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The Silver in India's Anti-Climactic Election

Above, Asia's oldest stock market, the Bombay Stock Exchange. Photo from Wikipedia.

Over 700 million registered voters went to the polls in India over the last four weeks, in what was the world's latest, largest display of democracy.

While the results didn't offer any major surprises (e.g. there was no real emergence of the Third Front), they generally looked like a strong affirmation of the public's support for the ruling Congress-led United Progress Alliance, and the economic policies of Prime Minister Manmohan Singh.  So at the risk of pontificating from 7,000 miles away, here's my take on why this year's general election for the lower house of Parliament in India (or Lok Sabha) was an important one.

While neither Congress or the BJP and their respective alliances have ever fully shown themselves to be free and clear of the cloud of corruption that seems to hang over every Indian government, this Congress party has shown itself to be a consistent, if lumbering, supporter of free market policies both regarding business activities in India and for the rules governing foreign investment.

As I write this, trading on the BSE has been temporary halted following an 11% opening surge on Monday morning in Bombay.  The markets perceive these election results as an indication that the economic liberalization of the past 15 years will continue and that the government will remain stable, despite the specter of terrorism and the albatross of overwhelming poverty.

Almost exactly five years years ago the Congress party re-took power from the BJP on the cry from India's masses that economic growth was only benefitting the wealthy and urban dwellers, but not trickling down to the village.  With five years of GDP growth at 6-9%, those days seem to be forgotten.  Whether these results reflect the continued migration of workers to cities or the beginnings of a true economic virtuous cycle that's reaching more of India, it seems like many Indians are feeling optimistic about the future, India's place in the world and their long-term economic fortunes.  And despite the global slowdown, India's economy is still growing at over 5% a year.

But the real reason I think this election is important, is that in many places there seemed to be a repudiation of some of the traditional old dogs of Indian politics:  Elderly, ideological, caste-oriented politicians who in the past have bought and paid for votes with handouts and color tvs and bankrupted public treasuries with needless monuments and debt forgiveness.  The question for these leaders always seemed "how do we get our share of the pie (or uttapam?)," rather than "how do we cook a bigger one?"

In Bihar, India's poorest state, 21 new politicians will take office following this election.  And in Uttar Pradesh, India's largest state by population, the Congress party apparently took votes from both the upper caste Hindu parties and the Muslim parties, two groups with constituents that are often at very different ends of the economic spectrum.

I'll caveat all this Jai Ho talk with links to a group of bloggers I greatly respect (desicritics).
First, one blogger's responses to several "consensus views" on what the election results tell us.
And second, an essay by Vivek Sharma, PhD, suggesting that this election demonstrated the Indian electorate's growing "maturity."

Here's a little more music to leave you with, my favorite music video, and movie, of the last year.

And What about in India?

To get another look at the effects of the global economic slowdown, I think its interesting to see what's been happening in India over the last month.

The burgeoning PE industry in India has slowed a bit, with four deals pulled in the last month after lengthy negotiations.

Blackstone dropped its $275M bid for 26% of Ushodaya enterprises, ICICI's PE group backed off an $800M deal with Jaypee Infratech, a major builder of infrastructure, the Future Group walked out of a deal with DishTV, and General Atlantic ditched a deal with Essar Power after signing a term sheet.

At least one of these was because of tightening credit available to investors looking for leverage and in the Future Group's case, they walked away because of of a reduced valuation.

But the downturn hasn't stopped Canaan Partners from closing its next fund, 25% of which may go to India.

And ePlanet, the old DFJ affiliate is taking aim at growth stage investments in India. While other growth stage investors plan on gathering for the first ever Indian VC/PE Growth-Stage investor conference in Pune, Maharashtra next month.

So there continues to be fundraising activity, at least at the early and growth stages. And although the Bombay Stock Exchange had a rocky run last week, it seems to have stabilized in the last three days.

But it ain't easy being an Indian LevFin guy (leveraged finance) right now...

And what about my old flame, microfinance? I'll dig into the recent news in that sector tomorrow.

Poverty in India: Advances Lead Declines

Wall Street day traders have a summary statement that I love:
"Advances Led Declines."

You might hear it on the nightly news sometime when the majority of stocks on the NASDAQ or NYSE have traded up following a long, roller coaster day of mixed performance.

"Advances Led Declines."

It describes incremental daily achievements that, over time, translate into the long mountain climb that is sustained economic growth. It is the quintessential phrase for saying that slow and steady tortoises are indeed making progress against speculative hares. We used to say it around the office at my old investment bank after a hard day's night filled with both a few frustrations and a couple major successes. To all the pessimists out there, it is a way of saying we took two steps forward, and only one step back.

Some good news yesterday: Economic advances are leading, and in fact driving, declines in Indian poverty.

According to a National Sample Survey released yesterday by India's Planning Commission, over the five fiscal years from 2000 to 2005 the percentage of India's population living below the poverty line fell from 26.1% to just under 21.8%, as defined by a government 30-day consumption recall index (a survey asking people what items they have consumed over the last 30 days, and in what quantity).

The full story and statistics from India's Planning Commission here.

If the numbers are indeed accurate (and not influenced by politics or a need to measure up to World Bank / international donor demands) then this is pretty compelling evidence that the benefits of India's economic liberalization are starting to reach those at the base of the pyramid - despite political claims like those of Sonia Ghandi's 2004 national campaign suggesting otherwise. In fact, rather than leaving behind the rural population, India's growth is actually helping the rural poor improve their incomes faster than those struggling with poverty in the urban setting. The report suggests that rural poverty declined much more (5.3%) over the five year period than urban poverty (1.9%).

For more on causes behind the decrease here's a great journal article from Yale Global Online explaining the numbers and showing the correlation between India's growth and its economic liberalization.

So incomes are up here, as is home ownership, but so are interest rates...and demand for goods and services in this country is starting to seriously outstrip supply...watch out, here comes inflation...

Walmart in India, Part 2

Yesterday I tried to set the stage for the pending Walmart arrival in India with a description of the Indian retail sector and the recent changes in rules governing foreign direct investment.

Here’s my take on what's to come...

As I commented on Om Malik's blog yesterday - contrary to many opinions I read in newspapers, equity research reports, and the blogosphere, I don’t think we’ll see one side or the other (organized vs. informal) "dominate" this vast and diverse retail market. I think the Indian consumer (as if 1.2 billion people can ever be placed into a single category) looks for different things from different vendors.

My Indian landlord and I buy our fresh fruits and vegetables from the guy on the bicycle who comes to our building in the mornings. If I want a breakfast smoothie I go to Barista (a Starbuck's-like Indian brand). But I also have a strong desire to get a lot of my major shopping done in one place, and when the big retail chains start opening up, they’re going to see me visit once a week/month.

Some of the best local shops ("Mom and Pops" if you want to call them) will evolve and survive because their location makes them convenient and because some have, over decades, built strong relationships with their regular customers. I'm also fairly certain that the most popular Indian brands (Reliance, Barista, Fab India, Pantaloon, Shopper's Stop) will continue to grow from the niches or sectors they have carved out because they have a headstart over the foreign guys in understanding what Indian customers want. However, I am convinced that a lot of undifferentiated products (the things you buy in bulk or all at once because they are co-located or too insignificant to justify their own shopping trip) are going to wind up being sold through big chain retailers. Some of them, like Walmart, will be partially foreign-owned.

Note: Walmart is partnering with Indian consumer services company, Bharti, as the government's rules stipulate that foreign retailers must split ownership of their ventures with Indian investors.

This being said, I don't think the arrival of these foreign chains will ultimately be bad for the average worker. Yes, there will be many local shopkeepers and vendors who are forced to close, but as Om Malik pointed out, there may also be many Indian suppliers, artisans and farmers who can cut out the cost and confusion of middlemen because of the size and consistency in orders that 'Big Retail' aggregated demand provides. Besides, the displacement threat to local vendors will certainly be no worse than that presented by the current arbitrary law enforcement of the Indian government.

Another note: Last fall India's Supreme Court put tens of thousands of Delhi traders and small business owners out of work when it suddenly ordered the shuttering of all shops and commercial outfits in residentially zoned districts.

And what about the Indian consumer?

If local customers are so disgusted at the Walmart shopping experience and feel so loyal to their local electronics shop or vegetable grocer, they can make that point by deciding whom to support with their Rupee votes.

My guess is that instead of maintaing the status quo, many lower income people (even some of those whose very jobs are impacted by the arrival of foreign retail) will choose to save a few rupees on bread, milk, TVs and T-shirts by shopping at Walmart and spending the money they save on something that gives them greater satisfaction than supporting the locally entrenched vendor. Even if a few products (presumably fruits and veggies) are more expensive at the Walmart and Reliance stores, Indians may decide to purchase them there because they are of a more standard size, shape or taste. 

For some customers, a sanitized, standardized shopping experience may not represent a loss in quality of life, but rather, a broadening of choices.

Most people don't choose to be poor or lower-income. But if they happen to be lower-income, it shouldn't mean they are left with sparser, more expensive, lower-quality choices.

Brand names (which generally come with organized retail) often give consumers, especially those in otherwise disorganized environments, a sense of trust and consistency. Take a look at the picture below - which store heading inspires the most confidence about what you'll find inside...

And at the end of the day it is up to the Indian government to make sure that Walmart and its peers follow the laws, pay their taxes, maintain their environments, and treat their workers fairly. It's also easier for governments to do that when they're regulating large transparent entities, instead of a thousand tiny grey ones.

Is the notoriously corrupt Indian government up to the task? That remains to be seen...

Walmart in India, Part 1

And now for the Walmart story...

Last year the Indian government, long skeptical of foreign retailers after its mercantilist British colonial experience and most vividly evidenced by its storied 15 year ban and subsequent battles with Coke, announced it would be relaxing the rules on foreign direct investment in India to allow multi-brand retailers into the country for the first time since independence in 1947.

As everyone (except folks in Arkansas) knows, there has been great criticism leveled in many developed countries at companies like Walmart and Tesco for "homogenizing cultures" and destroying "Mom and Pop stores."

Last summer Walmart finally threw in the towel in Germany and South Korea, deciding to wind down its operations in those countries rather than continue to fight losing battles against popular consumer sentiment.

But the experience in developing countries like Mexico shows a different trend. As the Wall Street Journal's India paper, LiveMint, reported last week, Walmart has been the largest private employer as well as the largest retailer in Mexico since 2004. The article suggested that Wal-Mex (as it's locally branded) jobs are prized among working-class Mexicans as they allow workers to get their names into government records and qualify for retirement benefits and social services in a way people in the cash-only economy cannot.

I don't know many "Mom and Pop" stores in Delhi (it isn't socially acceptable for most Moms to run stores in the markets here), but I do know lots of tax-evading local vendors with limited product variety, small inventories, unmarked prices, and cramped showroom space.

How do I know them? I shop at them for one, as consumers here have limited formal alternatives and many of local vendors in my neighborhood have set up shop (sometimes illegally) within walking distance of my flat. Moreover, I've interviewed a range of these informal shopkeepers in the process of doing due diligence for my firm's investments, as these local entrepreneurs are sometimes recipients of the micro-loans my firm seeks to promote. (The first reference to this irony in my "Grey Economy" post from November).

These are the people that make up the "unorganized retail sector" in India. And while the vast majority of them are indeed family-owned businesses, that doesn't always translate into superior customer service.

However, there are a number of Indian brands that are emerging to compete for a more discerning consumer and the growing Indian middle class (Barista - coffee, Fab India - fabric and textiles, Shoppers' Stop and Pantaloon - general retail, along with a handful of smaller boutique Indian jeans & T-shirt companies). These stores are opening their doors in the host of new malls and commercial plazas that are springing up in the major Indian metros.

In Delhi, these brands hold on the retail sector is being strengthened by newly zealous enforcement of archaic Indian zoning laws that have forced the shuttering of many informal retail shops (which, unfortunately, "squatted" in residential plots years ago when there was no zoning enforcement). More on the infamous Delhi "sealings" from last fall here.

So will the "Mom and Pops" be wiped out by the up and coming new Indian brands?

Will the new Indian brands get slaughtered by the Walmarts, Tescos and Reliances?

Will Walmart and the others stir up populist political fires and face a consumer backlash like Coke?

I'll share my predictions tomorrow.
In the meantime, here are a few thoughts from famed Indian-American technology blogger, Om Malik, and his readers, following a recent trip from his home in the San Francisco Bay Area, back to the city of his birth, New Delhi.

Two Indias - Not Even the Half of It

Before I delve into the retail market in India and the Wal-mart story - I want to set the stage a bit.

When it comes to classifying consumers on the sub-continent, there are at least two (if not more) vastly distinct and disparate types.

One India eats omelets and goes to Barista (a Starbucks-like shop) for breakfast.
The other has a sliver of chapati (flat bread) or goes hungry.

One India takes a new air-conditioned SUV or full-size sedan to work.
The other walks or drives a moped.

One India shops at Versace for $1,500 jeans.
The other remakes cloth from family hand-me downs into shirts and scarfs.

One India is getting rich off IIT (Indian Institute of Technology) degrees and jobs at Infosys, Tata, and Google.
The other is protesting the loss of family farm land to Government development projects.

One India spends its leisure dollars on expensive wines.
The other buys cheap beer.

Compared to India, John Edward's two Americas are two sides of the same coin.

There is an elite in this country that cares about fashion, style and status, and then there are about 1 billion other people who care about price, function and survival.

Lost in the mix is the emerging middle class, 100 million strong and growing each day, but challenged on both sides by an elite that plays above the law (or bribes it) and a massive unorganized proletariat that chokes the resources of the state.

Where does the average consumer turn for his trusted goods and services in this market of atmospheric stratifications ...?

Define the consumer.

Thus, enter Wal-mart, stage left...

Seeing the Forest for the Trees: India's '07-'08 Budget

While I had planned posts on both Wednesday and Thursday of this week, a power outage the first night, and an illness the second kept the laptop out of my hands. This stuff happens in India.
Without further delay, here's the latest news from Delhi.

The biggest story this week has been the release of the 2007 - 2008 Budget, which was unveiled by the Finance Minister, Mr. P. Chidambaram, on Wednesday in a speech to Parliament.

It seems that in trying to satisfy a lot of folks, the Finance Minister P. Chidambaram (head politico in charge of the Indian Government's money, and a chief member of Prime Minister Manmohan Singh's Cabinet) has tried to walk a fine political line, seeming to encourage further foreign direct investment and educational opportunities, but the first in a haphazard method and the later with more money rather than real cultural change in the bureaucracy.

More praise, criticism and analysis of the budget at the following links:

"Inflation was a key concern," Adrian Lim, Investment Manager from Aberdeen Asset Management

Budget Proposals may drag VC Funding by 50% in 2007, Thursday's Economic Times

"It's certainly a long road home," Managing Partner Donald Peck, head of South Asia investing for emerging markets private equity firm Actis, and Director of my firm, Lok Capital.

And an interview with Finance Minister Chidambaram here.

While it's hard to be entirely critical of the Finance Minister, as he has tended towards pro-business positions in personal and corporate income tax rates (if not on dividend taxes), there are some areas where, to me, Mr. Chidambaram seems to have missed the forest for the trees. A few examples:

- Tax benefits for Venture Capital investments will only apply to certain sectors hand-picked by the government (but why should investments in business process outsourcing be treated to better tax rules than software or real-estate? better to create a level playing field and let the investors choose where to place their bets)

- Significant increases in spending on education (a critical area for India as the education system here is widely considered to be a mess), but no new rules to tie those spending increases to better performance (or even just better attendance!) of public school teachers

- Further increases in farmer subsidies (a demand side mechanism) rather than a focus on further spending for rural roads and infrastructure (a supply-side mechanism) which would better enable the best farmers to get their produce to market faster and create agricultural competition

- Tax incentives to encourage hotel developers to build more mid-range hotels (desperately needed throughout the country) but restrictions causing those incentives to apply only to new hotels built in New Delhi and nowhere else. This is a political attempt to force developers to focus their efforts on Delhi at the expense of the rest of the country, simply to ensure that the capitol city is ready for its scheduled hosting of the 2010 Commonwealth Games

- Increases in central bank lending rates of only a half percent this winter while inflation rapidly moves from 5% a year to 7%

Finally, one gets a sense from the speeches and newspaper interviews given by the politicians here that the government is taking credit for India's current economic rock-stardom and darling status among investors. I think former CEO of PG&E in India, Gucharan Das paints a more accurate picture when he says of the economy, "[it] grows at night, when the government sleeps."

India On Fire?

Today, India's government reported that growth in the country's GDP for the current fiscal year (ending March 31, 2007) will hit 9.2%, crossing 9% for the second year in a row and matching Chinese levels as the country creeps closer to double-digits.

Is India growing too fast?

Yes, says the lead story from this month's Economist, which argues that without further government reform, improved infrastructure, reduced corruption and higher interest rates, India is in for a hard-landing when foreign money managers (whose short-term investments have made up 4/5th's of foreign capital inflows in India over the last 3 years) wake up from their Bombay Gin binge and begin pulling profits out of India.

What impact would a Sensex crash have on those of us who work in Indian microfinance?

Here's my take -
There certainly is a high potential for a destabilizing event across the Indian equity markets given the lofty valuations in the Sensex right now (average P/Es of over 21x) and the fact that so much of the money coming into India during the last few years has been in the form of short-term portfolio investment, which is much more liquid and speculative in nature than the larger, strategic purchases of chunks of Indian companies, which have made up the other 1/5th of foreign investment since 2004.

What this means is that if the short-term money did leave India all of a sudden, there might be a corresponding upwards jolt in interest rates – and if that increase happened to be more than a 100 basis points (1%), it could seriously impact the cost of borrowing for small microfinance institutions (MFIs) who are not well-insulated from macro economic forces.

If the cost of borrowing increased dramatically overnight, it could wipe out the profit margins of many of these MFIs, who live (and die) based on whether they can maintain a Return on Assets of at least 1% - 2%, (MFI's assets are their microfinance loan portfolios).

Furthermore, while much of the MFI borrowing from banks is done on a partnership basis, which resembles a revolving credit facility where rates can be adjusted monthly or quarterly, most microfinance loan agreements with borrowers tend to have a tenure of roughly 6, 12, or 18 months. This means that even if MFIs wanted to pass along the rate increases to poor borrowers, they may not be able to do so immediately.

So what do you do if you're a professional microfinance investor sitting in India?

Hedge your bets. Buy Walmart stock.

My Goodness, My Google

You know there’s something special going on in India when the world’s biggest search engine starts making its presence felt here in a big way, not just in Bangalore and Bombay, but at levels high and low across the country.   

During the final three days of last week, as I traveled around India for work (and play), I had conversations with three different Google employees, in three different states. The most recent encounter was with a San Franciscan working in Google’s Hyderabad office and waiting for the same flight as I at the airport. Before that, I met a Google business development exec at a small company in a rural state bordering Delhi. Prior to that, I chatted with a Google friend visiting from Mountain View on business and staying in Gurgaon, Haryana. All of these conversations were in person, except the last one, as my friend didn’t have time to reach Delhi before catching a flight. How did we communicate? Over Google Instant Messenger, of course.   

Having worked in the Bay Area it’s not just that I get all ‘googley’ over meeting employees of Silicon Valley’s brightest star – but it is something to see so many high-powered Bay Area types living and working in cities where the cows eat the trash. It’s a far cry from the Googleplex and the Golden Gate.   

There has to be a reason these Americans and returning Indians I keep bumping into are happy to toss all the trappings of Western life and strike out into the Wild, Wild East of India. The fact is, Google, and its employees here, get it. They understand the long-term value in India, and that it’s more than just low cost R&D and outsourced back-office support (though they have those functions in Bangalore and Hyderabad). The opening of sales and marketing offices in Delhi and Mumbai this past year signaled that Google understands the potential of the Indian domestic market to be not just a cost center, but also a real revenue driver.   

InternetWorldStats estimates there were roughly 40 million Internet users in India at year end. That number has been growing at a compounded rate of 35% per year since 2000. If this trend continues, there will over 100 million users in India by 2010, and I'm guessing the majority of them will quickly learn that Google is the most organized way of sifting through information in what can be a very disorganized country. And if the language differences across this country seemed a barrier to entry, the search engine and some accompanying applications have already been translated into four of the major local languages plus Bengali.   

While this past week’s three encounters helped me complete the whole Google thread for my blog, what really surprised me about the plane where I met the Google employee was the number of other American business organizations represented. Besides the Googler, there were several UBS analysts setting up outsourced information services for their investment bank, two MBA students from UVA’s Darden School, and a team of Accenture consultants training employees at their facility in Hyderabad – which one trainer mentioned, “At 3,000 employees, is roughly the size of our home office back in Chicago.”   

If they didn’t serve curry on the planes here, I’d have thought we were landing at O’Hare.

Cuts on the Face of the Diamond

                                          

There has been much news here recently surrounding the tension and violence in three provinces, Assam, Orissa, and West Bengal (the first a northeastern state, the other two coastal states along the Bay of Bengal). Assam's conflict is by far the bloodiest and longest-running, the result of a well-organized, ethnically-based militia fighting the national (and to a lesser degree, state) government, as well as attacking "mainland" Indians who have migrated to the region.

In Orissa and West Bengal the conflicts are primarily over the seizure of land by the communist-oriented state governments, and the land's sale and assignment to private corporations for purposes of industrial development in something that might resemble Chinese capitalism. The farmers whose lands were taken have to some extent been compensated and offered jobs, but what good is a TATA factory job to a independent, fifth-generation farmer who doesn't want to sell his land or change his lifestyle?

India has designated these land areas as "special economic zones" and claimed eminent domain for the economic good of developing the region, but the violent political backlash that has been seen in Orissa and WB suggests that either the compensation has not been acceptable to the landowners, or that the government and the companies involved here have mistaken forced industrialization for participatory economic development.

But today, juxtaposed to these "backlash" stories in my inbox, were two more announcements of U.S. venture capital investment in India from Mayfield and Norwest. Also of note was an article stating that VC and PE firms had invested roughly $7.5 B in India last year, triple the amount in 2005.

It seems that while on one side of the Indian diamond, farmers and nationalists are fighting factories and beating up bricklayers, on the other side in Bombay, ferengi dollars are flowing through the India Gate at record levels. I mention the two sets of stories in parallel as I think they typify the growing divide between the new India and the old one, and more pointedly, the rich country here, and the poor one.

Today in his comments at the Sa-Dhan conference in Delhi, Vijay Mahajan, IIT grad and CEO of the MFI BASIX, drew a diagonal line across India starting at the northern tip of Punjab, slicing down through the central state of Madhya Pradesh and heading across Orissa to the coast, suggesting that "if you could map the lines of economic inclusion in India, this is what they might look like." Going further, he stated that if investors, development professionals and the government did not focus on improving service delivery and overall quality of life in these Northern and Eastern states, India would not only miss its hoped for target of 8-10% annual GDP growth, but the country might also begin to see fault lines forming for another type of political partition, this time between the nation's haves and have-nots.