[Feature: The Changing India and Japan] The Attractions and Challenges of the Indian Market

2019/11/05

India, with the world's second-largest population of 1.3 billion people, is attracting the attention of market participants. The Chinese economy, which achieved high growth with the world's largest population of 1.4 billion, has seen visible cracks in recent years due to trade friction with the United States and domestic non-performing loan issues. Compared to China, more than half of India's population is under the age of 30, and it is in an environment where it can easily benefit from the tailwind of a demographic dividend due to an increasing working population. Therefore, India seems to have superior potential for future economic growth. In the general election for the lower house in May 2019, the Bharatiya Janata Party led by Prime Minister Modi won a landslide victory, securing more seats than in the previous 2014 results. The stable continuation of the Modi administration, which has managed the government with the promotion of economic reform as its banner, will also work positively for the Indian economy.

In the fall of 1991, while I was a member of Professor Michiyoshi Oshima's seminar in the Faculty of Economics at Juku, I undertook a relatively long trip to India for a reason far removed from the seminar's content: a field survey of ODA in India. I visited various cities as a backpacker, mainly in the north, witnessed the secular society and people's lifestyles firsthand, and fully enjoyed the charm of India where diverse cultures intermingle. At that time, India's population was 860 million and its total GDP was approximately 29 trillion yen. In 2018, the population was 1.35 billion and the total GDP was approximately 293 trillion yen, showing the rapid growth of the economy. During that interval, skyscrapers have risen in major cities, motorways have been developed, and several regional cities have also achieved rapid growth.

Back in 1991, some predicted the potential for business growth in India because English is one of the official languages. However, as can be seen from the fact that there are 17 official and semi-official languages printed on banknotes, cultural differences between regions were large, and systems and infrastructure varied from state to state. Furthermore, discrimination based on the caste system, which was supposed to have been prohibited by Article 17 of the Constitution in 1950, remained deeply rooted, and there were major problems in terms of employment. For this reason, India's talented human resources flowed overseas, primarily to the United States and the United Kingdom, and began to distinguish themselves mainly in the IT and financial industries. At that time, many Indians were also working in the systems departments of foreign financial institutions that had expanded into Japan.

Recently, we have seen an increasing number of Indian IT companies and real estate-related companies among our potential investment projects. The Modi administration, which is proactive in attracting foreign capital, has been promoting the deregulation of investment, simplification of corporate establishment procedures, and infrastructure development. I hear that some international companies are increasingly considering moving their manufacturing bases to India, partly due to the impact of rising costs in China.

Furthermore, while IT companies occupy almost all the top spots in market capitalization in the U.S. stock market, the birth of Indian CEOs is becoming more prominent alongside the increasing ratio of employees of Indian origin in major IT companies. The CEOs of representative American companies such as Microsoft, Google, and Adobe are of Indian origin.

While the Indian economy is showing such prominent prosperity, a slightly different view emerges when focusing on domestic venture investment. Investment from venture capital into venture companies has been on a downward trend since peaking in 2015, and in 2017, it fell to about half of its peak level. The decline in investment in startup companies is particularly noticeable.

Thinking about the reasons in my own way: (1) IT businesses in India are often transplantations of business models already established in China and elsewhere. Because competitors from other countries were also watching for an opportunity to enter India, the situation is difficult for domestic startups. (2) Unlike China, India uses English as an official language, making it difficult to create a closed market using its own language as a differentiator—as China (South Korea, Japan) does—and making it easy for companies from other countries to take the lead. (3) Because the Indian market is so huge, there was a tendency not to look overseas. (4) In the U.S., acquisitions and capital alliances by major IT companies are commonplace even for startup companies before they record revenue or profit. In contrast, Indian companies are reluctant to disclose information, making acquisitions by foreign capital difficult and limiting exit strategies for venture investors.

Incidentally, among the individual Indian IT venture companies we are looking at, those whose business performance has been trending well recently are companies that have succeeded in capturing a share of the domestic Chinese market. In highly competitive industries, it will be increasingly necessary to think about business with cross-border sales in mind.

Admittedly, it is almost impossible to comprehensively understand the Indian market, which is backed by a culture more diverse than almost anywhere else in the world. However, investment opportunities in India, which is destined to become a great power, are expected to increase rather than decrease in the future, and it is something we cannot afford not to know. And above all, India is interesting.