Inside investment: Indian takeaways
Rising levels of obesity have produced an epidemic of diabetes in India. But there is no part of the country more bloated than its bureaucracy and less healthy than its legal system.
A vision of the great Indian subcontinent lay stretched out before me as I stood on the sidelines of Institutional Investor magazine’s annual India Investment Forum held in late September at the Grand Hyatt in New York City. Looking across the impressive expanse of the main ballroom, I could see high government officials moving slowly forward to their seats like so many juggernauts threatening to crush any entrepreneur who fell under the wheels of their inexorable regulatory advance.
A profusion of dark-suited men, businessmen presumably, swarmed warily around these lumbering structures, casting verbal flower petals upon them while carefully avoiding the turning wheels. Foreigners of various types mixed in this crowd, watching with fascination and occasionally joining in. At the same time, one particularly bulky functionary made his way slowly, like a fully-laden oil tanker carefully negotiating its way up Thane Creek in the port of Mumbai, to the speaker’s platform.
There he called for greater transparency and, observing that many businesspeople are criminal fraudsters, asserted that putting these miscreants in dark, damp jails would encourage the others to invest more in the country. In introducing one particularly interesting session – Inefficient Indian infrastructure: are we ready for change? – the panel’s chairman noted that the past two years had been a "period of desolation for the Indian infrastructure sector".
Contractual, legal and financial issues have been like so many snakes at a garden party for wireless-phone operators and power-plant owners. The impression left was that these problems stemmed largely from governmental actions and inactions, and that government’s answer to the question posed must therefore be an emphatic ‘No’.
A speaker representing private industry noted that the World Bank’s Ease of doing business index ranks India 132nd out of 183 countries. This index is based on factors that include dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.
Of particular note is India’s 182nd place in enforcing contracts, putting it just behind Angola (181st) and ahead only of Timor-Leste, which is last of all. In India, contracts cannot be enforced through the courts, so private means must be employed, as was once the case in Chicago.
India ranks 166th in the difficulty of starting a business category, only slightly better than the West Bank and Gaza (177). This might be a particularly perverse example of George Soros’s reflexivity principle at work: when no one wants to come to your house you react by double-bolting the door. In dealing with construction permits, India ranks 181st out of 183, putting it behind Ukraine but ahead of Albania and Eritrea.
Yet Indian entrepreneurs both in India and worldwide are unusually successful. In the US, Indians constitute the highest-income ethnic group. One speaker noted that in the past 15 years, 13 of the 15 highest-returning listed stocks in Asia have been Indian companies.
India, in fact, has a lot going for it. Demographics are very favourable. One speaker said that in 2020, the average age in India will be 29, while China’s will be 37 and Japan’s 48. Younger populations are more dynamic and produce more economic growth.
Another driver of economic growth is the migration of the relatively unproductive rural population to metropolitan areas. A large number of rural dwellers can be thought of as an untapped pool of future growth. This year, the rural population of China fell below 50% for the first time. But of the Bric nations, India leads, with 71% still living in the countryside, compared with 27% in Russia and only 17% in Brazil.
Another advantage India has is the ineffectiveness of its meddlesome bureaucracy. The head of a state-controlled bank told the following story: A central banker at the Reserve Bank called him one day. The official said: "I am seeing these Western Union signs all over the country with offers to do money transfers. We have never authorized them to operate here, as far as I know. But I would be embarrassed to ask them directly on what authorization they operate, so will you do it?" The banker did so and was told that Western Union had gone to the Post Office and had been given a letter saying it could operate in India.
A very good line from the conference was that of a fund manager who said: "We worry about what is politically difficult to do, but what we should be worrying about is that even what is achieved politically may be administratively quite difficult."
When one thinks of these striving entrepreneurs in relation to their government, one can imagine a game of Whac-A-Mole, that old arcade favourite where the player holds a large mallet with which he whacks the moles as their heads pop up randomly from holes in a table. In this case the player is the government and the moles are entrepreneurs.
For India, it is fortunate that the lumbering player is much less energetic than the moles.