India.....the next Global Economic Super-Power....

Well, my wife and I just got back from another wonderful, inspiring trip to India.  We spent time in Delhi and the Eastern Industrial belt, Ranchi, Asansol & Kumardubi located in the Jharkhand and West Bengal States.

Here's my thesis:

India will be the next Global Economic Super-Power

Why?  Here are my general observations.

1. The Indian people are the hardest working people I've ever known or could imagine knowing.  They work long hours for low wages, are independent, self sufficient and intensely proud of their work and efforts.
2. They are highly educated, usually multi-lingual, inquisitive, well read and interested in a wide range of subjects.  They value education above all else and understand that education is the only way that their children will move up the socio-economic ladder.
3. They are fiscally responsible and honest. They don't borrow money unless they are absolutely sure they will be able to pay it back.
4. The country is surprisingly secure.  There is relatively low crime and virtually no violent crime.  Firearms are strictly controlled.
5. The county is "connected".  Smart phones are ubiquitous and inexpensive. 
6. Political barriers to progress are eroding.
7. The Indian people are kind, helpful, generous souls.  We were treated like royalty wherever we went.

Before I elaborate on the above and discuss the road blocks that must be overcome to make my thesis a reality, I've always felt that pictures usually tell a better story than words possibly can.  To that end, I've posted the following collage.  Captions reflect the US equivalent of the composition.

The intent of the above is first, to convey the energy, work ethic, physical, financial and emotional effort expended during a day in the life of the people of India.  Second, to illustrate how much work still needs to be done to achieve, by Western standards, a truly efficient, functioning society.

The pictures selected are neither "better" nor "worse" than any of the other pictures I took.  What I'd like to stress is that these pictures paint a very accurate portrait of daily life in India.  We hired a car and a driver and traveled 140 miles in about seven (7) hours.  The top speed we reached was probably about 35 miles per hour. There were people, cars, animals, trucks, commerce, activity and commotion everywhere. At one point of the trip I challenged myself to snap a picture where there was no person in the frame. I failed miserably.  Our driver was expert at "nudging" pedestrians, livestock and bicyclists out of the way without incident, as well as somehow avoiding head on collisions.  There are 140,000 traffic fatalities per year in India.  It's hard to believe, since highway speeds rarely exceed 40 miles per hour.  Sadly, most of these deaths are preventable as helmets and seatbelts are generally not worn.  "Transportation chaos" best describes our little trip.

That said,  the overarching theme which permeates every crevice of day to day life in India, in my observation, is the lack of understanding of the aggregate consequences of individual actions.  The Indian people generally think nothing of:

1. Allowing livestock (cows, chickens, goats, pigs, buffalo, and the occasional elephant, etc.) to roam freely with no constraint.
2. Driving any vehicle (car, bicycle, tuk-tuk, rickshaw, truck, etc.) anywhere there is open pavement. (There are no street signs, signals or markers.)
3. Urinating or defecating wherever they happen to be.
4. Having children without any plan to feed, clothe or house them.
5. Dropping a plastic bag or bottle, food waste, wrapper, can or other trash and walking away.
6. Power outages or "load sharing" for hours or days at a time.
7. Living in a tarpaulin covered hut.

Individually, none of the above would have any impact on the citizens or their quality of life.  However, in aggregate, multiplied by 1.3 billion people over dozens of years on a land mass one third of the size of the United States, the result is, to say the least, astonishing.

Oddly, the people seem to be, at least to a certain degree, "ok" with it. The Indian people seem to be happy with their lot in life. Local and municipal government efforts are inconsistent at best and often fail to provide what Westerners would consider "basic" services. (trash collection, water, enforced traffic laws, public transportation, an adequate electrical grid, etc.) In the US, my guess would be that these conditions would generate various levels response ranging from public outcry, up to ouster of political officials and potentially riots in the streets. Yet, in India, things somehow seem to get done.

Let's go full circle here....

Let's get back to my thesis that "India will become the next Global Economic Super Power".  After reviewing the above you are probably thinking that this thesis is most likely the byproduct of malaria or a bad plate of Tikka Masala.  On the contrary, there are grass roots efforts underway already. The economic and societal road blocks India faces are absolutely insignificant when compared to the competitive advantages described in the opening bullet points of this post.

According to the IMF, India is the third largest economy ranked by GDP on a Purchase Power Parity (PPP) basis, behind only the US & China and well ahead of Japan, Germany and the UK.  (Of course it's way down the list on a per capita basis)  India also has very little debt when compared to the rest of the world.  Total Debt (Public, Private and External) as of June of 2014 was at 120% of GDP with the ratio remaining constant (0% debt growth) since 2007.  By comparison the US is at 230% (Increasing 16% since 2007); China is at 217% (Increasing 83% since 2007) and Japan is at 400% (Increasing 64% since 2007)  (McKinsey)  Simply put, India doesn't owe its future to anyone.

Moreover, every business person I talked to gave the Modi Government a hearty "thumbs up" on its initiatives.  Whether it's the Swachh Bharat Abhiyan (Clean India Mission), Jan Dhan Yojana (National Mission for Financial Inclusion) or the Atal Bimi Yojana (National Pension Plan) there's movement taking place today that hasn't happened in the past.  The newspapers are filled with full page ads describing the industrial initiatives (Steel, Transportation, Roads, Rail, etc.) currently underway.  While I was touring the countryside, the media coverage of the Prime Minister's  (Narendra Modi) trip to China was constant.  Meetings, discussions and ceremonies with Xi Jinping were all anyone was talking about.  Northern border and security concerns, capital flows, FDI, joint venture opportunities, Modi's Bullet Raja higher speed ("Express" trains in India currently average 31 mph) rail plan, Pakistan relations as well as China's Naval operations/aspirations in the Indian Ocean were all on the table and open for dialogue.  The battle cry for the Modi Government seems to be "If China can do it, why can't we?". 

All of these initiatives are beginning to take root.  India's output growth accelerated to 7.5% last quarter (7.3% for the fiscal year ended in March), putting it ahead of China as the world's fastest-growing large economy.  Manufacturing activity progressed at a healthy 7.1%. Services such as finance, insurance and real estate continued to perform very well, growing by 11.5%. But with below-average rain hurting crops last year, agricultural growth was flat, at 0.2%.  "In this cloudy global horizon, India is a bright spot," Christine Lagarde, the International Monetary Fund's managing director, told college students in New Delhi in March, referring to a stagnant EU the slowing Chinese economy.

Putting more pedal to the metal , India's exports are relatively cheap and getting cheaper.  The Rupee is depreciating and worth about a third less in US$ than just a few years ago.  India's favorable Purchasing Power Parity (PPP) disparity will provide a tremendous advantage as markets open and investments flow.   The cost of goods, labor and services are declining on a relative basis and the labor force is poised and looking for global opportunity.  The Indian people are ready, willing and able to "go to work", yet nine out of ten Indians don't even have a "formal" job with a regular paycheck.  Most survive by doing handyman, or domestic work or making/growing/selling whatever they can to get by.  Wages for domestic work and these "odd jobs" generally pay about US$1.50 to US$2.00 per hour.  To illustrate the difference in labor philosophy from that of  the West, a few weeks ago the Union Cabinet authorized a law "limiting" child labor.  Children under age 14 can now only work in a family business or a few other non-hazardous industries with their parents permission.  Believe it or not, this is actually tightening the rules.  Prior to this new law, Children of any age were working in virtually any industry with no limitation as long as there was parental permission.  In the US of course, child labor is illegal per se.

India's FOREX Reserves are at record levels, $352B or 17% of nominal GDP (4.7% of PPP GDP) representing enough currency to pay 10 months of imports (compared to the financial crisis on 1991 when the reserves were the equivalent of 2 weeks of imports).  Unlike in the US, there's plenty of room for economic stimulus.  Bank Deposit Interest rates are at 8% and the Reserve Bank of India has just lowered its benchmark lending rate by 50 basis points to 7.5%.   Apparently India's finance minister saw no reason to follow the lead of "Helicopter Ben".  On the other hand, It would be difficult to imagine what the US economy would look like right now if the FED had kept interest rates at 7.5% since the financial crisis.

Today, India's Capital/Stock & Bond markets are developing, yet continue to take a backseat to China's markets.  An article in the Economic Times (May 9th) Opined "China's Tsunami Sinks D-Street".  The article's premise was that the eruption in China's equity markets was syphoning available global capital from Mumbai's Dalal Street (i.e. India's Wall Street).  Incredibly, "Between May 5th and May 12th - 25 Chinese companies would mobilize $377 billion, according to Bloomberg Data. This is eleven times the amount raised by Indian IPO's in the past decade and slightly greater than India's current Forex reserves."  The meteoric returns in the Chinese markets over the last year have stymied the ability of India's businesses to raise capital.  If this were to continue for an extended period of time it would be crippling for India's prospects.  Why invest in India when you can double your money in China?  Fortunately for the Indian economy, in the author's opinion, the tide will soon turn.

As discussed in great detail within this blog, once the Chinese economy implodes, and make no mistake about it, it will, India will be ideally positioned to fill the void.  In fact, China's economic day of reckoning will most likely come long before India has undertaken significant trade, capital and integration risk in China. As a result, Capital will begin to flow into India and in contrast with what's happened in China, it will not be wasted.  The Indian work ethic, resilience, honesty and creativity simply won't allow it.   In fact, India's economic ride with respect to China's impending hard landing should be much smoother in the near term than that of the US.  Again, as described in detail in prior posts, the US is more exposed to the Chinese Contagion than any other economy.  US financial markets and institutions are more immersed in this fraud and the related integration risk than any other economy.  US exposure to China's ADRs, A and H Shares, markets and US$ denominated bonds are well in excess of US$ 2 Trillion now and the values, as well as new money flow (China Stock-Connect et al) into these assets are increasing at an breakneck rate. 

China's Stock Markets, Shanghai (SSE), Shenzhen (SZSE) and Hong Kong (HK) have nearly doubled in six months and now have a market cap of about US$13 Trillion making these markets larger than the London, Euronext and Japan stock exchanges combined.  Amazingly, most of this value has been created in the last few months and has no relationship to the fundamentals of the underlying businesses.  The Shanghai stock market currently has a P/E of 68.  That's fine for a tech startup, but quite a frightening P/E for a mature index.  As a point of reference, the current P/E for the S&P 500 is 20.6

But as we have learned all too well, all good things must eventually come to an end and all bubbles will eventually pop.  Once the China/Global correction and the reallocation occurs, I will be very comfortable looking toward India for some very unique opportunities.

Namaste