600 million (!!!) without power in India–the negative investment case in a nutshell

Indian power outages

Media reports tell us that 620 million in India have no power, due to widespread failure of the country’s electricity grid.  That’s half the population of that country–and almost 10% of the world!  And we on the East Coast of the US think we have power problems!

For the twenty years or so that I’ve been following India, the south Asian giant has been touted as being the next big thing for emerging market investors.  But the dream has never become reality.

investment plusses…

The attractions are obvious:

–a mammoth domestic market,

–a significant number of entrepreneurs,

–a large pool of hard-working, well-educated workers, and

–the fabulous success of the IT outsourcing industry in Bangalore.

…and minuses

Three negatives, however, are just as prominent:

–the immense power wielded by a small number of industrial conglomerates that control much of Indian commerce, and which are not particularly interested in foreign competition,

–highly bureaucratic government at the national and regional levels, which tends to be highly inwardly focused and which is subject to religious, ethnic and class tensions, and

–the resulting lack of infrastructure, particularly roads and electric power.

the post-WWII development model

The classic post-WWII development pattern for emerging countries is to encourage technology transfer from highly skilled foreign firms.  These are typically induced to set up operations in the emerging nation through government incentives (tax breaks and red tape slashing) and by the availability of cheap labor, good roads and ports and sufficient electric power/clean water.  Underlying all this is a national consensus to make the sacrifices needed to foster economic development.

India doesn’t fit

India doesn’t fit this model.   In fact, according to the World Bank, India has recently been losing ground in important areas of infrastructure.  In its 2012 Logistics Performance Index, the Bank rates the second-largest country in the world by population as #46 in the quality of its logistics.  That’s just below Brazil, and slightly higher than Mexico and Argentina.  It’s also an improvement of one position since the 2010 report.

If we look a little deeper, however, India has fallen to #65 from #47 in the quality of its infrastructure, to #54 from #46 in international shipping and to #56 from #52 in its ability to track and trace shipments.

Its boost in the ratings comes from the timeliness of the shipments it does make (#44, up from #56) and its skill in using the logistics apparatus it has (#38, up from #40).  In other words, the ratings improvement comes from more efficient use of what little there is, rather than having an expanding logistics infrastructure.

The country hasn’t helped its reputation either with the Vodafone cellphone network affair, where it decided to retroactively change its tax laws to subject the UK firm to a multi-billion dollar levy on profits from a sale.  True, Vodafone may have exploited a loophole in the existing laws.  That’s irksome.  But changing the rules after the fact, rather than just closing the loophole, must give potential foreign investors pause.

By the way, India does have a program that allows private companies to build their own power plants.  In theory, they could use the electricity to drive their own operations and sell the remainder to the public grid.  But the latter prices are controlled by law, and set at a level that forces private power companies to lose money.  …oh, well.


3 responses

  1. As always, you tackle the pressing issues of today and give us a look into the financial reality that the participants are facing. Looking back at the Enron power plant debacle, you can see that the public utilities issues are huge here. In fact, look at China and the rolling blackouts from two years ago and you see the same issue that comes to a head due to the weather – not even hugely bad weather.

    All in all, I think that these issues in India even the playing field. For a manufacturing client who had contractors in China two years ago, it made us bring at least the finishing services back to the U.S. It all evens out in the long run…

  2. Reblogged this on Rhodes Holdings LLC and commented:
    I think that everyone should be familiar with this issue – it is one that we will be facing in 20 years (or tomorrow if the weather continues) without heavy investment and predicable regulatory environment in the U.S.’s infrastructure. In other words, politicians, don’t just talk about infrastructure investment, 1) give private industry a reason to invest, 2) get out of their way when they do, 3) don’t retroactively change the laws after the fact, and finally 4) act now and don’t just pontificate on the subject – Democrats and Republicans alike are guilty as charged.

  3. Well,that escalated to quickly.i think that would bring another Investment alternatives for other investors,leaving the failures that learned their mistake,they should have consulted Finance advisers like Ed Butowsky for good investment analysis.

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