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Economics: India: The New China
New York: August 08, 2005
By John R. Stephenson

Lately, we have seen quite a shift out of Washington. Perhaps a new ally in the war against terror or a new strategic relationship is in the works. But no matter what the reason, it was hard not to notice the red carpet treatment afforded to India's Prime Minister, Manmohan Singh as he visited the capital. Not only was the reception welcoming, but also, the Prime Minister had the rare opportunity to address a joint session of Congress. If that wasn't enough, he secured for his country access to American nuclear technology — as long as it is used for civilian purposes. With all the saber rattling on the hill about China, the cozy relationship with India stands in stark contrast, begging the question, is India the new China?

For decades, India was marginalized in the international system, in part because of its loose alliance with the Soviet Union. America, in an effort to contain Soviet hegemony, tried to gain influence with Turkey and Iran, two Muslim countries that bordered the Soviet Union, serving to marginalize India, a mainly Hindu nation. India, while never communist, disapproved of America's foreign policy and searched for a counterweight to American influence. They found it in the Soviet Union. Another reason for India's marginalization is geography. India is hemmed in by the Himalayan Mountains in the north, to the east are tropical jungles, and to the west is Pakistan. Literally, the country is an island surrounded by mountains, oceans and hostile neighbors.

Throughout much of the last forty years, India languished. With an economic system that combined the worst of centralized Soviet planning and Western markets, coupled with their geographic isolation, the country did not develop and its infrastructure disintegrated. With a tepid relationship with the U.S. and a friendship with the Soviet Union, India found itself increasingly isolated as the cold war ended. Not only that, but India has been defined by violence and political instability since its independence from Britain in 1947. The result? A poor fragmented country operating at the margin in the world economy.

But fiber optics and the Internet changed all of that. As the world becomes more and more interconnected via fiber optics, it is no longer necessary to ship physical goods. Much of the work can be done electronically. No nation has benefited more than India from the technology revolution.

As Thomas Friedman argues in his new bestseller, The World is Flat, "The dynamic force in Globalization 3.0 — the thing that gives it its unique character — is the newfound power for individuals to collaborate and compete globally. And the lever that is enabling individuals and groups to go global so easily and so seamlessly is not horsepower, and not hardware, but software — all sorts of new applications — in conjunction with the creation of a global fiber-optic network that has made us all next-door neighbors. Individuals must, and can, now ask, Where do I fit into the global competition and opportunities of the day, and how can I , on my own, collaborate with others globally?"

And nowhere is this globalization or flattening of the world more evident than in the service sector. As Freidman says: "There are currently about 245,000 Indians answering phones from all over he world or dialing out to solicit people for credit cards or cell phone bargains or overdue bills. These call center jobs are low-wage, low-prestige jobs in America, but when shifted to India they become high-wage, high-prestige jobs. The esprit de corps at 24/7 and other call centers I visited seemed quite high, and the young people were all eager to share some of the bizarre phone conversations they've had with Americans who dialed 1-800-HELP, thinking they would wind up talking to someone around the block, not around the world."

Another reason for India's emergence on the world scene has been 9/11. After the terrorist attacks on the United States, America started to look towards new relationships in its fight against terror. Almost overnight, both India and Pakistan were transformed into valuable assets in the fight. Not only that, but India was also viewed by Washington as providing an important economic counterweight to China's growing influence. With newfound friends and a technology revolution underway, could India's economic star be rising?

India might well be ready for great things in the decades to come. In many senses, India is in the same place that China was in during the 1980s. It has excessive bureaucracy, poor infrastructure and a culture resistant to rapid development. Yet it has the same basic materials that made China an emerging power today — namely a smart, well-educated workforce and an enormous population base eager for a better life.

Over the last ten to twenty years, China has been the place where fast money went in search of outsized returns. China was where the action was. But today, it is getting harder and harder to squeak out an outsized investment return in China. But India, could be the next great investment boom waiting to happen.

But, Jim Rogers the author of Adventure Capitalist is more sanguine in his prognosis. A prognosis learned by traveling around the world in a supped-up yellow Mercedes. Coupling man-on-the-street knowledge with his distinguished career as a hedge fund manager and financier, Rogers writes, "Notwithstanding all this, India was one of those countries I visited expecting to find exciting investment opportunities. Having been allied with Russia during the Cold War and pretty much socialist in its outlook, the country had found itself bankrupt by 1991, with no more than three weeks of foreign currency reserves left in its account. So the government started deregulating and opening the economy. India, it had seemed, had learned its lesson. And it was a country with a large middle class, so great things were possible.

"Unfortunately, by the time I left India, I found just the opposite to be true. Yes, I did see some signs of a liberalizing economy and a realization on the government's part that it needed outside capital and expertise. But an anticolonial, anticapitalist spirit prevails. The country epitomizes bureaucracy, chauvinism, and protectionism run amok."

Investors, looking to capitalize on India, should learn to read the tea leaves to see how this new Indo-U.S. relationship evolves. As with China, there will be many mutual funds springing up to capitalize on growth (should it materialize) in India. As before, another way to play an emerging market boom is to look to American companies that have significant operations and can therefore benefit from the boom in these emerging market economies.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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