Inside India
by Jayant Bhandari  (originally published in the Casey Report of January 2009)





[Ed Note: India’s role in the global economy has been largely overshadowed by the China Miracle, a virtual remaking and unprecedented growth of the world’s most populous country. For trend-watching investors, however, ignoring India would be a major mistake. For several reasons, not the least of which is that while xenophobes like to make fun of the Indian accents they hear on help lines, over 11% of the Indian population speaks English, the second largest English-speaking population in the world by a fairly wide margin. By contrast, just 0.77% of mainland Chinese speak English.

More important, the medium case has it that India’s population, unconstrained by “one-child” rules, will exceed that of China by as early as 2030.

To help readers gain an on-the-ground perspective, we asked Jayant Bhandari, originally from Bhopal but now a resident of Canada, to share his “stream of consciousness” observations from a recent trip he took back home, his first in 18 months.

Jayant served as a research intern at Casey Research a couple of years back – and now works as a consultant for Frank Holmes’ U.S. Global Investors. A determined free-marketer and student of Austrian economics, Jayant has started Indian subsidiary operations for two European companies, for one of which India became the biggest revenue generator.

At the onset of his trip, Jayant admitted to a strong scepticism about the overarching bureaucracy that chokes India at every level. You can view that scepticism as a negative, or as we do, a plus, when it comes to his reportage.]

In 1991, when I first went to the UK to do my MBA, I was often asked questions about roving cows on the street, snake charmers, servants, the caste system, elephant riders, the sati system, arranged marriages, dowry, female infanticide, etc. When I complained that India was much more than this, I was considered defensive. Recently, less than two decades later, I was told by a Canadian girl that I must be very intelligent; after all, I am an Indian. It seemed that she thought I must be able to do complex mathematics without a need for pen and paper. While I of course prefer the latter view, both are equally wrong, and adopting either will make you susceptible to choosing the wrong investment path when it comes to India.

In the article that follows, it is my intention to provide you what might be termed an “insider’s perspective” of my birth country. By doing so, it is my hope you will have a deeper level of understanding than most in the West of the risks and rewards inherent in this misunderstood but not insignificant corner of the world.

India is a very chaotic country. The information that comes out of the country is, to some extent, a product of that chaos and thus mostly unreliable. To make the point, nationalism is on the rise, which carries with it not only the huge social and economic risks I’ll discuss momentarily, but it also means that the information generated in India is prone to make India look better than it is. In addition, development is mostly concentrated in small areas. Consequently, those who visit only such areas are likely to have a warped understanding of India’s economy. And political correctness in the West means that the Western media and society prefers to “see” what they expect from the world largest secular democracy.

             A glistening building in the state-of-the-art, mega-campus of one of the most respected Indian companies, Infosys.

To help update my views on the country – I moved away in 2003 and last visited early in 2007 – I recently undertook a fact-finding mission to India, visiting family and friends, meeting companies across the spectrum, traveling by trains and planes and then spending hours on the road, mostly in traffic jams, visiting towns and villages, and interviewing everyone from top-notch CEOs to those earning a pittance. India is changing, and in some ways, quite impressively, but this must be put into the right perspective…

India has a population of 1.15 billion. An estimated 700 million of these have no access to what you would call toilets. While on a train in the mornings, it is impossible to avoid the sight of people defecating out in the open. 600 million people have no electricity. Those who do must bear frequent power cuts, quite often for days at a stretch. India has 3.3 million km of road network, most of it in a very sorry state of disrepair. Of these, only 8,000 km are dual carriageways. There is no Indian city that is not choked with traffic, pollution, and noise. The environment is in shambles.

Were India several countries, your perception of it would be no different from what you have of Sub-Saharan Africa. India’s GDP per capita in 2007 was $941, ranking 132nd in the world, merely a notch above Pakistan. Many of the countries considered economic basket-cases like Cameroon, Nigeria, Bolivia, Guyana, and the Philippines have a higher per-capita GDP. Of India’s population, fully 828 million people, or 76% of the total, live on less than $2.00 per day. In Sub-Saharan Africa, it is 72% of the population. Not surprisingly, therefore, India has 60 million chronically malnourished children, 40% of the world’s total.

That’s a macro-view of the place, but I really want to try and translate the cold, hard statistics into examples with a more “street level” perspective.

Labor at $1 a Day

For a chauffeur-driven car I took in Delhi for 17 hours straight, I paid $40 all-in-cost, including the driver’s meals, parking fees, and a “fabulous” tip. Had I chosen a non-air-conditioned car, I would have paid half as much. At my parents', the cook’s salary is $7 per month. The laundry woman is paid $5 per month, and the one who cleans the utensils also gets paid $5 per month. They all work for an hour each day seven days a week. Our chauffeur comes at 8 am and stays until 9 pm. He works six days a week. On the seventh, he comes for three hours. He gets paid $60 per month. You can get a shoeshine done for 15 cents. You can do an overnight train travel for about $5. My clothes get ironed for anything between 1.5 cents and 4 cents, picked up from home and delivered back. The minimum salary is $1 per day.

Ironically, despite such low labor costs, the world’s manufacturing is showing no signs of flooding into India, but you increasingly find Chinese goods even in small Indian towns. And while labor can be cheap, many things are extremely expensive, especially relative to the cost base. A shoe polish bought from a store cost me $5. A visit to a small gym in my small town cost me $3.50. A simple shirt costs $20. Hotels are as expensive, or more, as they are in the U.S. A meal at a restaurant in a small town costs about $6 minimum, and you can expect to pay two or three times as much at a cheap place in Mumbai. My hotel in Bangalore cost me $360 per night, even after applying a discount of about 30% because my stay came on the heels of the recent Mumbai terrorist attack. Most middle-class Indians find it cheaper to go abroad for vacation than to organize a similar one in India.

Why the disconnect? The answer has to do with the problems a $1 per day wage earner tries to add value in India. His efforts lack potency. For me, Indian driving is a visible metaphor for the value-destructive existence of the country’s socio-economics. A YouTube search for “
driving India” should provide enough video clippings to warm you up on what I am talking about. Despite the slow-moving traffic, over 130,000 people were killed in car accidents in India last year. About 15 to 20 times as many people are hospitalized. It is virtually impossible to find a vehicle that is not dented.

             Luggage left at a crossing. A policeman is here, but the owner is nowhere to be seen.

In short, driving in India entails a tangible waste of property and time, not to mention lives. It shows the compromises the people make with their own and others’ lives. And it demonstrates a certain lack of discipline, not to mention a superstitious and fatalistic approach to living and lack of respect for basic law and order.

Those who have lived and worked in India would likely confirm that this conduct extends well beyond driving and is present in the broad array of everyday transactions. While the Indian bureaucracy is famous for its excess of regulation, this sort of lost productivity is immune to regulatory solutions alone.

Yet, India Is Changing

On two occasions during my visit, I went to a public-sector bank. The line-ups were orderly. When one person tried to jump the line, a teenager very politely and confidently asked him to go to the back of the line. I could have cried. Merely a few years earlier, there would be as many hands poking inside the teller window as the number of people in the bank. On both occasions, it took me less than 20 minutes (!) to get my work done. Previously, this could have taken hours.

In another incident, I witnessed a car hit a scooter. Several people rushed to ensure the rider was all right. Previously, no one would have paid any attention. I take these as signs that there is a cultural metamorphosis happening. Middle-class teenagers are very different. They mostly do not seem to care about people’s caste and religion. They understand much better the ugliness of being corrupt. They are a lot more honest, forthright, and very smart.

Today, parents are doing everything possible to educate their children. There is hope in the society. India’s traditional fatalism is weakening. People are prepared to put in an effort to move up. Less than 15 years back, it would take you years and a hefty bribe to get a telephone connection. Today, it is available on request and no bribe is needed. The typical luxuries of life and consumer goods are now easily available in India, enticing emigrants to return.

India’s economy has grown by 8.8% annually for the last five years.

These are all signs of hope.

Moving into the Fast Lane?

Albeit from a lower base, is India now on a decidedly fast lane, moving out of drudgery and becoming increasingly stable?

Unfortunately, no. And Pakistan can hardly be blamed for this, though that seems to be a constant theme heard in the country.

Corruption seems to have worsened in India due, in my view, to two factors. The first has to do with how much public servants -- envious of their private-sector peers – want as bribes. As the economy has done better, the amounts asked as bribes have risen quite significantly. Second, until about a decade ago, the state was the major employer, attracting the very best talent. Today, the youth have many more options. The best now prefer working with MNCs and Indian private companies. This has led to a decline in the quality of those entering the government.

In the path to development, a lot of people have been unfairly burdened. Government wants to print as much money as possible. The resulting inflation – now running in the range of 7%, having recently dropped from a high of 11% -- hurts the poorest people the most, while transferring the benefits to those who own assets. In the end, the loose monetary policies create a fake boom that must lead to a bust. Another way the poor people are hurt unfairly is through the government policy that results in their property being confiscated “for the greater good,” to build factories, dams, and roads. The elite, middle-class society mostly doesn’t care about this and, in fact, supports such government measures; all in the name of the free market.

65% of Indians work in the agriculture sector, representing a mere 18% of the economy, with only marginal growth. These people, to have a future, must move to manufacturing. Alas, there is no political will to liberalize labor laws and deregulate the manufacturing sector.

As the poor people’s expectations rise from watching TV and as the social control of religion on them decreases, high inflation and lack of options to work and grow economically are becoming increasingly problematic.

Social Problems on the Rise

Socially, the problems are growing, though they are kept from surfacing by increasing nationalism. But “nationalism” is always an artificial glue and cannot hold forever.

Muslims, which make up 13% of the population, are unfairly treated and find it difficult to get jobs. There have been many instances where they as a community were humiliated. As recently as 2002, thousands of Muslims were displaced in the province of Gujarat, with over 2,000 massacred. Many more were raped, all in the name of Hinduism.

And make no mistake, the Indian army rules Kashmir with an iron fist. In the West, India is quite erroneously seen as a frontier to fight Islamic terrorists. It is not. Hindu terrorism is just as bad.

Making the solution to this social problem more knotty, there is a lack of education among the Muslims and when given a chance, they do more than their fair bit in keeping the vicious cycle of violence going.

Regionalism was the reason why barely a couple of months back, there were riots in Mumbai. This was to rid Mumbai of people from Bihar. Bihar is the third most populated province of India – extremely poor, socially very backward, and economically stagnant. People from Bihar drive taxis and do menial work in richer provinces. In Mumbai, properties of the people of Bihar were destroyed. Many were badly beaten. Some were killed.

There is a Maoist insurgency in eastern India. Singh, the Indian prime minister, calls this -- not the more widely publicized Islamic terrorism -- “the greatest internal security challenge we have ever faced.”

The northeastern provinces of India have been fighting for secession. These fights kill many more people than the disturbances in Kashmir do.

Indeed, the above being only a partial list, India has a lot of political and social problems -- between religions, communities, regions, castes, and classes -- that you are unlikely to hear of in the Western media.

             Imagine the unnecessary waste, stress, confusion, and value destruction that this entails.

As is the case with India’s roads, the path to economic and social progress is riddled with serious potholes. Investing in India should be done keeping in mind the nature and risks of its economy. Educational, health, and consumer goods (soap, shampoo, tea, cigarettes, etc.) companies might carry the least risk and perhaps the best upside. Alas, foreign retail investors cannot directly invest in the Indian stock market. This must be done through institutional investors, yet another sign of the regulatory morass that constantly gums up the works in India today.

Jayant Bhandari

Casey Research correspondent Jayant Bhandari is consultant to an institutional investor specializing in natural resources and emerging markets. In addition to starting and running two businesses, he has developed and run Indian subsidiaries of two European companies, one of which became the market leader in its sector. He has an MBA from Manchester Business School (UK) and now lives in Vancouver, Canada.