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Investors in India know that the performance of their investments will be affected by corruption. That's because India has more than it's fair share of graft as corrupt politicians, bureaucrats and police extract bribes from society which increases the ...
Investors in India know that the performance of their investments will be affected by corruption. That's because India has more than it's fair share of graft as corrupt politicians, bureaucrats and police extract bribes from society which increases the cost of doing business there.
I've long held the view that in a few decades time it is India, not China, which will be the world's biggest economy. I've been investing in India for quite some time and pay close attention to the level of corruption, because when this starts to decline it will boost the profits of India's companies and thus their value.
The good news for the vast majority of Indians and foreign investors is that there may have been a sea change in attitudes following the arrest of Anna Hazare, a prominent figure in the anti-corruption movement, which triggered massive protests and attracted worldwide attention.
Hazare was arrested on 16 August just before he started an indefinite hunger strike to protest about the lack of political support for the Jan Lokpal Bill, which has been held up in the Parliament of India for the last 43 years. The bill aims to establish an independent body to investigate and prosecute allegations of corruption against politicians and bureaucrats as well as protecting whistleblowers, so it's no surprise that India's notoriously corrupt politicians haven't rushed to pass it.
In many countries public officials are badly paid because the state expects them to supplement their income with bribery and extortion. This means that when people and businesses interact with the state to do things such as obtaining licences, moving goods through customs, having a telephone installed and finding a place in college for their children, they often have to pay bribes to get officials to do their jobs.
The result is that bribery becomes ingrained in the culture and is effectively another tax except that the money goes straight into the pockets of politicians and state officials whilst producing no public benefit. This tolerance of corruption then encourages some people in the private sector to seek bribes, further undermining the economy.
Whilst paying bribes may enable people to get things done more quickly, it ignores the fact that those who won't pay or can't afford to pay will get a vastly inferior service or nothing at all.
Even with rampant levels of corruption the Indian economy has managed to expand at a very fast rate in the last two decades. Forecast economic growth for 2011 is 8.5% whilst for 2012 it is 9%; rates which recession-stalked Britain can only dream about.
The reason for this growth is that India is in the middle of a massive deregulation programme which is freeing up its economy. But there's plenty more to be done, in particular improving the country's poor infrastructure, and this is proceeding apace albeit with plenty of corruption along the way.
Whilst India has a legal system which is based upon English common law, it doesn't work particularly well because of backlogs and judicial corruption. But the rising Indian middle class is putting pressure on politicians to reform the system.
India's two official languages are Hindi and English. The latter gives India a big competitive advantage because English is the de facto international language of business. With the exception of Pakistan, India's neighbours don't consider it to be a military threat whereas China's (especially Taiwan) are very wary of it. Don't underestimate the effect of these two factors.
India's rival in the corruption stakes is China. Corruption permeates the Chinese economy, just as in India, but in China anti-corruption protests as we are currently seeing would have been violently shut down by corrupt local officials, and the lack of a free press means that corruption is far less likely to be reported than in India.
In India there are websites which expose corruption and let people compare their experiences. Shortly after the Indian anti-corruption websites were publicised by the BBC similar sites were set up in China. The Chinese sites were quickly shut down by the authorities but the Indian ones are still up.
China has a massive demographic problem, the seeds of which are already sown thanks to its one-child policy. This has distorted the shape of its population to the point where China will grow old before it gets rich and won't have enough workers to support its elderly population, causing immense social tensions as a result.
The Western world faces similar difficulties but as we're far richer we'll be more able to cope. In contrast, India has a relatively young population so it won't face this problem for many more decades, if ever.
When I want to invest in another country and don't have enough local knowledge, I turn to an investment trust or unit trust. One of my biggest holdings is in The JPMorgan Indian Investment Trust (LSE: JII) which, despite a very rough last twelve months, has been an excellent performer over the last five years.
There are several other funds which specialise in India, such as the Elephant Capital (LSE: ECAP) private equity fund and the Infrastructure India (LSE: IIP) investment company, but the vast majority of funds have substantially underperformed the JPMorgan trust in the last few years.
The horizon for my Indian investments is twenty years (I did say that I'm a long-term investor!), when I expect my shareholdings to be worth many times more than they are today. A few percentage points here and there, as in today's bumpy markets, will seem a minor fluctuation by comparison.
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