square inch of the streets are occupied either by vendors, beggars, street urchins, or buyers. Walk around one corner and you’ll see a cow being fed by its owner. Around another is a beautiful wedding procession, colorful, loud, and jolly. Around another is a Sufi mosque, and around the next is the flower market with garlands as far as the eye can see. Commerce in India is a way of life and the Chandni Chowk has been in existence on this very spot for centuries. It is a sight not to be missed. Of course, the pickpockets know this as well—beware. There is little violent crime in a place like Delhi, but petty theft is pervasive.

The Jama Masjid is another one of Delhi’s great sights. A beautiful mosque that was commissioned by Shah Jehan, the Moghul Emperor who built the Taj Mahal, it is open to visitors daily. You’ll notice that the predominant form of architecture in Delhi (of really historic buildings) is of Moghul heritage. It was the Moghuls who arguably brought India out of its dark ages and also caused its collapse. They left behind scores of fantastic buildings and complexes, like Fatehpur Sikri, made of red sandstone, and the Taj Mahal in Agra. There is no lack of outstanding architecture in India, both Hindu and Muslim, and much of it is fantastically preserved. There is no love lost between Hindus and Muslims and in much of Indian society, while members of the two religions coexist, there is a noticeable social and business chasm between them that I encountered in my dealings with both groups.

My favorite part about Delhi is leaving it. India has much more to offer than a polluted, noisy capital city. It has its charms and Delhi-ites love it like no other place, but it’s not the best introduction to the country. If you must, the best time to visit is between November and March when the weather is cooler—and it can get cold. I’ve been there in the monsoon season, and that is a time to avoid at all costs, unless 100-degree, wet, humid days are what you are seeking. Delhi is also a great staging point for a visit to Katmandu and Mt. Everest, only a short hour-and-a-half flight to the north. I won’t be talking about Nepal, but if you go, stay at the Yak and Yeti in Katmandu, a beautiful hotel in a city and country that is one of my favorites to visit for recreation.

Mum-BUY

There are few places that I have visited in my travels that are as vibrant as Mumbai. Formerly Bombay (from the Portuguese bom baim or “good little bay”), this coastal city on India’s West Coast is the country’s financial and entertainment capital. Choked with traffic day and night, the city manages to function in grand style. From beautiful Victorian-era buildings such as the main train station and post office, to skyscrapers in the financial district and mansions in the Malabar Hill area, Mumbai offers a glimpse of cosmopolitan India. Bollywood, India’s prolific entertainment business, calls Mumbai home, and if you are looking for glitz and glamour, you’ll find it here.

Mumbai is also home to the Bombay Stock Exchange (BSE). It’s an interesting place. The exchange building is kind of modern—it’s tall, has lots of glass, and looks like it could pass for a mini skyscraper in any modern city. Unfortunately it is surrounded by fairly ugly buildings and is on a street that would easily pass for a poor street in Manhattan. Inside, the exchange floor is beautiful. Air-conditioning is still a little spotty, though, and it can get quite warm in the summer. On my first visit here I met with the head of the stock exchange who was still sweating despite the window unit in his office.

It was an interesting time, my first visit. The Asian financial crisis was just beginning and India was in the midst of a bull run. It weathered the storm quite well, in hindsight. India is less prone to be affected by external crises than many other countries. Its currency is not convertible, its population tends to buy locally made goods, and it’s still largely an agrarian economy. The low level of reliance on imported and exported goods makes it less likely to be affected during global downturns. Frankly, the situation is not by choice; India has been a relatively poor country for decades. Things are changing now, but not for the majority of the population. Like China, when you have more than a billion people, even a minority of the population is bigger than the entire population of the United States.

The BSE has been on a tear over the past decade increasing in value ten fold since 2001 and holding those gains today. The financial crisis affected the BSE, but it bounced back with a vengeance. See Table 2.1.

Table 2.1 Bombay Stock Exchange 2001 to 2011

In terms of historical valuation the market is trading close to the higher end of its historical averages. It hasn’t reached the absurd levels it reached in the mid-90s when the price earnings ratio reached 45 and price to book was 6.5. There are three explanations for India’s strong market performance. First, the market is extremely small in terms of capitalization at $1.6 trillion. Sounds like a big number, but that market cap is less than that of the five largest U.S. companies. Second, the Indian market is still the recipient of strong Foreign Direct Inflows, which can goose prices in a small market. Finally, Indian stocks are trading well because there is underlying growth in the economy. It’s a good situation for now. But India, like every other emerging market, is prone to massive volatility and is not immune from market manipulation.

The Big Bull

When I first began covering emerging markets in 1992 as the research director for Taipan, an emerging market publication, India was on my screen for all the wrong reasons. It was the subject of global scorn because of a massive market manipulation pulled off by the infamous Harshad Mehta (infamous there), more fondly referred to as the Big Bull.

The Big Bull was very bullish on Indian equities. After making his way up the exchange ladder from a small-time stock broker, Mehta developed a following based on his trading prowess. Little did anyone know that this prowess was the result of heavy market manipulation. Mehta would borrow money through an intricate scheme where his funds would be guaranteed by government paper during a 15-day float period. He would use the money to buy up shares of companies and, through his promotion of the upward momentum that seems to draw in buyers, he would make enough to pay back the funds from margin. This continued for a period of months during which he likely caused a huge bull market in Indian share . . . until he, and ultimately the market, crashed, as well.

The market has never seen manipulation of that scale since. But, it points out the weaknesses inherent in emerging markets. At the time, the BSE’s market cap was less than $100 billion, and that makes for a very tight float considering that it had thousands of small-cap companies listed. Add to this the lax oversight by regulators and it’s not surprising that it happened and can happen again in just about any market. It was no secret that the Indian exchange was nothing more than a fixed game. One prominent exchange official who I met on my first visit told me in not so many words that the market was rigged. It was several years before I had enough faith to recommend an Indian stock.

A Profitable Afternoon at the Cricket Club

In 2006, my colleagues Greg Grillot and James Boric and I met at the Cricket Club of India as guests of Ajit Dayal, a prominent and successful fund manager. Once a bastion of the city’s elite, the Cricket Club has not changed much since its founding in 1933. The pitch is beautiful and still mowed and seeded by hand, as I witnessed during lunch. The food at the club is superb, especially the chicken tikka (moist morsels of chicken breast marinated in a mélange of delicious spices and then cooked in a tandoor oven made of clay at temperatures north of 900 degrees).

Ajit is a good friend of mine. He got his start as a lead manager of a $2 billion fund for Vanguard back in the ’80s. Today, he’s the founder and manager of Quantum Mutual Funds and is the quintessential value manager who has been making money for his clients in the Indian markets. You can read more about Ajit here: http://ajitdayal.com/ajit_bio.html.

As a fund manager, Ajit is very well connected. He and his team are in constant contact with executives at major and minor Indian companies, and they put out a lot of very good research—the type you don’t see coming from Wall Street.

Our visit this time was actually to set up a future visit planned for the end of 2007 with a group of investors for a more in-depth, boots-on-the-ground investigation of the country and companies.

India is a very closed, insulated country. Much of the wealth is controlled by a minority of the population. A few families control much of the major industry—Tata, Ambani, Mittal, Godrej, and Premji—are but a few family names that dot the list of wealthiest people on the planet. These are the Carnegies, the Rockefellers, and the Gateses of India controlling stakes in industrials, energy, and technology companies.

Down to Business

Mumbai may be the financial heart of India, but the real growth has been taking place in places like Bangalore and Hyderabad. These southern cities are where the Indian tech giants and start-ups alike make their homes. One major reason so many Indian companies are very successful is their ability to attract very low priced talent. But, it goes a step further.

On my last trip, my colleague Chris Mayer, editor of Capital & Crisis, and I visited the campuses of Infosys and the infamous Satyam (in 2009, the company was found to have cooked its books for almost a decade and what was once a billion-dollar enterprise collapsed overnight into a penny stock, only to regain its footing under new management).

Both campuses were located off side roads that seemed quite normal by Indian standards, nothing to suggest the billion-dollar enterprises hidden in the woods. Now, this is no Silicon Valley by any means. Poverty is rife throughout the country and just being in Cyberabad (Hyderabad’s nickname), does not provide immunity from day-to-day reality.

In Bangalore we met with several local officials before heading off to see the tech centers. They gave us a slide show explaining how the municipal government was working to improve the infrastructure. An hour later we were traveling on a pot-holed road fearing for our lives. This type of wishful thinking is not uncommon in India. The politicians say the right things but rarely deliver. The situation is starkly different once inside the campuses of these high-tech companies.

On the Infosys campus, we were driven around in golf carts through a sprawling, beautifully manicured property dotted with modern buildings, some of which are striking in their architecture—including a glass pyramid at the Bangalore campus. Tennis courts, soccer fields, food courts, and dorms are the norm. Infosys’ campus in Mysore spans 337 acres of land—the largest “corporate university” in the world.

Landing a job at Infosys is like winning the lottery in India. Once accepted you are relocated to a campus, housed, trained, fed, and able to live a life of comparative luxury. In return the company expects you to perform to world standards. For the average Indian, even in the middle class, landing a position at Infosys is like being transported from India to California overnight. Loyalty is paramount and competition is keen even though the salary is one-fifth that of a similar position in the United States or Europe. Looking at it from a pure numbers perspective considering India’s vast population, landing a top job at Infosys or the like is probably on par with making the NBA.

Our hosts lead us through a presentation at their media center explaining the dynamics of IT consulting and how seamless it is now that communication is so efficient. A roster of clients at Infosys includes major players like Verizon, ABB, Analog Devices, and so on. It’s actually quite difficult to get a client roster for the company because many of its clients are not happy about releasing details of their relationship with Infosys. Backlash from citizens, especially in the United States, regarding outsourcing of jobs has made it a very touchy subject in many circles. Yet, at a time when the United States was in a recession following the financial crisis of 2008 and 2009 and in the period of slow growth in 2010 and 2011, Infosys shares hit record highs as more businesses naturally turned to the company to save costs. This is India’s promise: a low-cost center of highly technical operations in a country where English is spoken everywhere and is most definitely the language of commerce. That was one of the issues I had with China; it’s one of the few major world powers where you cannot operate comfortably or even visit without an interpreter.

Companies like Infosys, Wipro, and Tata dominate IT consultancy in India and, while priced for perfection today, they do suffer sharp drops when the Indian markets correct, which happens every two or three years. They are among the best bets for participating in the Indian markets. The key is to wait for a correction and then trade.

Infrastructure is likely the easiest “sure thing” play for India. Unlike China, which has spent over a trillion dollars on infrastructure projects in the past 20 years, India has spent a lot of time instead. Indian officials have spent time talking about the trillions needed to improve, build, and maintain their infrastructure. High-speed rail—it’s not going to happen. It’s hard enough to maintain the low-speed rail systems here. Airports? They’re a throwback to the 1970s in almost every respect. Roads? It takes a good hour and a half to get from the airport in Mumbai to the Taj Mahal Palace at the Gateway of India on Apollo Bunder—a distance of about 20 miles from the airport. It is my favorite hotel in Mumbai, a world-class experience from the outstanding food and nightclubs to the well-appointed rooms and service. Be sure to stay in the historic wing. This is the same hotel that suffered a terrorist attack in November 2008. I was staying there just months before. The hotel has since reopened in all of its grandeur, and I would not hesitate to stay there again.

The ride from the airport to the hotel in Mumbai is an event in its own right and should tell you a thing or two about the road situation. As I mentioned, the ride during rush hour will take more than an hour—believe it. Picture this: We are in a large coach. Next to us is a taxicab. Next to the cab is a cart being pulled by a horse. Next to that is a tuk-tuk. Next to the tuk-tuk is a scooter. Next to the scooter is a private car. Next to the private car is a man on foot pulling a wooden trailer. Next to him is a cow. And running around these various forms of transport are pedestrians trying to get across the street—there are few traffic lights and scofflaws are the rule of the day. Oh, I forgot to mention, multiply the scene above by a few thousand and then put them all on a street that would qualify as a minor street in a U.S. city and you will get the drift. Yet, with all of this traffic and mayhem, I have yet to witness one accident on the streets. The local cabbies here (and in China and Vietnam and Thailand and I am sure many other places) have a saying: “good brakes, good horn, and good luck.” The traffic situation in India is by far the worst I have witnessed in all of my travels. Yet, the country manages to thrive and prosper. It’s a scene I like to call “controlled chaos.” I can only imagine how much wealthier and more productive India could actually be if it actually did improve its infrastructure.

Larsen and Toubro or L&T is likely the best pure infrastructure play in India. An $11.7 billion company, it has more work that it can handle; its order book, or backlog, is currently more than three times its annual sales. Involved in everything from heavy engineering to energy, the company has seen revenue double in the past five years and quadruple in the past 10. The markets have taken note of this and its shares are amongst the best performers over the past decade. It’s difficult to project where the share price will go in the short term, but over the longer term this is another company that you need to own if you want to bet on India’s infrastructure growth. And if there is one certainty it is this: India will not grow without spending many hundreds of billions of dollars on its infrastructure. You can get more information on Larsen and Toubro at www.larsentoubro.com/lntcorporate/common/ui_templates/homepage_news.aspx?res=P_CORP.

Sights and Sounds

For all of its deficiencies, India is an absolute joy as a travel destination. It’s a mind-blowing, mind-numbing country to visit. You literally do not know what you will see around the next corner. In Delhi, it could be street urchins putting on an acrobatics show for a few rupees. In Mumbai, it could be a colorful wedding ceremony. In Jaipur, it could be a festival marking the end or beginning of one of the many religious holidays complete with elephants and camels decked out in all manner of paint and precious metals. In Allepe to the south, you can meander down backwaters in an intricately carved houseboat, while at the Amber Fort you can ride an elephant to the gates and take a jeep back down. In Cochin, fisherman still cast the same nets their ancestors cast a thousand years ago, while on Elephanta Island, near Mumbai, you can be carried up the steps on a palanquin to see Hindu temple ruins dating to the fourth century. Many of these are riddled with bullet holes after being used by the Portuguese for target practice in the 1500s. In Udaipur, you can spend glorious nights at the Lake Palace Hotel, a hotel built in the middle of a man-made lake, and watch elephants bathe in the lake. You may recognize the hotel as the backdrop in the James Bond film Octopussy. And, even after visiting India a few times, you will barely scratch the surface. I have yet to visit the hill stations like Darjeeling or tiger preserves such as the Royal Chitwan National Park across the border in Nepal. A major destination country, India boasts thousands of miles of tropical coastline, none more famous than the beaches in Goa, where many hippies from the 1960s made the Indo-Portuguese coast infamous.

However, there is one place in India that draws more than 2.4 million tourists a year: the Taj Mahal. It is as magnificent as you have imagined it to be. Perfectly symmetrical, this architectural wonder is an easy two-hour train ride from Delhi. The grounds are easy to walk about and the monument is wide open to visitors all year round. The Taj is located in Agra, not the prettiest of places as far as cities go. But, it is definitely a must-see on any trip. Plan to spend at least a day at this “mausoleum to eternal love” and then retire to the fabulous Oberoi Amarvillas for a cold drink on its massive verandah overlooking the Taj in the distance. It is one of the best hotels I have stayed at in India. You can find more information about the Oberoi at www.oberoihotels.com/oberoi_amarvilas/index.asp.

India is a shopper’s mecca where bargaining is expected for any and everything whether at a shop or a street market. Silks and fabrics are great buys as are precious and semiprecious stones. Silk rugs, wooden carvings, inlaid knick-knacks, exotic saris, hand-painted prints, and, of course, spices are abundant everywhere. Most shops take credit cards, and U.S. dollars are also widely accepted. It can get overwhelming at times as the selection for just about any item is very deep. If you want something hand crafted and not machine made, India is your place. Sweat is cheap here, cheaper than China, and work is sought after in every corner. In the bigger cities like Mumbai you will find the best quality fabrics and the most current fashions, usually dictated by the Bollywood set. In places like Rajahstan, you will find sapphires and Lapis (from Afghanistan). Gold is available everywhere and usually it is 22 carat and never less than 18 carat. Buying gold jewelry in India is perhaps the best bargain of all, as you are often paying only based on weight and not for design. Be careful though, gold paint is cheap. Almost any item can be shipped to the United States or any other address, and I have had several items—big ones—shipped to me without any issues.

Unlike China, India is a democracy with very liberal stances on everything from freedom of expression to religion. While a majority Hindu country, all religions, races, and faiths are not only tolerated but encouraged. Of course, there are periodic fallouts among religious extremists of all types. One has to note that there are more faiths represented in India than any other country in the world. It is a true melting pot in that sense. It is a good idea to read up on the different places, especially the temples you are planning to visit. Each group has its idiosyncrasies and while it is very hard for a tourist to offend someone in the country, the better option is to be well informed.

There are two ways to travel to and within India. One is on your own and this is perfectly safe. English is very, very widely spoken, as India was a former British colony. You will be accosted by beggars and street urchins. Your best bet is to give out food and not money—I prefer the mini snack packs as they’re easy to carry. If you get flustered easily or hate crowds, don’t visit India. If you still must go, then do it with a tour group where you may enjoy the safety in numbers. I have had the pleasure of visiting India with a group and without. By far, one of the best organizers of tours to India (and China and many other exotic destinations) is Opportunity Travel, headed by a very close friend of mine, Barbara Perriello. If she does not have a trip scheduled, she can put one together through some of her contacts. Opportunity Travel specializes in relatively high-end travel programs, something you will be eternally thankful for after your visit. You can contact Barbara at [email protected] or visit her web site at: www.opportunity-travel.com/.

Strengths

India is a democracy, the largest one on the planet. It has an established legal code, a well-functioning banking system, and a history of commerce. The country has a huge, educated population that is English speaking. The government in power today is more pro-business and pro-foreign investment than at any other time. The political climate is also stable and the electoral process is not a mystery. While road infrastructure is challenged, the country has a good network of airports, railways, and ports.

The country has a major geographical advantage located as it is in the heart of Asia with easy access to the Middle East and Africa via the Indian Ocean and to China via land, and Australia and Indonesia for resources. Its forte is technology, and Indian companies benefit from dominance in the IT arena.

The well-educated population is cheap by global standards and offers a huge skill set, including English fluency. The country also has a massive population of laborers, who populate its factories at a very low cost, making ventures in India highly competitive and potentially very profitable. India is not considered a global threat militarily although it does maintain a large army and air force.

India’s expatriate community is huge and very skilled. Its professional class can be found all over the world and thrives in middle- to upper-class society wherever its members settle in the West. They are now beginning to focus on their home country—exporting their ideas and skills back home. This has allowed India, like China, to accelerate both in terms of growth and innovation by taking some of the best ideas and trying to incorporate them into Indian society at large.

Weaknesses

India is, by most measures, overpopulated in relation to its resources. The vast majority of its population is reliant on locally produced foodstuffs and that means an over reliance on weather patterns like the monsoon season. Parts of the country have a history of droughts and famine when the rains do not come.

India does not have a good infrastructure apart from the ones mentioned previously. Roads are terrible at best and transportation, while cheap, is not pleasant. There are tolls roads, which are better, but the country is sorely lacking a good highway system.

While India is a peaceful country for the most part, it does share a very volatile border with Pakistan, and constant fighting over the beautiful Jammu/Kashmir region often scares the rest of the world, as both India and Pakistan are nuclear nations. India also shares a border with China and while there have been conflicts in the past, most observers do not believe either country is interested in pursuing that type of relationship.

India has also been the target of several terrorist attacks in the past few years. This is the result of conflicts with Pakistan and also the relatively lax security that is prevalent across this country where petty theft and tribal issues are the norm.

While a huge part of the population is educated and progressive, India does have a large population that is illiterate and, for lack of a better word, backward. This has resulted in a wide chasm between the haves and have nots, something that is common to all emerging markets.

India has a poor power grid, and power supply is not reliable in many areas. This is due to aging systems and a growing population that is consuming more and more power. It is not unusual to find villages with inadequate power. Drinking water is another problem. Foreigners cannot drink the water in India; and be very, very sure that even your bottled water is from a trusted supply—get it at the hotel before you venture out. Diseases common to tropical climates have not been eradicated, either. In a sense, there are two Indias: one that is thoroughly modern and one that still feels like it belongs in the twelfth century. Fortunately, India’s religious and social mores allow for harmonious coexistence. That may change though. India’s caste system is also a problem, as it tends to marginalize a huge chunk of the population just because of the misfortune of being born to the wrong caste.

Yes, the caste system is alive and thriving despite efforts by the government’s public relations arm to play it down. Open any Indian paper and you will see personal advertisements that are trying to match make an “upper caste Brahmin boy” to an “upper caste girl.” This represents a weakness because it does not allow the population to fully benefit from India’s growth and success, something that may go from weakness to threat.

India’s stock market is well established. It’s the oldest in Asia and functions well. As in most emerging markets, it does not have the liquidity to absorb massive foreign investment. And, as I noted earlier, market manipulation can occur. This is true in any market; however, in smaller markets the effects can be more pronounced. The Indian market is also very volatile. While there are more than 5,000 companies that trade on the Dalal Street exchange, fewer than 10 percent of them make up more than 80 percent of the capitalization. When there is a panic, try to imagine a herd of elephants trying to squeeze through a set of French doors and the resulting chaos.

While the Indian government has been trying to adopt a very pro business and pro foreign investment stance, it has run into issues that are hard to resolve. India has a very, very established labor and business contingent. Many of the trades are controlled by families or clans that date back to before the Mughal times. For example, in Mumbai, commercial establishments use Dhobiwallas to do their laundry (Dhobi is derived from the word wash). These Dhobiwallas occupy a massive outdoor laundry facility that is in itself a sight to see in Mumbai. They not only work there, but they live on the premises as well. Like a trade union, they don’t take any prospect of modernization lightly.

India’s business community also benefits from the past policies of isolationism. Since the country was never a massive importer of foreign goods, it never liked the prospect of opening its doors to foreign companies or competition without exacting a very high price. That same mentality exists today. Companies like French supermarket giant Carrefour or U.S. powerhouse Wal-Mart have not been able to open retail operations in India as of the summer of 2011. The rules are easing, but both companies will have to make major investments before they will be allowed to operate if at all. Both companies have spent more than a decade trying to convince the government to let them operate a retail store. The main opposition lobby is the millions of shopkeepers that run tiny little businesses in every neighborhood in the country. It’s not about progress, it’s about competition and Indian business is not fond of external competition.

Poverty is a major issue for India. It is a problem that has to be addressed before the country can move forward. India’s per capita annual income is less than $1,400. A huge percentage of the population, more than 500 million people, live on less than $2 per day. Even when measured for purchasing power parity (the amount the same dollar buys in India versus a country like the United States) the number is still under $7 per day. That type of poverty is something you do not hear about in the business channels or the business community, but it exists and it’s real.

Finally, corruption in India is an epidemic. But that is the same in every emerging market and many developed markets, too. It is a weakness, however, that prevents transactions from being completed, prevents projects from being completed on time, and in general saps the economy of growth.

Opportunities

India is where China was 20 years ago in terms of growth. That presents a compelling opportunity for many investors. The retail sector is huge with over one billion consumers. The infrastructure opportunity is the biggest in the world as it represents the country’s greatest need. Agriculture is also a huge opportunity as much of the country’s food supply comes from small farms that do not use modern mechanical or seed technology. The country boasts a massive, educated workforce that can be subcontracted by richer countries in areas like technology, pharmaceuticals, and industry. A relatively open society, India is also one of the world’s largest exporters of entertainment. Bollywood dwarfs Hollywood in the number of movies it produces—almost double—and India is beginning to export its entertainment culture. By the same token, India is a huge potential market for incoming entertainment. Most families have or have access to televisions, and I can think of few countries I have been to where screen entertainment is such a popular pastime.

Threats

The greatest threat India faces is not being able to sustain growth. It has a massive agrarian population that is moving into the cities and taxing every possible resource from water to electricity. A massive, unskilled labor force dwarfs the skilled labor force and if reforms to the system are not achieved, then social unrest will be the order of the day. Already, there have been instances of major strikes and threats of shutdowns when the lower castes feel that their opportunities are being impugned by the upper castes. Among the huge, uneducated population, work stoppages and threats of violence are often adopted as a means to effect change.

Pollution is a major problem in the country. Like China, India is hugely reliant on fossil fuels and there are few regulations that protect the environment. In rural areas, disease and mortality are major issues. The rural population has also been slow to adopt birth control measures, and unlike China, which mandated birth control by fiat, India, as a democracy, has never been able to address the issue adequately through education. Overpopulation is as big a threat as any other in a country that can barely feed its population in the best of times.

While there are few internal political or social threats, one in particular does stand out. India is a majority Hindu nation and every so often Hindu nationalism rises to the fore. Instances of major violence are well documented between Hindus and Muslims and Sikhs. In 1984 for example, more than 500 (some estimates put it as high as 1,500) people were killed at the Golden Temple in Amritsar when Indian forces ousted militant Sikhs who took over the vast religious compound. The militants were protesting the disenfranchisement they felt they were suffering at the hands of the Hindu majority. Within four months of the massacre, Indian Prime Minister Indira Gandhi was assassinated by her Sikh bodyguards, leading to further bloodshed across India. While tensions between the Hindus and Sikhs has simmered down, tensions between Muslims and Hindus have picked up. Several terrorist attacks in the past five years, including two in Mumbai in 2009 and 2011, have been placed at the feet of Pakistani-backed Muslim separatists who look at the Jammu/Kashmir region as belonging to Pakistan. While neither country has come close to declaring an all-out war in recent years, border conflicts are common. Perhaps the only reason India has not invaded Pakistan, which it could do, is because both countries possess nuclear weaponry.

Isolationism is also a potential threat to India’s emergence. If it does not liberalize policies allowing foreign companies more rights and more access to its markets, it could face a backlash. Companies like Coca Cola, India’s leading soft drink until 1977, pulled out of the country when the new government ordered the company to turn over its formula and dilute its stake in the local franchise it owned. The company returned in 1993 when a new, more liberal government took over power. I recall on my visit in 1997, I could not get a Diet Coke anywhere in India and yet, just across the border in Katmandu I was able to get my fill. India must open its doors to compete on the world stage, yet it faces a major crisis at home if it does so too quickly. All emerging markets face this same threat, but if a country like India wants to become a first-tier emerging market, then economic reform must move at a faster pace than it is moving today. Right now, the country solidly occupies the second-tier space.