The Daily Reckoning - Weekend Edition
December 3-4, 2005
Baltimore, Maryland
by James Boric
MARKET REVIEW: THE INDIAN STORY YOU HAVEN'T HEARD - YET
How do you invest in India?
This has been a popular question for years now - especially here at The
Daily Reckoning headquarters. And how could it not?
India has the 12th largest economy in the world. Real GDP growth weighed
in at 8.17% for FY 2004 - double that of the United States. It adds the
equivalent of a Canada to its middle class each year. Real wages are on
the rise. And just about every major sector in India is growing. You know
the stats...
- India's mobile phone sector is up 53% in the last 18 months
- Between now and 2007, India has earmarked over $117 billion to improve
its infrastructure (power plants, ports, roads and airports)
- And the banking sector in India is on the rise as more and more Indians
are taking out loans to buy their first house and car.
Chances are, you could invest in any of these sectors and do very well for
yourself over the next 10 years. But there is a far bigger story to be
told about India - one which 99.9% of Americans know nothing about.
While every economist in the United States is busy crunching the same old
boring India stats to make their bullish case, I've spent a lot of time
following a developing opportunity that is playing out right now in
Mumbai, Delhi, Bangalore and every city in India. This opportunity is far
bigger than anything you have heard about before. Every high-ranking
Indian business leader and political figure is involved. Every mom-and-pop
shop-owner has a strong opinion. And every Fortune 500 company (including
Microsoft, GE and Wal-Mart) is trying to get in on the deal.
The opportunity is still in the developing stages. But when it finally
comes to fruition - and it certainly will - the profits will be measured
in the hundreds of billions of dollars.
The opportunity I am referring to is India's impending decision to
permanently open up its $200 billion retail sector to foreign investment
for the first time ever.
As it stands now, India's retail sector is closed to the world. No
American outfit (or European or Asian for that matter) can set up shop in
India unless it agrees to a diluted partnership with an existing Indian
business. Those partnerships involve splitting revenues, paying
ridiculously high taxes and forgoing the right to own the land they
operate on.
Basically, India makes it as hard as possible for any foreign company to
compete with its mom and pop storeowners. And it's no wonder why. Those
small shop owners account for 98% of all retail sales made in India each
year - totaling more than $200 billion. And it's been this way ever since
the British pulled out of India in 1947.
But it's about to change.
India's current prime minister, M. Singh, is a major believer in free
markets and open competition. He understands that foreign investment and
competition lead to more jobs, more taxes and more revenues in the long
run - even though it forces those who can't compete (your small business
owners) out of business in the short term. And he's proven what
competition does for an economy's overall health.
Since taking office in 2004, Singh has increased foreign investment from
26% to 49% in the insurance sector. He raised foreign investment levels in
the telecom sector from 25% to 74%. And he allowed foreigners to own up to
49% in Indian airline companies, as opposed to 40% a year ago.
The result: India's insurance sector rose 62.3% in the past year. The
telecom sector rose 102.67%. And the airline traffic shot up 25%.
Even before his reign as Prime Minister, Singh developed a strong track
record of opening India up to the world. In 1991, India was on the brink
of bankruptcy. Its debt equaled 8.5% of its GDP. Its current account
deficit was nearly 3.5% of GDP. And India had only about $1 billion in
reserves sitting in the bank.
Singh, then serving as India's finance minister, immediately rolled up his
sleeves, took out a $5 billion IMF loan and opened the country up to
foreign direct investment and foreign competition. He simplified the tax
structure. He lowered many of the ridiculously high tariffs. And he
slashed subsidies for domestically produced goods.
The result: India's economy grew between 6-7% each year after. It now has
over $145 billion in foreign reserves in the bank. And the Indian stock
market is up 505.6%.
And now he has vowed to open India's largest remaining private sector to
foreign investment and competition - its $200 billion retail sector. In
fact, in an interview with India's Financial Times, Singh said he would
like this to happen by the end of this year.
Of course, I don't expect that to happen so quickly - although it could.
Chances are it will take another year (or several) to get the job done.
But when it does happen, look out.
The last time anything like this happened in Asia was in 1992. That's when
China opened its then $75 billion retail sector up to foreign competition.
Here's what's happened afterwards...
- The Shanghai Stock Exchange's market value soared 44 times over
- The Hang Seng Stock Exchange rose as much as 314%
- Total wholesale and retail trade increased 393.3% in the next 10 years
- The number of supermarkets increased 1,068.24%
- Retail employment nearly doubled.
Now the same thing is likely going to happen in India. The only question
is, how soon? Based on Singh's track record over the last 15 years as a
prominent Indian political leader, it will be sooner versus later. But to
find out for myself, I am headed back to India in February. Of course,
I'll keep you posted on what I find.
James Boric
for The Daily Reckoning