Intriguing India

I recently finished reading a fascinating book titled The World is Flat . It was written by Thomas Friedman, a Pulitzer Prize winning columnist for The New York Times, and its main theme is globalization and what it means for the world of the 21st century.

It is crammed with thought-provoking ideas but for me the real eye-opener is the insights it offers into what is happening in India. Friedman’s descriptions of how India’s rapidly growing, well-educated middle class has made the country one of the world leaders in technological services are a wake-up call to every North American.

If you own a computer, you may have already discovered that the technical support number you call is answered by someone in India. But did you know that these people are preparing U.S. tax returns and interpreting North American CAT scans? Are you aware that the new office tower under construction across the way may have been designed by an architect in India or that the latest stock market news from Wall Street may have been posted by a reporter in the Reuters office in Bangalore? I certainly wasn’t.

All of this information, and much more, prompted me to take a new look at dia, a country that, frankly, I had not paid much attention to in recent years. Everyone talks about China as the next economic super-power and I think that can be taken for granted. But I believe there is a strong case to be made to put India right up there as well.

“India only twenty years ago… was known as a country of snake charmers, poor people, and Mother Teresa,” Friedman writes. “Now it is also seen as a country of brainy people and computer wizards.”

India is still plagued by an outdated caste system, religious and social conflicts, rural poverty, a lack of infrastructure, and political tensions with Pakistan. But it has a lot going for it as well, including:

Democracy. It may be imperfect, but India is the most democratic major country on the Asian mainland, one of the many positive legacies left behind by the British.

Language. The official language of India is Hindi but English also has official status and that has turned out to be a huge advantage in terms of propelling the country to the forefront of the technological revolution. Friedman reports that Indian students now focus not on merely learning English but on training themselves to speak it with an American accent.

Politics. For years, India’s economy stagnated under a pseudo-socialistic regime that was almost xenophobic in its antipathy to foreign investment. All that changed in 1991 when the finance minister of the day, economist Dr. Manmohan Singh (now the Prime Minister) put the country on a growth path through a program of economic liberalization, repealing many trade restrictions and opening the door to outside companies in the process.

Education system. The Congress Party government led by Dr. Singh is throwing huge amounts of money at education, and it is paying off. According to the World Bank, the country now has the world’s second largest education system after China, with well over 100 million children aged 6-10 attending primary school. Male literacy is up to 77 per cent (females, unfortunately, are still far behind). The country has almost 16,000 colleges and universities which produce 2.5 million graduates every year.

Upward mobility. India has a rapidly-growing middle class, which Friedman describes as consisting of “people who believe that they have a pathway out of poverty or lower-income status towards a higher standard of living and a better future for their kids”. These people are hard workers, increasingly well-educated, and very competitive.

India certainly has problems but at this stage it appears there is no turning back the clock. In the past decade, the country has established itself as an integral part of the world’s technology system. China may have taken over as the globe’s manufacturing centre but when it comes to fields such as software development and computer technology, India is right up there.

That’s why I’m convinced that anyone who has a long-range view of the world and who wants to participate in one of the economic dynamos of the future should have some money invested in India.

There is one Canadian mutual fund that focuses exclusively on the country, the Excel India Fund. It has a volatile history and a high MER of 3.51 per cent but over the three years to July 31 it produced an average annual return of more than 41 per cent.

Alternatively, you can look at the Morgan Stanley India Investment Fund, a closed-end fund that trades on the New York Stock Exchange under the symbol IIF. The fund’s mandate is to invest at least 65 per cent of its total assets in Indian equities, using the Bombay Stock Exchange National Index of 100 companies as its benchmark (expressed in U.S. dollars).

The fund was originally created in February 1994, so we have more than a decade of performance history. Since inception, it has produced an average annual compound rate of return of 9.4 per cent but that figure is misleading. The fund had a very slow start, losing 36.5 per cent in 1995 and then marking time until its break-out year in 1999 when it exploded to a 144 per cent gain. The next two years saw losses of 29.6 per cent and 14.6 per cent respectively but in 2003 the fund posted another huge gain of 93.2 per cent. In 2004, the advance was a more modest but still highly respectable 27.2 per cent. Gain for the first seven months of this year was 16 per cent.

Don’t let the returns blind you to the fact that this fund, like Excel India, can be highly volatile. So don’t invest unless you’re prepared to stay in for the long haul and don’t put either fund in a registered plan – they’re too risky. Be sure to talk to a financial advisor before making any decisions.