India turns 70 years of age this year, as do I.
I was born there shortly after India obtained its Independence from Britain, on August 15, 1947, in a fiery, brutal birth of the country. The British left a burning mess – a very painful split of the country with a huge humanitarian cost. There were mass forced migrations, lost property, split families and refugee camps orders magnitude bigger than the ones in Palestine. Millions were killed in sectarian violence. Territories, like Kashmir remained disputed and festering sores, and permanent rivals were created: Pakistan, a muslim, theocratic, illiberal state (as Fareed Zakaria calls it) and a secular, liberal, messy democratic experiment called India.
Since then India has come a long way. By any measure there have been big improvements – life expectancy has more than doubled, education levels are better and economic activity has soared. Now with two decades or more of rapid growth the expectation from India is high. Will it be the next Superpower? Is it the emerging country to invest in given slow growth in the rich countries?
I have lived in the Bay Area now for almost 50 years since I first came here to pursue a Ph. D. at Berkeley. So as an entrepreneur and a venture investor I would like to give my personal perspective about India’s progress as an emerging country and its desirability as an investment destination.
In the last month a couple of events have focussed my attention on India – a lecture by Ramachandra Guha, the well known Indian historian and author, at Berkeley, titled, India at 70, A Historian’s Report Card, and a two-week trip I made to New Delhi to conduct a personal property transaction.
My Trip to India
Anecdotically, let me start with the recent two week trip, which, like most visits to India, is suffused with deep stimulation to the senses and a bewildering array of happenings. It was hot – pavement-melting hot. Every single day the temperature was above 110 deg, the hottest mid-April in New Delhi’s history. The air hung thick with the collected efflua of smoke-belching, grid-locked, noisy, honking traffic. Hot vapors rose from the ground, mixing the smell of food vendors’ spices, cow droppings and fly-littered open trash along the roadsides, even in the poshest locations of the country’s capital. Much of the city is unplanned, crammed with a mishmash of assorted houses side-by-side with hovels, homeless pavement habitation and a lot of low-productive or purposeless humanity shuffling around or squatting in the shade to avoid the heat. Despite its economic miracle of the last two decades India has only moved a paltry 3% of its population from poor to middle class – as opposed to 50% for China.
In the news while I was there: Because of a drunk driving incident the Supreme Court has banned the sale of alcohol within a half kilometer of every National and State Highway. Overnight many of the city’s bars and five-star hotels could not serve beer, wine or cocktails – a tremendous impact on their customers and their bottom line. It’s an example of arbitrary rule making that Indians just routinely endure and that keeps economic growth in India subpar. The recent demonetization of high denomination Indian currency notes was another example of heavy-handed and ineffective rule-making at a colossal scale.
The business transactions that I was doing involved commercial property that I had invested in with my cousin many years ago. We had to fill out a stack of 50 forms; 200 pages of contract had to be individually signed or notarized, fingerprints and photos in triplicate had to be affixed. Tens of thousands of rupees worth of Stamp Paper had to be purchased, along with attorney fees. I had to spend a whole morning at the courthouse – a teeming, overcrowded, noisy building full of government clerks, called babus, each bent on slowing you down and showing their importance. There was supposedly air-conditioning in the court building but it was not turned on. So we dripped with sweat along with the other elbowing multitudes as we awaited our turn at the window where our paperwork could get done. Nobody formed a queue that I could discern. Without an attorney who pushed his way through and greased some palms we would have gotten nowhere.
I got a haircut and a massage at the local Westin Hotel in the suburbs of Delhi. It was at the nice, cool, soothing hotel spa with a ritualistic jasmine hot oil deep rub, with calm meditation and yoga on the side, along with a neem-steam sauna. Aaah! You need this kind of thing every now and then to retain your sanity. The guy who gave me the haircut, M. Khan, was a very young muslim guy. We got chatting. He was from Moradabad in the heart of Uttar Pradesh (U. P. ), the largest state of India.
This state has held recent assembly elections and the nationalistic, Hindu-centric party, the BJP swept the elections, gaining 80% of the seats. The new Chief Minister is a man called Yogi Adityanath. He wears the Hindu saffron robes and has a strong agenda, rather like Trump’s, which a lot of people love. U. P. is a mess and everyone believes that a strong man is needed at the helm to make the “trains run on time”. And indeed he seems to have made a lot of high profile changes. But he also has a strong religious mind-set that says Hindu values must be imposed to sustain the cultural vitality of the country. So while I was there a ban on all consumption of beef was being contemplated. Already zealous religious mobs were raiding muslim eateries and using violent tactics.
Anyway, M. Khan, the muslim barber, told me that he was going back to Moradabad the next week to get married – a girl (his cousin) he had known since he was a child. I asked him if he was all excited about the prospect. He said he was very happy indeed and looking forward to much celebration. “But, sir” he said, “We are not even serving any chicken at the wedding”. The zealous “enforcers” make surprise checks at muslim weddings and if they even suspect that beef is being served there is hell to pay. And only they decide whether something suspiciously meaty is beef! The $4 billion dollar Indian beef export industry is in limbo.
Ramachandra Guha’s Analysis
So onward to my second recent analysis of India, viz. the lecture by Ramachandra Guha at Berkeley. Guha is a well known historian and author with many great books on modern Indian history. He currently lives in Bangalore and was visiting Berkeley at the Institute for South Asian Studies.
His Report Card on India brought up the multi-faceted aspects of India and its performance since independence. I am summarizing below my very subjective interpretation of what Guha said (he didn’t give any grades, just talked in qualitative terms):
Here India gets Guha’s highest score. India is an astonishingly effective democracy. It has more people that all of Europe, more than 27 distinct languages, many different religions and even a big diversity of races. Yet it has held together and is confoundingly stable. Churchill said at the time of de-colonization: India is no more a country than the equator is a country. It is just a region. I give it ten years at most.
And today at 70 years of age India is a shiny example of a diverse, pluralistic, secular democracy, with 1,300 million people, that remains relatively strong and united. All segments of Indians, including the much-maligned muslims, remain largely committed to India and, despite the loud complaining, are satisfied with the liberal, free, democratic arrangements. When compared to the EU which in just a few years of its creation is unzipping rapidly, India is bigger and more committed to its union and republic. Anti-democratic forces do exist, particularly in the non-secular tendencies of the current party in power, but India will never have an Erdogan or a Kim Un.
Here India has failed quite badly at the Primary and Secondary levels. Although literacy levels are rising steadily, more than half of the 350 million kids now aged 0-16 will remain near-illiterate. High school completion rates are abysmal. Compared to China or Vietnam India is a stunning under-achiever. In fact it trails almost all countries except sub-Saharan Africa.
At the college level there are some impressive stats. India has world class engineering, medical, science, business and law schools. In space exploration, India is a powerful player, having had a successful mission to Mars and also a major satellite launch business. In pharmaceuticals and Information Technology India is near cutting edge. Still, India does not pull its weight in creating an educated and skilled citizenry.
Grade: C minus
There’s a lot of hype here. Certainly in the last two decades India has pulled its economy up from dismal levels. India claims to be the fastest growing major economy in the world today at 7+ percent growth. Yet, as the Economist magazine points out, this is probably overstated. The banks are heavily laden with non-performing assets and there is little new capital formation for the corporate structure. As the Economist states: If this is 7% growth what does stagnation look like?
There are segments of the economy that do well: IT, Pharmaceuticals, Space, Nuclear Power, Solar and Wind Energy, Telecommunications are all great strengths. India remains utterly horrible at manufacturing and construction. There is no “maker’ culture and the bad infrastructure is a drag. Imagine in a country with 900 million cell phone users – a huge domestic market – there is not one Indian cell phone manufacturer!
In one Wall Street Journal survey India ranks below 150th, as a country, in the Ease of Doing Business category. The current Prime Minister, Narendra Modi, (that many say is the only adult in the room in Political India) has made great efforts at very innovative reforms – boosting Solar, building much needed country-wide infrastructure, implementing a federal level Goods and Services Tax, GST (a kind of VAT) to replace a myriad of individual district and state tax jurisdictions, and creating a national identity card (called Adhaar) to streamline government-to-people interactions and transfers. Despite all this, economic progress is anemic. Corruption and red tape remain. Money-losing government firms have not been privatized. Exports remain weak and quality of manufacture is unimproved. Banks have bad debt to the tune of 10% of GDP and no one in government has a clue about how to fix this.
Quality of Life/Human Development:
International studies and Guha’s assessment vary here somewhat. A recent U. N. Report ranks India at 122nd out of 155 countries in the Human Development index. That is low indeed. Lower than all other countries in South Asia! (Pakistan is 80th). This study includes lots of subjectivity, although measurable material consumption, health, longevity, access to facilities etc. are included.
Ramachandra thinks India is way better than that. There are informal structures and cooperation that tend to make an intangible contribution. Still India has a long way to go.
Here Guha has the harshest assessment. India has failed to even have a national debate on the ravages to the environment wrought by neglect and lack of policy. Guha says that all rivers in India are now biologically dead. Lakes, streams, nallahs are filthy, putrid unhygienic, disease producing cesspools.
Since rivers and lakes are essentially dead, much of India lives on ground water, through tube wells etc. The consumption of water is way above what can be replenished. In Gurgaon, a thriving Cyber City outside Delhi, which has world high tech offices, the water table has fallen more than 100 feet in just a few years.
There is indiscriminate de-forestation. Coal is the major source of electricity (although this at least is changing) and the cities are the worst polluted in the world.
So what are the prospects for investing in India for someone seeking high, emergent market returns and global diversity?
Somehow everything you read about the future prospects of India comes out hyperbolically rosy. There are surveys that show the Indian middle class growing to more than 500 million in 2025 and India overtaking the US in GDP by 2040. These are amazingly out of whack.
Even though India has the most generous definition of middle class it has less than 3% of its population in the middle. The rest are poor to very low middle. See this article.
Investment returns in India are never as good as hyped. And they are certainly not worth the inherent risks.
To take an example: After the success of Alibaba there was a lot of hype about e-tail in a rapidly emergent India. Companies like Snapdeal and Flipkart were touted as the next Alibaba and had astronomical growth rates and prospects. I was indirectly an early investor via a very savvy India Venture Fund. Now it turns out that much of this was unsustainable hype. The growth of e-retail, which was fueled by huge, investor funded discounts, was unsustainable. So after a record year in 2015, e-tail is essentially flat. Forecasts for 2020 and beyond have been drastically slashed. Snapdeal will probably merge with Flipkart at a minuscule fraction of its valuation just a couple of years ago. Further the entry of Amazon into this winner-take-all space has clouded the competitive landscape. I’d be surprised if even Amazon can make a good return any time soon on their $5 billion investment in India.
This kind of thing occurs again and again. The final results in Indian investment are not reflective of a 7+% growth economy. India will make great strides in certain areas, notable, infrastructure and solar but there is no clear road to investing. For solar the best bet in my opinion is still the US company, Tesla, which will no doubt provide lots of support in batteries and other areas.
Will there be another Google or Microsoft out of India? Maybe, although the challenges are formidable. I would not bet on it for the foreseeable future.
The stock market in India is doing reasonably well. The indices are at all time highs. Still, adjusted for currency fluctuation, high fees for investing in India, and the large risks, you are better off being in the US. The Dow index remains a powerhouse.
Further I don’t think India provides a diversification advantage. In 2008 when the US market crashed India did not act in an uncorrelated way. It fell equally badly, so no additional diversification advantage was apparent.
I hope I am wrong – I keep rooting for India to do well. I invest there, through savvy people I know, and I also contribute to charitable activities to give back to the place where I got my start. India has tremendous potential and is a great geopolitical ally of the US. It has a freedom oriented, secular mindset and always ranks high in support of Western liberal ideas. We all hope that it will make a turnaround! But as an investor you are better off elsewhere.