For years now I’ve preferred investing in China over investing in 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.
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’s economy 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 of investing in.
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 defence 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 the Indian 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 in India 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.
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.
Invest in India?
Limit your exposure to investing in 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 India’s 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.
For me, I’d just like to see them keep their lights on first.
Keith Fitz-Gerald
Contributing Editor, Money Morning
Publisher’s Note: This is an edited version of an article that first appeared in Money Morning (USA)
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