Another Sleeping Giant Awakens
We hear from many commentators that weve entered a new era in world politics, that the world has only a single superpowerusand that the second American century, if not the American millennium, is about to begin.
But while we are gripped by hubris and gloat over our cultural, economic, and military superiority, the worldas alwaysis shifting and changing under our feet. We are a competitive species, and nothing stirs our competitive juices as spying some other group that may come to dominate us.
Just as French influence over the world in the nineteenth century gave way to British, who were in turn forced to give way in world affairs to the United Statesour very presence summons forth other superpowers.
Its clear to those who study the evidence that China will either be the great superpower of the next century or simply a mighty rival of ours, but whats unrecognized is the likely rise of yet other superpowers. In our isolationism, Americans fail to recognize the importance of the coming euro, which may stumble in the beginning, but which may eventually unite Europe into a single market larger than ours. With Europes traditionally tighter fiscal restraints, its currency will rival ours as a foreign-reserve currency, ending our decades-old monopoly. We are so ignorant of such matters that most of us cannot fathom the benefits to us of providing the worlds only reserve currency, any more than fish appreciate the benefits of the ocean in which they swim, but ask the fish on dry land how important the ocean is.
Without the major benefits of providing a reserve currency, we would have a reputation matching that of the Italians for fiscal prudence. We get away with fiscal murder because other countries hoard our treasurys bills, notes, and bonds, and black markets around the world take out of circulation fully 80% of our currency, in effect giving us an interest-free loan and taking pressure off our inflation.
Naturally, knitting together Europe through a common currency will provide a powerful boost to its market, giving it the oomph to rival ours. South America has been on an economic tear for longer than a decade, and through regional treaties and free-trade market organizations promises to build itself into an hemispheric powerhouse.
And yet another superpower is rising in Asia besides ChinaIndia.
Until recently India, its politics and economy imbued with statism through its alliance with the former Soviet Union during the Cold War, has been even less vital than a sleeping giant. The British united India in the way colonialists have so often done, by fiat. Just as the British did in Africa and the French did in West Africa and the Portuguese did in Brazil, the British crammed a variety of cultures, languages, and religions into one political pot they called India.
One third the area of the United States and occupying most of the subcontinent of India in south Asia, India has close to four times our population, nearly a billion people, second only to Chinas 1.2 billion. It borders on China in the northeast, Pakistan on the west, Nepal and Bhutan on the north, and Burma and Bangladesh on the east. If it hasnt reached the head of steam in development that China has, that may be because it only began rejecting its version of statism in 1991, whereas China has been revolting against its version since 1979. This can be seen in the figures: in the period 1965-1996, Chinas annual GDP growth has been 8.5%, whereas Indias has been "only" 4.5%. Indeed, the growth rate was above 7.0% for the 1995-1997 fiscal years, but fell to 5.0% for the year ending March 31. However, Chinas been going full blast at revitalizing its economy for a full 17 of those years, whereas India has been at it only five, and these setbacks happen.
And yet India has the fifth largest economy in the world, behind only the United States, China, Japan, and Germany, and larger than that of France, Britain, Italy, and Brazil. Its obvious what decades of more effort will bring.
The legacy the British bequeathed the Indians had both positive and negative effects. On the one hand the British left behind order in the form of bureaucracy and a single language for political and business purposes, English, in a country with 1,500 languages and dialects. (The Indian constitution recognizes 14 other official languages besides Hindi, spoken in the north.) As a people the Indians are bright. Unfortunately they learned their bureaucracy from the Englishand then took it to an ever higher level of mindlessness. Their Cold War alliance with Soviet communism provided a model of how to strengthen their bureaucracy until it became the bureaucracy of bureaucracies. My visits to Indian government offices during the Cold War were visits unlike those in any other country; often it was hard to find the clerks amid the dizzying mountains of official forms.
On the positive side, the British also left the Indians with a strong sense of democracy and the rule of lawas they did with so many of their colonies, including the United Stateswhich may give the Indians a strong leg up in their rivalry with China, which has no legacy of democracy and often a rule of law by whim. While corruption is rampant, still there are elections and universal suffrage. Today India is a federal republic. Its constitutional head is the president, elected every five years. He is advised by the Prime Minister and a Cabinet based on a majority of the bicameral Parliament, which consists of a Council of States, representing the constituent units of the republic, and a House of the People, elected every five years by universal suffrage. Unfortunately, all too often the Prime Minister must form a coalition of a dozen factions to constitute a government, a feat that often leaves a government with a crippled ability to govern.
As a result of its stultifying statist regulations, in 1991 the country was essentially bankruptthere were only three weeks of foreign-currency reserves leftwhich meant it was limited to only another three weeks of vital imports.
Impelled by necessity, India then deregulated, unshackling its always clever businessmen to develop the subcontinents wealth and talents. Today it has built up $25.4 billion in foreign-currency reserves.
Under analysis India almost seems like two countries, rural and urban. Eighty percent of India is rural, living in villages, and seventy percent of the population is involved in growing rice, wheat, peanuts, corn, and millet for subsistence, and sugarcane, tea, oilseeds, cotton, tobacco, and jute as cash crops. The opium poppy and cannabis are grown both for the illegal drug trade and the legal pharmaceutical market. India has more cattle per capita than any other country, but their economic value is limited by a religious prohibition on their slaughter. Rich in minerals, India mines coal, zinc, iron, manganese, mica, bauxite and lead.
Surprisingly, India is one of the most heavily industrialized areas in the world. It produces many textile products. Its heavy industry produces iron, steel, machine tools, transportation equipment, and chemicals. The country exports cut gems, jewelry, and corporate software.
Indias continued great growth will come from its middle class and their brain-power. Its not well-known that India has the largest middle class in the world, 200-million people strong, which gives it an enormous market for consumer goods and a highly productive workforce. So clever and mathematically inclined are Indias middle class that through the Internet and e-mail their intellectual workers are able to write reams of software for our Silicon Valley at prices a fraction our code-writers charge. In addition, Indian entrepreneurs have formed their own Silicon Valley to produce hardware and software.
Indians here have been an economic boon; by income and education they have recently been our the most successful immigrant group. Having left India because they couldnt spot opportunity, they fill the computer departments on Wall Street as well as those of Main Street, populate our technology institutes out of proportion to their numbers, work extensively in our various Silicon Valleys, and have become big investors in our hotel-motel industry.
One of Indias toughest issues is its mix of populations, religions, and languages. Although the population is overwhelmingly Hindu, there are enough Muslims10% of the populationto cause severe political conflicts. In addition, there are significant numbers of Christians, Buddhists, Sikhs, Jains, and Parsis. Although such discrimination was outlawed in 1950, the caste system still has a strong grip on India.
In fact, such diversity in cultures means India is not a real country; at some point over the next 30 to 40 years its likely to split into several, if not many, countries. In an effort to keep the republic knit, national Indian politicianslike politicians from time immemorialhave constantly provoked Indias neighbors and created strife, be it with China, Bangladesh, or Pakistan, as a way of distracting the populace from the nations internal problems.
On the bullish side, the strife between India and China looks to be over. Both sides have traveled to the other in search of peace, and like much of the rest of the world these days, each appears to have concluded that there is more wealth to be obtained through trade than through martial expansion.
What else does India have to sell? In 20 years you may have your taxes calculated over the Internet by a New Delhi accountant, and your financial planning might be done by a firm in Calcutta. If you own a bank or an insurance company, your back-office work done might well be performed by work-groups in Bombay. Much legal work is off-the-rack forms; theres no reason to pay a U.S. lawyer $300 an hour for routine work that could be done over the Internet from Banglahor at $20 an hour.
Some of this transposition of jobs is the result of our closing our borders to immigration; in this fashion we are exporting jobs via the Internet, losing payroll-tax benefits and the value of workers spending their paychecks inside our borders.
Unlike the Russians but like the overseas Chinese, overseas Indians want to go back home. The Indian diaspora is spread over the United States, Europe, and Asia, and they send capital to the mother country and are inclined to do business with the folks back home. This gives India an economic advantage. In addition, India has a plethora of young people, by-passing the population bomb fast ticking away in such richer countries as Japan, Germany, and France.
My take on India as a place to invest is that it will do well over the next five to fifteen years, but not so well in the to thirty- to forty-year time frame, when political pressures left over from the British forcing together its disparate parts may split up the republic. That is, theres less political risk in investing in a restaurant or retail chain there for the intermediate term than in a pipeline or power plant for the long term.
Does India have problems? Of course. Its banking structure is rickety, and most of its 280 banksdespite what their books sayhave a negative net worth. These weak banks are going to have to be cleaned out before the economy can truly do well.
Today Indias real interest rate is 8.0%, and most companies borrow at real rates of 10 to 12%. Indias exports increased by only 2.4% in dollar terms in the first eleven months of the last financial year, compared with growth rates of more than 20% in the mid-90s.
New factoriesbuilt by investors capitalizing on deregulationnaturally are putting out of business the inefficient factories of old, throwing a portion of the workforce on the street. However, Indias new government, led by the Hindu nationalist Bharatiya Janata party, has a clear agenda to promote the interests of Indian industry, as well as recognizing that India needs more foreign investment, not less, if its growth is to recover to 7% annually.
Yashwant Singha, the financial minister and a new member of the Bharatiya Janata party that leads Indias coalition government, could be speaking for progressive finance ministers around the globe when he was recently interviewed by the Financial Times of London, which asked, "What is your message for foreign investors?"
"That we are normal human beings as any other," replied Singha. "We are not out of some other planet. We are not Hindu nationalists as newspapers in the west tend to describe us . . . . We are committed to economic reforms. We will carry forward the process of internal liberalization much faster . . . . We are ready to welcome foreign investment in a very big way in sectors which we feel it has a major role to play. We dont have any negative feelings about it."
And how might todays savvy investor go about investing in India?
Before 1991 foreigners werent allowed to invest at all, but with the reforms it has become possible. First, the bureaucracy allowed expatriate Indians to invest, opening the door a crack. To make direct investments today, you must form an Indian company or establish a joint venture with an Indian company. Mutual funds of Indian stock, closed-end funds, do exist; several are in the United States but more are on the London exchange, where they sell at a discount. Depository-receipt issues also exist on the New York and London markets. Of course, if you buy a mutual fund you must do your homework on the fund manager. World-wide, there are now 45,000 mutual funds, 9,000 of which are in the United States, and there cant be that many smart 29-year-olds in the world.
It would be wise to look into the better Indian commodity companies to obtain the double whammy of the burgeoning Indian economy and the coming world-wide lift in commodity values. Which commodities and which businesses? Examine those India is good attea, spices, computer work of all kinds, mining, tourism, and imports brought in for the huge Indian middle-class.
In our blindness, we think the century now ending will turn into the American millennium. In our hubris we dont recognize that around the world other nations are entering the global sweepstakes, and that their progress outpaces ours. In addition to China, South America, Africa, and Europe, India has jumped into the race, turning itself into a terrific place for the future. Be attentive to another new player on the world stage.
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