India is rarely as shiny as its fans insist. The $1bn fraud perpetrated by Satyam Computer Services will not only throw the $40bn software and outsourcing industry into a tailspin, it will also raise disturbing questions about the risks of doing business in India - and even the sustainability of the country's much-vaunted growth miracle.
Only a few months ago, India saw itself as relatively immune from the global credit crisis. Some officials patted themselves on the back for going slow on liberalising capital markets, crediting their prudence as yet further evidence of the country's inexorable rise. But India now has a credit crunch of its own. Exporters are hurting and threatening to lay off 10m workers. Terror attacks on Mumbai have cast into doubt the competence of the security apparatus and shaken business and consumer confidence.
[...]
In spite of its poverty, it has sold itself as a country to which Fortune 500 companies can entrust sensitive data, banks their back offices and even patients the production of medicines. Its extraordinary success in IT over the past decade was based on the trust and credibility it established with globalised companies; the Satyam scandal has now put that at risk.
Outsourcing companies, furthermore, are keen to move up the value chain; to outsource some of their own functions and even to start acquiring the western companies whose businesses they help run. These ambitions are laudable. But like India itself, whose economic success story is built on extremely rickety social and infrastructural foundations, such grand designs can also smack of hubris.
Sunday, January 11, 2009
The FT Editors Echo Jim Rogers on India
Jim Rogers has mentioned his doubts about India as a destination for investment on various occasions (for example, in this unfortunately undated article on his website). Friday's Financial Times included a bearish editorial on India, prompted by the accounting scandal at outsourcer Satyam Computer Services ("Satyam Scandalises"). Below are a couple of excerpts from the editorial.
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India has a lot going for it in terms of human capital (math, science, engineering) and natural resources. Overpopulation is a problem, and thanks to Britain, India has a more humane democratic government who isn't going to institute a draconian one-child policy. So the road to modernity will be longer and messier than China's but in the long term, more stable.
Proximity to radicals is a problem, but could be a boon by giving a sense of national identity to the population as they unify against the threat. When a society doesn't have an external threat, it tends to fragment. And unlike some of its predominantly Muslim neighbors, the population in India is not sympathetic to terrorists.
"So the road to modernity will be longer and messier than China's but in the long term, more stable."
That's Tom Friedman's view. As someone who roots for India as a fellow democracy (and as a strategic counterweight to China for us), I'd like to believe it's true, but, as Rogers points out in that essay I linked to, India is a big, messy country, with lots of issues. One is that, for every Indian engineer or scientist with lots of human capital, there are maybe another ten Indians who are illiterate. Another is that there is ongoing civil unrest, including a Marxist insurgency in one of India's eastern states. Still another issue is India's poor infrastructure -- Rogers noted how the same cell phone wouldn't work in different parts of India, and how slow traffic crawled along on the country's main east-west highway, etc.
That's true, there are vast numbers of illiterate people there. But I would see the potential in that, as well as the liability.
And currently there are also vast numbers of literate, well educated people as well(not relative to the population of India so much as relative to the population of the rest of the "educated" world). I think the educated Indian economic segment will continue to push forward, growing the economy at a high rate. While it may take a long time and a Malthusian food crisis or two for them to be a truly modern state, I don't see progress derailing. Stalling, sure. They're a ways behind China, but I think this is a tortoise vs the Hare scenario if you imagine the future. I like China too however, and I'm invested there as you well know.
The only BRIC country I don't, and have never liked, is Russia. Which is a shame because Russia has a ton of natural and human resources. But as long as Putin moves the country backwards, I can't feel investment dollars are safe there. A World Bank study I read showed Russia was ranked alongside Swaziland and other third world countries in corruption.
Speaking of BRIC, one of the companies I mentioned to you earlier, BOBS, is expanding to Chile. I bought more shares at 2.75 and may buy again.
I agree with you on Russia as a BRIC I wouldn't want to invest in directly. I like Brazil because of its apparent stability at the federal and macroeconomic levels and because, as a commodity exporter, it's levered to China.
I'll have to give BOBS another look. One of the great things it has going for it is that it has a history of successfully competing with McDonald's in Brazil, so there's no reason it shouldn't be able to successfully compete with McDonald's in Chile, or perhaps elsewhere as well.
H.S. Dent on the coming depression and bullish on India. Interesting interview.
Good Indian portfolio: SLT, IBN, TTM, and RDY. Average down on these guys during global recession and when India recovers these will lead the way, IMO.
Seeking Alpha ought to do a better job of transcribing conversations. Dent's kind of all over the map in that one. He thinks 2008 was the secular peak for commodities; if so, that would have had to be the shortest secular bull market in commodities on record. I think Rogers's take that the few times in a century forced liquidations of last year distorted intact secular trends in commodities seems more plausible.
One country I didn't see mentioned there was Australia. Seems to me that it ought to do well, riding the waves of Chinese and Indian growth. Plus, Australia has no net federal debt, so it's in great shape fiscally.
I agree, Australia is positioned great as well. Change BRIC to BAIC for international exposure.
I'm hoping to add more to Alloy Steel soon, unless SSRX and BOBS continue to stagnate which will keep me adding to those two. Are there any other Australian companies on your radar?
"BAIC" -- I like that. Australia makes a lot more sense than Russia, that's for sure.
I'm going to have to do some digging for Australian stocks. Something tied to the macro trend of the growth of Perth (which also happens to be the home of a lot of Indian ex-pats, btw). A local infrastructure company might do well there over the next decade or so.
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