WHY DON'T THEY GET INDIA?
A lot of Indians believe in rebirth and transmigration of the soul.
While it is an intellectually rich philosophy, its quick and everyday version simply means that a person's second, third, fourth or nth life is influenced by his actions, or karma, in previous ones. By this simplistic yardstick, I must have been a foreign investor in at least a couple of my earlier births!
Ever since I began my entrepreneurial life in the early 1990s, I have dealt, rather pleasantly, with foreign investors of all hues, shapes and sizes. One foreign investor or the other sits atop every key milestone. In the early days, there were venture capitalists just coming to grips with the 'maddening complexities' of India. I was, in their lingo, a person with 'promising intellectual capital' in a 'virgin consumer-focused business' which was likely to witness 'explosive growth as India's GDP shifted gears and consumer aspirations stretched beyond the needs of daily survival'. In other words, I was a poor but bright fellow, bereft of any financial capital, brimming with special media skills and ideas, capable of creating 'value' as the country's television content business was 'unleashed'. So if they gave me $5 million in cash and a chunk in equity, I could build a team of professionals and a company which could become a leader in 'India's nascent media industry'. That's the first kind of foreign investor I encountered way back in 1993.
I must hand it to these guys for getting it somewhat right. Frankly, if I had $5 million in those days, I would have kept it under the mattress, but never given it away to a struggling thirty-two-year-old who barely had enough money to buy a second-hand car. But these guys did bet on us, and I daresay, made plenty of money. As our operations grew, we took bigger bets-and ran into even weightier foreign investors! The early-stage venture capitalist gave way to the late-stage private equity chap, who now gave us $20 million, but took a smaller chunk of equity, simply because 'start-up risks had been mitigated, and proof of concept was visible in our growing operations'. These fellows would visit us once every quarter, sit through board meetings, see some fancy graphics, meet our key people, tour the facilities, and round off with plenty of spirits at the Dublin bar. Their excitement about India was always subdued, tinged with an edge of scepticism, if not outright disbelief. Why does your government take so long to give approvals? Why is your foreign investment policy so restrictive? Why are your airports in such a shambles? How come your hotels are so good, when the roads leading to them are so potholed? How do you speak such good English? Why do you have so many newspapers? Why are so many of them in English? How are they able to survive? Why don't you lower your voice when you make fun of your politicians? How come your licence was not cancelled after you did such a tough interview with the finance minister? Why are there no malls here? Why are your cinema halls so rundown? Why don't Indian consumers pay for services?
Every conversation would end with some variant of the same observation: 'You know what, it's not like that in China-or Korea, or Thailand, or Dubai.'
As we acquired commercial muscle, our confidence and market share soared. From foreign investors who gave us equity capital, we moved 'up the value chain' to do deals with 'foreign strategic players'-large American media groups who bet their brand, programming and reputations with us. Our first joint venture was with CNBC to launch a twenty-four-hour business news channel in India. We made all the investments, took all the risks, and paid them a royalty. We followed through with another deal with CNN, to launch a twenty-four-hour general news channel in India. Again, we made all the investments, took all the risks and paid them a royalty. We then bought 50 per cent of Viacom's India operations, including such iconic brands as MTV India, Nickelodeon India and VH1 India. We put in slightly over $100 million to launch Colors, a general entertainment channel; the venture was led by our CEO, delighting our foreign partners with its spectacular success. Next on our rollcall was Forbes, as we set about publishing Forbes India.
In less than five years, we had put together a pantheon of the world's leading media brands on the same Indian balance sheet. Who would have imagined, or dared, to bring such competing American media groups-CNBC, CNN, MTV, Nickelodeon, VH1, Forbes-under a single owner? I am often asked: 'How did you pull that off?' My answer is a shrug; how do I say that I must have been a foreign investor in at least a couple of my previous births?
The colour of money changed from 'financial' to 'strategic', but the scepticism never ceased. Why is the Indian market so small? Why are Indian regulations so weak and confusing? Why is there no protection for intellectual property rights? Why does the Indian consumer steal our signals? Why do Indian courts take so long to decide anything? Why do Indians prefer tacky Bollywood films to Hollywood's masterpieces? Why are Indian commentators and politicians so free with their words and criticism? Why don't you have stricter libel and defamation laws? Why do we have to use Indian satellites only? Why are long overdue policy decisions put on hold by ever-so-frequent elections? Why is India's bureaucracy so timid? Why are India's bankers so conservative? Why are the interest rates so high? Why are all policies made in English? How do Indians speak such good English? Why does such abject poverty coexist with such immense amounts of corporate wealth in India? Why don't you want more dollars to come into your country? How come you have built such an efficient capital market? But then, why don't you have a bond market? Why do you control the prices of oil and cable TV? Why is the government trying, but failing, to ban jeans in colleges? Why do your social clubs insist on western attire? Why don't you allow more foreign players in your cricket league? Why do you have such old politicians in key ministries? Invariably, almost every such 'why conversation' would end with: 'Oh, but it's not like that in China-or Korea, or Thailand, or Dubai!'
Frankly, I could never escape the feeling that India was just a 'hedging instrument' for the investors. While they put serious money and conviction into China, Korea, Thailand and Dubai, their attitude towards India was, to use their terminology, somewhat 'derivative' or 'collateral'. India was a bit too complex and inexplicable for them, yet India had some of the dynamics which could, one odd day, make for an economic superpower. So even if they couldn't, or wouldn't, understand the country, they dared not bypass it, since India had mysterious potential: it could be the quaint outlier, or 'multi-bagger', in their portfolio. It made sense to 'play blind' on India-put in some money, but not bother too much with it. If you were dealt a good hand, you could make a killing; otherwise, your 'max downside' was to simply write off the investment as a 'hedging cost' for bets taken elsewhere in Asia.
A question began to beg for an answer: do these foreigners even 'get India'?
I was twenty-two when I first set foot on foreign soil, in February 1982. It was under extraordinary circumstances. I was flown into New York for emergency medical treatment. Our plane landed in a city buried under a severe snowstorm. Muscular attendants pushed my stretcher past immigration and loaded it on to a howling ambulance. Everything was a blur of ceiling lights and whizzing corridors. It was my first brush with American efficiency, and I was wide- eyed with admiration. The traffic into midtown Manhattan was exceptionally heavy, but we made generous use of the howler. Cars would part with magical discipline, clearing the way for my ambulance to race to the hospital. I was checked in and tucked into a rather comfortable bed. I spent the whole evening answering questions from friendly male nurses (the whole experience was full of firsts!).
I spent the next four months in hospitals, clinics, hotels and sub-leased apartments. I would run into guards, housekeepers, lift attendants, nurses, all of whom, without exception, would ask me one cheerful question: 'You from Pakistan?' India simply did not exist in popular consciousness. That was the year Gandhi swept the Oscars. I was often asked 'if that guy was for real?' Another question would pop up with unerring regularity: 'How come you speak such good English? Have you studied in London-you have such a British accent! Does every Indian speak such good English?'
At the end of four months, I was convinced about two things: Americans are a terrific people to deal with, but India is simply not on their radar. It was an astonishing revelation, since the streets, universities and hospitals were crammed with Indians. Yet we did not exist, as a nation, or a real, tangible, identifiable entity.
One question has troubled me for nearly three decades now: why don't foreign investors really, I mean really, get India? Why can't they figure us out?
I have often been asked, 'You are such an India bull, what do you believe is the biggest risk to the India story?' This is one question I have answered without the slightest hesitation. There is only one risk for India, and that's the lack of confidence that India's own leaders have in its abilities and destiny. Every other disability stems from this endemic, ingrained complex that our policymakers suffer from. They peg India lower than an Indian can stretch to. They force India to punch below its weight. They are content being in the upper quartile, never quite believing that India has what it takes to be at the top, not just near the top. They delight in small achievements and celebrate the climb to the base camp, secure in their conviction that India cannot scale the peak. They are so incremental and risk averse that they pitch India much lower than what young India is yearning for, aspiring for, and increasingly, is impatient for.
I am not an academician, nor an economist, nor a policymaker-I am a simple editor and entrepreneur. The book I am asking you to read is largely a work of instinct, intuition and experience. Today there is a transformational opportunity for India to do what China has done-lift hundreds of millions of its people out of poverty. Between India and China, the odds are fifty-fifty. It's an amazing race between China's hare and India's tortoise-one that China need not automatically win, and India should not believe it is bound to lose.
CHINA AND THE ART OF ESCAPE VELOCITY
Napoleon once said, 'Let China sleep, for when China wakes up, she will shake the world.'
China has woken up-as predicted, its economic growth has shocked and awed the world. While several factors are responsible for this miracle, the principal thrust has come from capital spending on a scale unknown to mankind. China has built schools, hospitals, roads, railways, airports, bridges, ports, ships, skyscrapers, factories, malls, technology parks and new cities with an ambition that can only be described as spectacular and brutally effective-and I use 'brutal' in a largely positive sense. There is simply no other word that can capture the mind-numbing ambition and scale on which China has marshalled its investment machine There is a saying in the Red Army that quantity has a quality all its own; that quality is now on show for the whole world to gasp at.
China today is investing nearly half its GDP, something that's simply unprecedented. No other economy, at no other time in history, has invested capital on that scale. At the peak of its economic miracle, Japan was investing only 30 per cent plus of its GDP; but China is investing 50 per cent! Roy Ramos of Goldman Sachs paints a graphic picture of China's credit expansion, estimating that in less than ten months in 2009-10 it added 'the equivalent of India's banking industry twice over'.
Over 200 years of economic experience tells us that hyper-investment creates a bubble and ends in a dreadful collapse. Even common sense should tell us the same thing. If you spend trillions of dollars in creating mammoth bridges, malls, plants and ports, the immediate impact is nice and invigorating. The economy expands, people earn more, they spend more, factories hum with production, and wealth gets created. But problems begin when ports go half empty (because they are larger than needed) or roads fall short of toll revenue targets (because fewer cars are being driven). It's what economists call 'over-capacity' created by 'hyper-investment'-in common sense terms, it's simply a case of building a palace when all you needed was a five-bedroom dwelling (ask the Emir of Dubai). The trouble begins when you have to keep extra guards, gardeners, electricians and housekeepers to tend to the unused parts of the palace. Sooner or later, you begin to feel the pinch of all that wasteful maintenance of unused rooms and hallways. That's when you cut your losses and abandon unused parts of the palace which eventually fall into ruin; the feel-good bubble gets pricked, and wealth is destroyed.
But China has consistently defied all such prophesies of doom. Too many smart people-for very cogent and rational reasons that are steeped in economic logic and theory-have been predicting that China's bubble has to burst. But it's not happened, and shows no real signs of happening, yet.
True, there have been bumps along the road: China has weathered a few storms and some small bubbles have been pricked, but nothing that can be called an epic disaster caused by an epic spree of hyper-investing. Actually, the time has come to acknowledge a truth: either conventional economic theory will have to be rewritten, or China will eventually collapse. The two cannot co-exist. China cannot defy 200 years of economic laws with such ease and facility; either its defiance will end in tragedy, or conventional economic theory has become irrelevant and hit a dead end.
Frankly, it's not too bizarre to believe that China could be scripting a new economic logic. I would venture a 50 per cent wager on China actually trumping conventional theory. Why do I say that? Because by investing on a scale hitherto unknown and untested, China may have defined a new 'escape velocity' of capital spending. Traditional theory says that investment should be 'sustainable', that is, it should be 'matched' by rising consumption. But what if you pump so much capital into your economy-similar to putting extra fuel into a rocket-that you 'escape' the gravitational pull of low thresholds? Especially if the bulk of your capital is spent on infrastructure (roads, railways, schools, hospitals, ports), as against factories which produce toys and televisions? This could be the Chinese masterstroke, the single discontinuity which could defeat 200 years of economic wisdom. Big factories may create over-capacity, but mammoth infrastructure could trigger higher productivity and the ability to create wealth. So it may be a fatal mistake to look at China's investment spree in a single lump of factories- plus-infrastructure. Perhaps big factories create waste, while big infrastructure, especially life-enhancing social assets, empowers people. By rapidly educating your workforce, by brilliantly executing immensely large projects, by importing expertise and dollars in a shrinking world, you could create a 'shower of wealth and productivity' such that consumption 'trickles through' quickly into the bubble. The sheer scale of your activities could end up swelling the tide in which everybody and everything rises together; a new model of 'tidal wave investing' could buoy the whole ocean to a much higher watermark.
China's final and ultimate repudiation of conventional theory may be the apparent neutralizing of democracy. Two hundred years of political economy have taught us that genuine enterprise and innovation take place only when people are free, when individual genius soars unfettered. Look around you-America, Europe, Japan, Israel, South Korea, Brazil, India, Australia, the bulk of the world's wealth resides and flourishes in a democracy. But China is challenging that axiom; once again, it is using ambition and infallible execution to trump democracy. It believes that people will trade wealth for freedom; for nearly three decades, this belief has held good and gathered in strength. So will China drive the final nail into the coffin of history? Can real wealth be shared and sustained if ordinary people live in constant fear and threat? Sooner or later, won't the will to create wealth break down, or a revolution of rising expectations overturn the rule? However much China may protest otherwise, the jury is truly out on this one.
Clearly, China is crafting a new economic wisdom which has stood textbook material on its head. It's spending unbelievable amounts of capital under an 'escape velocity' model as opposed to the 'sustainable investment' theory of conventional economics. It is betting on consumption 'trickling through' as against 'matching investment' under traditional economics. It is using mandated prices of foreign currency, wages and land, as against free market discovered prices, and finally, it is doing all of this in a rigidly controlled quasi-democracy (many wouldn't bother with such semantics, and call it a plain authoritarian state, but that could be missing a few nuances of China's extraordinary story). Will it succeed? As I've said before, I wouldn't wager more than 50 per cent on this happening. But what about the other 50 per cent?
Now look at India: that's a classical textbook case. India's structure is an uncanny prototype of a 'promising' economy. Well above half its GDP-nearly 58 per cent-is consumed by over a billion people (another 11 per cent is consumed by the government), giving it the kind of organic strength that transformed the economies of the US, UK, Germany and Japan. Just its rural economy is made up of 800 million people spending over $425 billion. This when agriculture's share is declining, manufacturing is rising, and services are already more than half the GDP-again, a classically attractive mix (although India needs to have higher manufacturing and even lower agriculture, but the lines are moving in the right direction). Like China, India saves nearly 40 per cent of its GDP, but the bulk comes from households (as against China, where state- owned corporations with somewhat contrived accounting contribute more than households).
India's resource consumption has decreased for every incremental dollar of GDP since 1991 (as against China, which was using three times more resources per dollar of GDP than India). India's economy is healthily private, with state-owned corporations accounting for less than a tenth of the output. Its stock exchange was set up in 1875, the oldest in Asia-it is also perhaps the most digitized in the world. At slightly over a trillion dollars, its stock market capitalization is about equal to its GDP-another beautifully balanced economic attribute. Its foreign reserves are over a quarter of a trillion dollars, neither uncomfortably high, nor low. Its bank credit is roughly equal to half its GDP (as opposed to 150 per cent for China), while bad loans are at an astonishingly low 2-3 per cent in a world devastated by toxic financial assets (recall that China's bad debts are precariously estimated at between 30-50 per cent, the large range itself betraying a huge risk of fuzzy estimates). Indian banks had virtually zero exposure to the sub-prime paper that ravaged America and Europe. About 40 per cent of the economy is exposed to global trade (exports and imports)-low enough to escape world crises, yet high enough to remain an open, competitive economy. The Indian rupee largely floats against world currencies, in contrast to China's yuan, which is globally pummelled for being artificially undervalued. The rupee danced in a 25 per cent band after Lehman's collapse, without disrupting anything. A red rag is India's weak government budget and rather high public debt at 80 per cent of GDP-but here again, the highly vulnerable dollar loans are paltry by Asian standards. India is in a very sweet demographic spot, being the youngest country in the world: half a billion Indians are less than twenty- five years old, giving it a unique 'demographic dividend' among peers. Ten of the world's thirty fastest-growing cities are in India; its urbanization rate, at 30 per cent, is accelerating. With 350 million people displaying a reasonable proficiency in English, it's the largest English-using country in the world. Its judicial system is robustly based on English common law. It's a genuine, albeit imperfect, democracy.
To repeat, India is a classical textbook case. If 200 years of economic theory is sound, then India simply must succeed in creating an America- and Japan-like miracle. Continuing to infuse physics into economics, India's growth is like the 'wave theory': closer to the epicentre, the waves are tiny, densely packed, and look really small. But as they spread outward, they pick up cascading strength, making larger and stronger concentric ripples. It starts as an undetectable wobble, but soon becomes a ring of thrusting circles, growing in size and strength with each outward lunge. That could be India's model-dotted with micro changes, the atoms picking up energy from each other, pushing and jostling those around them to move faster, until all the particles begin whizzing around kinetically, pumping up a balloon of spreading prosperity.
So, if China's got the all-new, not-yetfully-tested model of 'escape velocity' capital investments, India's going with the rather established 'wave theory' of inaudibly permeating growth.
I also stumbled upon a fascinating piece by Nobel Laureate Paul Krugman called The Myth of Asia's Miracle: A Cautionary Fable. It was written in the early '90s-therefore, it can be interpreted with the luxury of hindsight. Krugman analysed two earlier economic races: one between the US and Soviet Union ('50s through to the '80s), and another between the US and Japan ('70s and '80s). He cited plenty of popular commentary from those days which read ominously like today's obituaries. By way of example, he quoted Calvin Hooper (1957) who had predicted that 'a collectivist, authoritarian state was inherently better at achieving economic growth than free-market democracies (and) the Soviet economy might outstrip that of the United States by the early 1970s'. Others asserted that 'Japan would overtake the United States in real per capita income by 1985, and total Japanese output would exceed that of the United States by 1998'.
According to Krugman, these predications were bound to fail because they ignored the intangible force-multipliers of innovation, technology and competitive efficiency. He added that similar predictions were also being made then (do remember that 'then' was the early '90s!) about the US and China. 'The World Bank estimates that the Chinese economy is currently about 40 per cent as large as that of the United States. If China can grow at 10 per cent annually, by the year 2010 its economy will be a third larger than ours.' Of course, at that time Krugman concluded that this comparison too could fail. Today we are in 2010, and we know that Krugman was right. Forget about being a third larger, the Chinese economy continues to be less than 40 per cent of the US even today.
Krugman's fallacies have a crucial bearing on who will ultimately breast the tape, China's hare or India's tortoise. Perhaps the answer will not be quite as simple as who is investing more and growing faster today. You will have to put your arms around a few intangibles: Who has superior innovation? Who has more entrepreneurial savvy? Who is grappling with and expanding in intensely competitive conditions?
Finally, there is another, enormously enigmatic factor at work here. It's not about China versus India, but China and India versus the rest of the world. During their peak growth decades, countries like Great Britain, the US, Germany, Japan or South Korea added trillions of dollars in income to hundreds of millions of people. But it's for the first time in human history that trillions of dollars are being added to billions of people. Now imagine this contrast playing out on the ground-for instance, America and China have roughly the same land mass, but China has thirteen times more people than what America had a century ago when it began its economic miracle. So today's China (or India, for that matter) could be cradling several countries, or sub-economies, at different points of transition; its rich coastal sub- economy is perhaps the equivalent of a Japan or Germany, while parts of the hinterland could be similar to a Brazil, South Korea, Australia or Bangladesh. As soon as the top 150-200 million Chinese hit a Japan- or Germany-like living standard, the growth impulse could be moving to another sub- economy which is mimicking a Brazil or Australia, and finally, perhaps three quarters of a century later, to the 'Bangladesh-like sub-economy'.
Earlier, in 50-150 million people countries like the US, Japan or Germany, many people would get very rich quite rapidly. Now billions more are getting somewhat rich (but not 'very rich') at a reasonable clip (but not 'rapidly'); as soon as one sub-economy becomes rich, the growth wave moves to the next-in-line poorer one. Earlier, the smaller rich economies made a 'one-time transition' over a few decades; but China and India, because of their large numbers, could see 'serial transitions' as one sub-economy after another hits higher living standards. This could make their growth stories far more elastic, with repeated 'rebounds' from 'slowdowns', as one sub-economy plateaus but another begins firing on all cylinders. What's more, this uncharted dynamic could be happening simultaneously across both countries in a contiguous part of Planet Earth. The centre of economic gravity could be shifting from some point in the Pacific Ocean to a dot near Mount Everest.
Earlier, each transforming country had a somewhat predictable economic graph, with a thin two-dimensional line rising along an 'S curve'. Today, China's and India's income curve is more three-dimensional, thickening and flattening out over billions of people in several sub-economies. It is a wave without known coordinates, one that cannot be mapped on any prior experience in human civilization. Will this dynamic create many more happy, better off, better educated and motivated citizens, workers and consumers? Or will it create a larger constituency of relatively deprived, worse off, more dissatisfied people (compared to peers in smaller countries that became wealthy much earlier)? Will a slower accumulation of wealth encourage them to patiently strive for more, or make them impatient and angry? How differently will these billions of 'comparatively lesser mortals' work, play, consume, save and invest versus their historical counterparts?
So what's my wager now? If I put 50 per cent on China, would I put more on India? No, I would still venture no more than a 50 per cent bet on India, because we are at a critical crossroads in economic history. In stock market parlance, China is the 'beta stock': it could give wildly high returns, or it could sink like a stone. India is the 'defensive scrip' which may not leap to the stratosphere, but is also unlikely to fall too much from where it is. If China scales the summit, it will force a rewrite of economic textbooks. If India ascends to the top, it will reinforce the strength of conventional wisdom.
But which way will history turn?
China's spectacular sweep, compared to India's relatively mild rise, could tempt an easy answer, but it would be wise to remember that history unfolds over several decades, perhaps even in fractions of centuries. So it truly may be too early to call this match. Do also remember that China and India were the quickest to bounce back after the Lehman crisis. China's rebound, however, was accompanied by huge debt and deflation, as prices (and therefore demand) were weak. India's turnaround was sturdier, caused by lower debt and modest inflation. So in economic terms, India's nominal GDP grew twice as fast as China's for a few quarters on the trot-the first time that this happened in nearly three decades. This is what economists call a 'lead indicator': in simple language, it could be the one swallow which makes the summer, an early signal of change. But before we spring to quick conclusions again, do remember that China is so far ahead that India's fledgling momentum could easily get snuffed out. The imponderables are far too many; China's ambition and confidence are, unfortunately, equalled by India's poor governance and self-doubt. China could yet re-write economic theory, and India could yet blow its chances.
As with all good games of chance, there's a joker in the pack. What if India were to graft some of China's ambition and determination? Or, what if China were to adopt some of India's democracy? Now the game gets really interesting, because the odds then move, from comparing economic structures, to figuring out which country can do what more easily. Can India fix its governance more easily than China can repair its politics? Whoever gets this one right will win the biggest wager of the twenty-first century.
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