Monday, May 15, 2006

India at a threshold- a first hand account

I was in India for a 20-day family vacation and found an India that continues to amaze, dazzle and disappoint simultaneously. The real-estate market is booming, stocks are growing faster than in any other world economy (except Russia) and people are excited about the future. And it is the last aspect that holds out the greatest hope. An estimated 200,000 engineers will graduate from India's universities and colleges.

Here is a list of key trends that I observed during my 2-week trip:
  1. Its not just IT: India's economic boom is perceived as an I.T. and outsourcing boom. Even though the catalyst over the last 15 years may have been I.T., the economic miracle is no longer limited to IT. Other sectors that are doing well include: Financial Services (Banking & Insurance), Real-estate, Telecom, Manufacturing, Construction, Oil and Gas, Retail etc.
  2. Purchasing Power: The purchasing power in India has gone up. A car driver (chaffeur) used to make around $30 a month in India till mid-90's. Today, a car driver makes around $100. Even though it may not seem much to the western eyes it is a 3-fold increase over a relatively short period. With inflation under relative control and easy availability of consumer credit, the average person in India is spending on luxuries such as motorcycles, televisions, clothing, etc. The rich and the elite have seen their wealth explode too with big increases in real-estate and stock market valuations. This has resulted in a US-style economic boom at the top with many of India's rich (those that make $30,000 or more) able to spend on western-style luxuries including luxury cars (BMW), centrally air-conditioned houses, expensive appliances, exotic vacations etc.
  3. Education: Education is undergoing a transformation in India for the better. There are many more private colleges offering engineering degrees and MBAs. And since these colleges are market-driven they do not suffer from the government mandated course structures and in stead focus on what the job market demands- courses in I.T., tourism, general management are proliferating. Though many of these colleges are no where close to the standards of the elite Indian colleges, they serve a crucial role of meeting the demand supply gap.
  4. Return of the family-owned empires: With the advent of IT billionaires, many had declared the old family owned businesses of Tatas, Ambanis and others as out-of-date. But many of these businesses have entered new businesses in Telco, Oil&Gas and Retail and are flourishing. In fact, many MNCs prefer to enter India's sometimes tough to navigate markets with these giants that have substantial local knowlege and channels for distribution.
  5. Connectedness: The density of telephones in India has shot up from less than 2% in late 1990's to over 8% in 2005. The number of mobile phones - including wireless in local loops or fixed mobile connections - as on Sep 30, 2005 was estimated at 42.98 million. At this level, the mobile base is just marginally short of the fixed-line base of 43.8 million. Today cab drivers, grocery vendors, house-maids and village businessmen have access to their customers and suppliers thanks to the mobile phone. The calling rates are some of the lowest in the world with rates as low as Re.1 ($0.02c).
The business environment in India has changed substantially. There are many large well-capitalized projects being attempted and executed especially in Real-estate development, Oil and Gas, and Retail. Retail and Insurance sectors are still encumbered by regulations that prevent FDI (Foreign Direct Investment) but local investors realize that it is only a matter of time before foreign competition is allowed in these sectors and are trying to move aggressively to acquire market share. The exit route for many of these businesses would be to sell out to foreign global MNCs such as Wal-Mart while others like Reliance may be looking to a long-term battle. In either case, it has created lots of opportunities for India's youth coming out of colleges and for investors- foreign and local.

How can you take advantage of India's growth?

It is fascinating to learn of India's boom but how can you and I living and working in the United States (or anywhere outside India) take advantage of this boom. There are some key emerging trends that are actionable for you and I.
  • Invest in India: You can buy ETFs (Exchange Traded Funds and equivalents) that are listed on American stock exchanges These include IIF and IFN. In addition there are India focused mutual funds like ETGIX and MINDX that reflect the boom in India's stock market. From my perspective, these funds provide the best and safest mechanisms of leveraging India's growth.
  • Leverage India:L The next best option is to invest in businesses that are takind advantage of India as a market and as an outsourcing resource. Citibank is a key example. Citibank was one of the earliest companies in India to realize its potential for delivering global services at low-cost. In addition, Citibank decided to invest in India as a market for its products and services. Finally, Citibank invested in various businesses including i-Flex (recently Oracle bought out Citibank's stake). Other examples of global MNCs that have been effective at leveraging India for outsourcing include IBM (IBM acquired Daksh- a large call-center business for an estimated $200 million), Oracle (Oracle acquired i-Flex), Accenture, etc. Other businesses with ambitious India plans and investments include Coca-Cola, Pepsico, Mc Donald's etc. However, this route of investing in India provides a very minimal exposure to India's growth as for many of these businesses Indian revenues account for less than 10% (in many cases less than 1%) of global revenues.
  • Do business with India: India is a rapidly growing economy and in certain sectors such as I.T., Telecom, Retail and Real-estate the growth is even more impressive. GE has positioned itself as an infrastructure store for developing countries like GE. You may want to analyze how your business can participate in India's (and for that matter all developing countries') growth. For example, if you are a automotive parts business- do you want to compete with India's aggressive automotive industry or do you want to co-opt it by entering into strategic agreements and ventures. Similarly, what services and products can you provide to the booming sectors. There are many unique constraints that are India specific that can be a deterrent to your entry but can be used to build a USP (Unique Selling Proposition). For example, there are regular power cuts in India. This presents a challenge to sale of electronic goods such as TVs and Computers. However, you could integrate a UPS (Uninterrupted Power Supply) device with your gadget to provide a value-added solution. One local firm (Su-Kam) has capitalized on the power problem in India by selling 100s of thousands of "invertors" (battery powered generators that store electricity in batteries).

I look forward to your comments on India's growth story and how you and I can participate in this growth.

1 comment:

Razib Ahmed said...

Thanks a lot for visiting my blog SouthAsiaBiz
and posting a very intelligent comment. I agree with you that purchasing power
is increasing. However, the main challenge will be for the Indian economy is to
motivate people to use their increasing purchasing power for buying Indian goods
and making productive investment. Please, try to visit my blog often and post
comments as your opinion will help other readers in forming their own opinion.
You have a nice blog- no doubt about that.