India: Right Here, Right Now

David Yarrow recounts a recent trip to India's business capital

David Yarrow, Founding Partner, Clareville Capital
Originally published in the January 2006 issue

I spent 10 days at the end of November in India. The visit was organised ostensibly to visit Cairn Energy's operations in Rajasthan and meet with senior Indian oil ministers in Delhi. However, an earnest long distance investor trip ended up with Clareville Capital signing an office lease in the central business district of Mumbai. This is not normal behaviour, but the India of 2005 is not a normal story. In a country in a rush, it is difficult to be anything other than equally hurried.

The Indian boom is not a market event, but a massive socio- economic one and whilst foreign investors may currently choose to give it their full attention and back the story, the implications go far beyond the sterile expansion of forward P/Es that overseas and indeed domestic buying has prompted. India will be a key variable in the business world over the next 10 years and cannot be ignored. The country may not hold the foreign reserves, intrigue, danger and mystery of China, but dynamics are unfolding in a manner and speed that are sure to catapultit to a place on the world stage that its demographics deserve.

India's progress could have a profound thematic impact on sector performance in the years ahead – as indeed it, China, Brazil and Russia have had in 2005.


The economic growth trajectory of India seems sublimely stuck in a 7% – 9% range and this year, net profits as a percentage of GDP will rise above wages for the first time – heralding the true birth of capitalism. It may be churlish to suggest that the statistics are skewed towards domestic consumption and foreign investment and slightly light on domestic capitalgoods investment, but it is true nonetheless.

Consumption is being driven by favourable demographics and rising affordability. Over 100m Indian households will be classified as "consuming" by 2010, up from 50m in 2002. According to McKinsey, the number of airline passengers since 1996 has risen sixfold and the number of registered cars has doubled. The Indian energy secretary told me that every month another 50,000 cars join the already crowded roads of Delhi, whilst Honda expects to sell 3m mopeds in India this year – a year on year rise of 15%. Meanwhile the number of mobile subscribers grew from 5m in early 2002 to 45m just three years later – an extraordinary 6.3% growth per month.

There is a true virtuous cycle at work as production of goods leads to demand for other goods. As time has gone by and capital has been added to each production process, individual goods become cheaper and demand for all goods rises. I am told that it is Says's law which suggests that increased supply and its corollary – falling prices – unleashes more demand. It seems to be at work here.

These are certainly heady days for India and its entrepreneurial, educated and engaging middle class. Consumption is strong, but equally business and foreign investment is also booming.

Statistics on India's growth are commonplace and can be attained at ease. There is no alpha in their collection and subsequent republication.

It may be worthwhile explaining the combination of positives that pushed me towards establishing an office and then examine the negatives that were ultimately not collectively compelling enough to force a change in mind.

An educated society

30 million Indians are currently going through college – an astonishing statistic. India has by far the highest number of students graduating in medical science, engineering or technology of any country. In total, 6% of adults have a Bachelor degree and every year the aforementioned demographics will mean more graduates, more intellectual capital and more aspiration. India has 2400 colleges of professional education (engineering etc) up from 989 in 1992 and now has 272 universities, up from 196 in 1992.

Over 250,000 software engineers will graduate in India this year compared to 60,000 in the US. When Intel announced plans to invest $1bn in India over the next five years, its chairman commented "Education is the first, second and third priority for determining the success of any economy – I would encourage India to build on its strengths in education and software".

It is an educated society and, in the main, a literate one too. The literacy rate has taken huge steps forward in recent years. The percentage figure for literacy in the 15 – 24 age group has risen by 10 percentage points to 74% in the period from 1992 to 2002. It is anticipated that this trend will continue.


It's not so much that India has a big population (1.1billion) – we know that. We also know that it is growing at around 20m a year. Half of the Indian population is below the age of 25 and 31% is less than 15. Economists that study demographics have concluded that the majority of a country's consumption takes place by those between the ages of 15 and 44 and by 2010 INDIA WILL HAVE 580M IN THIS BRACKET. This is the most favourable demographic profile the world has ever seen. The UN has some interesting numbers – 71 million Indians will be added to the working population in the next five years – 23% of the world's total increase. Europe will have no addition whatsoever.

Of course the trick of converting this profile into a sustainable consumption led boom, whilst keeping a lid on the cost of money, is not a given. There are many other factors to consider, but it is as helpful a start as a central government could ask for.

Within a day of expressing an interest in renting an office to Deutsche Bank locals, we had our space and this despite a property market with less than 2% vacancy levels. Furthermore, I had met the neighbouring tenants and found a tenant for myself over Wimbledon. A busy 24 hours [see boxout at end of article].

My experience has been repeated many times over with other foreign businessmen. Bill Gammell, Cairn Energy's CEO found himself being introduced to ONGC directors at a drinks party within hours of touching down within the country. The relationship forged there and then has gone on to provide a key building block for the company's activities in India.

Religious calm and political stability

Thirteen years ago, religious tension in India reached a peak when over 10,000 Hindus used their bare hands to tear down a mosque in Ayodhya. Not long after this, Bombay – as it was then – was rocked by a dozen bombs in a single day.

The western world was offered the odd palatable, if somewhat quirky, insight into Thackeray's fascist leadership – such as the time when hebanned Valentines Day – but in the main, Mumbai during the Shiv Sena area offered few palatable truths. This was not a time to be optimistic on the country and any paper on the Indian investment opportunity must surely address this issue before moving forward.

As history tells, ultimately sense did prevail and Thackeray lost power in 1999. In Mumbai, business comes before religion as well.

But surely some tension must linger and last month I found myself repeatedly asking the same question on the current state of Hindu/Muslim relations. The answer – whether it came from an Indian banker, an oil minister or a geologist – was that sectarian politics was largely dead.

If so, this is an extraordinary progression. Cultural mingling does appear to be the order of the day. A leading local investment banker at MSDW put it in a way that struck a chord:

"It is only an issue where unemployment is high. When people are busy, religion doesn't matter. It is a refuge of the bored. Do you see anyone in the central business district of Mumbai look bored? No – so there is no trouble. We have moved on. Now the passion is for making money, not playing God."

The political situation in India is noisy. Indians enjoy politics and the excessive amount of press coverage dedicated to the state and central politics is presumably demand led. The Prime Minister – Dr Manmahon Singh – is not a natural leader, and of course he was not democratically elected (Sonia Gandhi appointed him). However, he has a reputation for unimpeachable integrity and with degrees at Oxford and Cambridge and a PhD in Economics. Financial reform and in particular tax reform, is right on India's critical path and Singh's background as a renowned economist and finance minister augurs well.

Whisper it gently, but India may well be enjoying political stability. Those in the know believe that the Singh led UPA (United Progressive Alliance) will run its full term until 2009. The principal opposition – the right wing BJP party – is in disarray and is increasingly coloured by the influence of hardliner Hindus and represents no immediate threat. The biggest risk would be that the UPA splinters as factions seek opportunity out of the BJP's demise.

Buoyant financial services

A trickle of western banking bolt heads in Mumbai has turned into a torrent. What is more, many of these offices are not only providing operating support and back office activities, but actually going about the business of investment banking. Allegedly a third of the proposed 9,000 JP Morgan workforce outlined for India by 2007 will be working for the investment bank.

The offices of CSLA, Deustche, MSDW and Citibank in Mumbai – none were small operations – and the Deutsche research base has grown 500% in five years. In fund management, Fidelity has long been known as a fan, and Anthony Bolton actually spent time with the Cairn Energy Board in Rajasthan last year. Fido now has 650 staff in India.

Meanwhile the financialmarkets are on fire. Foreign net buying of equities since July 2003 has been $14bn compared to $15bn in the preceding 10 years. The equity market is now broad with over 75 companies valued at over $1bn – in total India now equates to more than 12% of the global emerging market capitalisation. Foreign investors now own 42% of the free float market capitalisation on Indian companies.

In China, the financial services sector is opaque at best and positively murky at worst, but Mumbai is rapidly developing into a credible financial market place. The Indian financial sector is well entrenched and transparent. The Bombay stock market is the oldest in Asia and the media gives the market generous coverage.

Elsewhere, penetration of financial services remains low – 1% of Indians have credit cards and 2% have life assurance. Gold is still kept under the mattress.

For Brits that gorge on the financial products offered by an industry that accounts for a third of our economy, it is difficult to conceive of a capitalist country without a mature banking backbone. We are conditioned to believe that a strong financial system is the key ingredient to economic growth and it is the firm belief of the international bankers that I met in Asia that the Indian banking system is on a much better footing than China. Their risk assessment systems are robust and NPLs are 2% of GDP against 25% in China. Central banking supervision is effective.

Technological literacy

It was no surprise to me to see the comfort with which the average white collar worker in India handles technology – after all Clareville's head of IT is from Gujarat in North West India. Much of the Indian IT noise has come from foreign companies outsourcing, but indigenous IT spend is now on the rise and this should create huge domestic demand.

Given that the average wage for an experienced software programmer is $11,000 in India compared to $83,000 in the US, it should be no surprise that 2005 has been marked with so many Indian companies being awarded outsourcing contracts. The most significant deal was probably ABN AMRO's $2bn outsourcing contract where three Indian firms were awarded the application management – one deal in many.

Bangalore is Palo Alto without the Starbucks and the "think outside the box" bullshit. It currently plays host to Dell, Sun Microsystems, Microsoft and Intel and in total is home to over 100,000 software engineers. No UK city has ever had more than 100,000 employed in a blue collar profession (at its peak in the 1970s, Coventry employed 65,000 people in the car industry), yet today's India achieves this figure in a white collar one. Infosys Technology – India's technology flag carrier will, by year end, employ over 100,000 engineers.

Indian IT firms have a head start over global competitors in the offshore delivery model and one has to suspect that this is something that the country will increasingly capitalise on.Of course they are lucky the way the sun moves around the world in that just as American engineers go to bed, their Indian counterparties can seamlessly pick up the baton and go to work. We should come to work in the early morning and have on our screens all manner of advanced statistical analysis on our funds – hot from the office space in Mumbai.



Those in the know tell me that the lack of infrastructure in India has held back GDP growth by 2%-3% per annum. The change in central government did not help in 2004 simply because the new regime kept their powder dry until a thorough review was conducted.

The harsh reality is that there was little to review. India boasts only 2000 km of motorway compared to 30,000 km in China – not a big surprise given that figures show central government spent $3bn in 2003 year on roads – compared to $25bn in China. No other factorhas had a greater impact on Indian manufacturing competitiveness than the poor road network. Of course this matters little toIBM and JP Morgan – they have all they need in their satellite communities – but it does affect traditional industry. 40% of all communities in India are not connected by all-weather roads.

The situation is no better in other public services – 60% of Indian homes are not linked to public sewage systems. Power stations are inadequate for the massive incremental demand for electricity, and regional airports cannot cope with the surge in landings caused by the 20% compound growth in domestic traffic.

This is all very familiar for those that invest capital in the country and to the extent that it is discounted, it isn't necessarily a negative. At the margin what is relevant is where we go from here. The government is making a fresh effort and infrastructure spend will rise from 3% of GDP in 2003 to 4.7% in a couple of years ($45bn). Mumbai will have a metro system and Bangalore and Hyderabad new airports. Annual power addition for 2006-7 will be 2-3X the 10 year average. But it is the road network that is by all accounts top of their agenda and that seems good sense.

Optimists will say that this will only give further impetus to a boom that has momentum despite the shaky infrastructure, whilst the bears will say,"Where will the money come from, and by the way China, spends 11% of GDP on infrastructure?"

Health and poverty

There is an annual deficit of 45,000 houses a year in greater Mumbai – and therefore 45,000 households every year are added to the slums.In the cold words of the planners, their shelter needs are "satisfied by the informal market". The slum population should in theory double every 10 years. For visitors it makes for uncomfortable viewing, but for the Indian middle class there does seem to be an acceptance – a kind of "it is what it is". The Indian poor seem at the margin a great deal happier than the poor in other countries, yet there can be no doubt that the lowest income strata will not participate in the country's progress. Health is, however, another matter, and that the World Health Care Organisation should place India as fifth on its global watch list (behind four African states) is a sad indictment of the inequalities of what is now a trillion dollar economy.

The twin deficits

Make no mistake – this is the biggest issue for investors in India. It cannot be an unfamiliar topic for Americans and it isn't for Indians either – the country called in for help from the IMF in both the early 1980s and the early 1990s.

Current Account

India has some extraordinary padding in its current account. The export of services such as the IT ones offered in Bangalore add 3% to GDP and then of course ex-pat Indians send back around $25bn a year to the mother ship – a record for any country and another 3% kicker. So they are 6% up before most other countries get out of bed.

Two up with three to play, and yet they are in trouble. The unprecedented consumption boom comes at a time when India's oil import bill is on the rip. As a result the current account balance is deteriorating and even though the oil bill is only 20% of FX reserves.

There is little love lost between the Energy Ministry and ONGC – India's biggest quoted company and one of the top 15 oil companies by market cap in the world. The Energy Minister – Mani Shankar Aiyar – is not only openly dismissive of ONGC's ability to make the kind of discovery that Cairn did in 2004, but is critical of their production and safety records. The uneasy situation is complicated by the fact the government still owns 85% of the stock. It is difficult to see the UK government owning 85% of BP and then lambasting Lord Brown in the Commons – but that is the state of play in Indian energy politics.

The Chairman of ONGC – Subir Raha – is by all accounts a patriarchal figure and is not easily bullied. He continues to embrace international diversification – which may help his minority shareholders, but is little use to a country consuming 2.5bn barrels of oil a year and producing less than 750m.

It is hard not to sympathise with the Energy Ministry. The recent material hydrocarbon discoveries in India have been made by Reliance Industries and Cairn Energy. The former is a vast industrial conglomerate that also sells mobile phones and the latter was, until recently, a £500m Scottish wildcatter.

It is material finds that are needed. Cairn Energy's Rajasthan field looks increasingly like it will be a 1bn barrel find and in itself would be sufficient to feed Indian energy for a year. Finds like Mangala are not common and the oil below will be guzzled very quickly. Mangala could look after the world for a week, but then be dry.

Fiscal Account

India's tax revenue to GDP is very low at 15 % (OECD average 37% and emerging market average 20%). This has been the main problem, but the government has shown more initiative here than in just about any other policy area. In particular the imposition of VAT at a state level last year has gone well – two thirds of Indian states have implemented the central government proposals and the plan is to move to National VAT in three years time. The hope is that the collection of VAT will capture all links in the chain, boost overall tax compliance and provide a great boost to tax revenues. In the VAT compliant states tax revenues are up 12%. If the tax revenue to GDP ratio were to rise 2 pts, it would release $12bn per annum for infrastructure spend.

A stronger tax system is pivotal to a stronger India. There is real hope here and if anyone can install an IT based tax information network by the end of next year, it should really be the Indians.


India is clearly on a roll and it is conceivable that the roll is still in its infancy. After all, it was only 13 years ago that religious violence in the country reached its post independence peak and the IMF has come to India's rescue twice in the last generation. Bubbles are by definition transitory, and since the collective aspirations of an increasingly educated, increasingly emboldened, and increasingly influential middle class are likely to feed on themselves for several generations, India's economic rise is no bubble.

Every week the list of US and European companies that commit to the country lengthens. This week it may have been JP Morgan and Intel, but next week it will be others. I am delighted that we have established a foothold in a friendly country with massive intellectual resource. If we do not, we will surely only have ourselves to blame and therein probably lies the marginal difference between committing intellectual and financial capital to India compared to Russia, China or Brazil. At the margin, there is less to chance.

An appetite for business

The appetite to do business can be illustrated by chronicling our own experienceof the process of securing office space in Mumbai.


During meeting with Deutsche Bank executives, Richard Ellis property agents are recommended as leading operators in Mumbai.


Clareville Capital's London office arranges meeting with Richard Ellis agent at the Taj Mahal Hotel for 6 pm.


Indian rep of Richard Ellis turns up. Engaging and bright, he talks with a rich knowledge of the financial service community and the wave of hedge funds setting up in Mumbai. Nikhil gives a very slick powerpoint presentation which he navigates with impressive dexterity. He has an MBA from Delhi University and it shows.


At his suggestion, we are joined by his college friend – Leander Paes – India's top tennis player. Suave, charming and sophisticated, the immaculately suited Paes is a serial dater of Bollywood stars. After a brief banter about Andrew Murray, he invites me to watch him play at Wimbledon next year and I then find myself asking him to stay with us, which I immediately regret given the impact he would have on my wife!


The two Indians give me an idiot's guide to Mumbai business districts and I brief them on our modest plans. Nikhil emails his office with his conclusions and tells me to keep four hours free the following day. The two depart for a Bollywood Premier.


Package arrives at my hotel with bespoke itinerary from Richard Ellis and details of intended office visits.

12:05 – 12:20

Office tour progresses as planned. The landlords often turn up on site to help with questions.


Final site is suitable for our requirements. I agree terms with landlord who, on discovering nature of our business, introduces me to another tenant – Motilal Oswal – one of India's leading indigenous institutional brokers – who rent a small back office site on the same floor. They then encourage immediate meeting and call Director of Equities who sits in their main office in a nearby building. Meeting arranged after close of Indian Market. They want to tell me about Bloomberg's operations in the city, but of course, they also want to do business in the years ahead.


I have a beer as planned with two representatives of Motilal Oswal at nearby Hilton. They are all charming and helpful and ask me to come and see their flagship office. I agree and we go straight for the tour. In 18 years within the securities industry, I have never seen a more avant-guard office. It makes Execution in Brick Lane look rather dated. We have all seen office gyms before, but this was my first sight of a steam room by the dealing room and – best of all – a movie theatre. As I arrived the whole equity team were watching Cliffhanger from their padded seats.


Satyaprakash Shimoga – their front man – lends me his driver as he heads off to do the graveyard shift to US institutions. He is exceptionally well informed about the securities industry in both the UK and the US. We promise to meet up in London in January when he is over.