Recent investor focus has been on US, Europe and China. India is (in part) an English-speaking country that is also the world’s second most populous. What is the prognosis for investing in India, and for the Indian capital markets in general?
I asked Harshal J. Shah, President of Reliance Capital Ltd. and CEO of Reliance Group’s corporate venture capital business, to provide his views on the Indian economy. Reliance Capital is listed on the Bombay Stock Exchange, is one of India’s largest non-banking finance companies with presence in asset management, life and general insurance, asset reconstruction, consumer and housing finance. The VC firm is one of India’s largest and best-performing portfolios, with investments in the US, France and India and exits on NYSE and NASDAQ and several multi-billion dollar enterprises.
What do you see as the future of the volatile Indian stock markets?
With anticipated increased monetary flow, liquidity will permit greater growth for emerging companies. Foreign capital also seems to prefer investments in India over China, although may await the election outcomes for the Legislatures in five key Indian States. Assuming expected results, foreign interests should begin to participate, having missed part of the rally that started in January.
What was of interest to me was Shah’s caution concerning the Greek crisis and its impact on the EU; truly, the Euro is a global concern. Additionally, Shah points to the high fiscal deficit, although the government is undertaking divestiture of companies and the auction of telecom spectrum to meet cash needs. (As the deficit is 5.2% of GDP, I am forced to wonder about the US fiscal situation.)
Will US concerns about direct investment in India abate?
The policy of the government is to foster investment in India. India being a democracy, its government must respond to populist pressure. So there will be little resistance to investment in “new” industries (tech, media, financial services) but traditional industries that affect many people (retail, agriculture) will be harder for foreign investment to crack. The government is trying; for example, when the government rolled back approval of 100% direct foreign ownership in multi-brand retail operations, it approved similar investments in single-brand retail.
I pointed out that India had attempted to tax the sale by Vodaphone in its acquisition of assets based in India, causing a concern that a buyer of Indian assets located outside India could be taxed within India upon a sale of those assets to another non-Indian buyer. Shah noted that the Indian Supreme Court recently had indeed ruled in favor of Vodaphone, and Shah thought that this was a permanent unambiguous decision that would clear the way for transactions being treated tax-wise as in the rest of the world.
Who is investing how much where—into India, out of India?
In the six months ending October, 2011, Shah noted that India invested $25M USD outside of India and that $20M USD were invested into India. “In essence, India is becoming a net exporter of capital.” Shah sees an acceleration of foreign direct investment in the future. This money mostly comes from the US and Europe (hence, I assume, one source of concern over Greece), but some from the Middle East and a surprising amount from Japan. China is also “becoming a banker to India as well, with its large cash reserves, and its ability to provide large amounts of supplier financing and project finance.” He sees both Japan and China increasing their efforts, althought the US will continue to be India’s largest foreign investor, with smaller companies joining the parade of giant US companies (GE, IBM, Apple).
My personal view is that to characterize GE, IBM and Apple as US companies is an historical but not a currently functional statement, given our flat world, but surely if Shah is correct that smaller US players will invest in India then that would indeed be a true US direct investment trend.
Entrepreneurship is viewed in the US as the engine of economic growth. How about India?
Shah sees dramatic growth in entrepreneurship. The country churns out engineers and scientists, and the government must create a business environment to provide jobs for them. There are impediments, however: regulations favor large companies, bureaucratic delays, finding and retaining talent, implementing IP protection, poor judicial system, “coalition politics,” availability of VC money, infrastructure.
That struck me as a formidable list, but then again anyone traveling to India on business can indeed see that the country is driving forward economically, in spite of such impediments. India may not feel quite like Singapore, but it surely doesn’t seem to me to feel like it’s asleep.
And for Harshal, clearly, India is where the action is.