Why India Doesn't Deserve Your Investment Dollars

By Jayant Bhandari

I have long been extremely pessimistic about India's investment prospects. Having grown up and lived there until I was 36, I am intimately familiar with Indian culture, which I think is the single biggest barrier to the country's economic progress.

Recently, there have been massive protests against corruption, the treatment of women, and other social issues in India. I'm pleasantly surprised by this; it is very rare for downtrodden Indians to fight for their rights. There is no doubt that this is a positive change, and these recent developments jolted me to reevaluate my views on India's prospects. Philosophical Shortcomings

I believe that the bulk of India's problems are a result of the country's collectivist system, which detaches people from the consequences of their actions. Economic feedback in India is warped costs are socialized, while benefits are not.

As a result, trickery and heavy-handedness are the norm in India, and they work. Real wealth creation feels unnecessary. From an individual's point of view, time and capital are better spent making political connections and offering bribes, both of which are more lucrative and efficient than making an honest living.

India has been like this for forever. It did not go through the age of reason or the age of enlightenment. It never had a major war or suffered any significant fall in well-being from times past. In other words, there has been nothing to shake India from its philosophical slumber and force its citizens to re-evaluate outdated precepts.

When I left India for the first time to study in the UK, the very concept of seeking out the truth was a revelation to me. In India, any attempts to seek fundamental insights or question the system are culturally discouraged. Such exploration is seen as an assault on the society. My earliest memories from India are of being slapped by my teachers for asking questions.

Recently, a top Indian federal government minister was alleged to have accepted a bribe. To ward off further bad luck, he sacrificed a goat . How could such extraordinarily superstitious people rise to the top? Who voted for him? Scarily, the constituency that he comes from is one of the most "educated" and well off in India.

Over the years, scores of organizations have tried to diagnose India and offer remedies for its economic malaise. Representatives from the World Bank and the IMF have offered dozens of suggestions, including increased investment in infrastructure, a less corrupt bureaucracy, control of inflation, removal of restrictive labor regulations, education that encourages innovation and creativity, better law and order, a stable exchange rate, and a better public health system.

But none of the proposed solutions stick. I believe this is because they only address proximate causes. For any lasting change to take hold, India's core philosophical underpinnings must first evolve. Daily Life in India

India's laggard economy has taken its toll on Indian citizens. More than half of the population has no access to toilets . They defecate in fields and near railway tracks, often far from where they live. Women must go in pairs to make sure no one is watching and for security. Large populations have no running water, and waterways are polluted. 1,600 people die every day of diarrhea.

33% Indians have no access to electricity . Blackouts are frequent, even in big cities. The supply of cooking gas is also

unreliable. Many must cook on wood in their small huts, poisoning the air and polluting the environment.

Indian roads are choking with traffic on a per-vehicle basis, nine times more people die in vehicle accidents in India than in China. The airline system is also very limited. Trains, too, are overcrowded and dirty, and it is a herculean task to get a train ticket. You need political connections and I am not exaggerating if you fail to plan your trip at least a month in advance.

Everywhere in the country, government sweepers sweep the streets using brooms to relocate dust from roads to the air. Then the dust settles overnight, and they sweep it again in the morning. Garbage collected from roads is often burnt underneath trees. Pollution in India is remarkably bad, especially given that the country is not heavily industrialized yet.

You would think that investment in badly needed sanitation, water, or energy infrastructure would produce attractive returns and quick paybacks. But it doesn't. Infrastructure investments are dominated by political manipulators rather than entrepreneurs. Corruption runs so deep that Indian bureaucrats find pleasure in impeding the flow of business, even if it results in no personal gain for them. As a result, the work ethic is very bad, it is difficult to enforce contracts, and costs of doing business are high and unpredictable. Weak Investment Prospects

India had strong economic growth in the 1990s. I believe the two main drivers were a weak government (always a good thing) that was the result of the assassination of two earlier PMs (Indira Gandhi and Rajiv Gandhi), and the technological revolution that ushered in the Internet and cellphones.

India's GDP growth rate peaked in 2007 at over 9%. Having picked the lowhanging fruit from the technology revolution, its growth rate since has continued to fall. Today, it is 4.5%.

Several Indian companies that I follow have ROEs (return on equity) of 20% or less in nominal terms. With inflation in the last five years running between 714%, investing in Indian firms just doesn't give you much, if any, riskadjusted return.

Because of the lack of attractive returns, Indians speculate in real estate and precious metals, which consume half of gross savings. Rental yields are often less than 1% a year, making property a massive bubble. The stock market is also very expensive, with an earnings yield of 7% (lower than inflation) and a dividend yield of a mere 2%.

Perhaps nowhere is India's economic failure more apparent than in comparison with China. Indian salaries are a quarter of Chinese salaries, yet Indian markets are flooded with Chinese goods. Why are Chinese companies outcompeting Indian companies, despite the latter's massive cost of labor advantage? Information: A Catalyst for Change?

Times are changing in India. There is now TV in the most remote parts of the country. This seemingly innocuous development has drastically changed Indians' expectations. Previously, people in low castes did not even know what they were missing. They did not fathom that they had an independent existence, that they could be anything but slaves. When that's your starting point, even watching Jerry Springer brings hope. TV shows them how good life could be. Growing Internet and cellphone usage have a similar effect.

Soon-to-be married girls today ask: "Do I have a right to take my own decisions?" That was unthinkable in the recent past. A mere 15 years ago, I had never known of any divorces, except in movies. Now people move on when their relationships don't work, and men can no longer take women for granted. Girls wear skirts to school now. Of course, the schools are no paradises. But compared to the immediate past, this is a significant improvement and something to be very optimistic about.

I do think this progress is positive. These are indeed encouraging signs that India is slowly emerging from its misery. But it is painfully slow. How long will

it take?

The dissemination of technology to more Indian citizens has alerted them to the fact that that people in the West live a much better material life. Indians want to improve their own lives, and so they now clamor for economic growth. But I think their expectations are growing much faster than India's paltry growth can deliver.

Could this be the catalyst that ignites change in India? Indians' high expectations combined with the complete inability of the mammoth Indian government to adapt has exposed the government as very brittle. Perhaps for the first time, India finds itself at a crossroads: it must pass through social upheaval to awaken from its philosophical slumber.

It will happen someday. But keep in mind that the country has no history of bottom-up social revolution. The Indian people have a tendency to compromise rather than fight. I think the country will continue to simmer in corruption until the system accumulates enough energy for a massive social upheaval. Then change may finally gain a foothold.

Until that time, my money will be elsewhere.

Jayant Bhandari, a resident of Singapore, is constantly traveling the world to look for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. He also runs a yearly seminar in Vancouver titled Capitalism & Morality . Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran Indian subsidiary operations of two European companies. He still travels multiple times a year to India. He has written for Liberty magazine, Mises Institute, etc. He is an MBA from Manchester Business School (UK) and B. Engineering (computers) from SGSITS (India).