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

India, with the world's second-largest population of 1.3 billion, is attracting the attention of market participants. In recent years, the Chinese economy, which achieved high growth with the world's largest population of 1.4 billion, has shown visible signs of strain due to trade friction with the United States and domestic bad debt issues. Compared to China, more than half of India's population is under the age of 30, creating an environment that easily benefits from the demographic bonus of a growing labor force. Consequently, India appears 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 2014 results. The stable continuation of the Modi administration, which has managed the government with a focus on promoting economic reform, 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 the Juku, I embarked on a relatively long trip to India for a reason far removed from the seminar's content: a field study of the actual state of ODA in India. I visited various cities, mainly in the north, as a backpacker, witnessing Indian secularism and the way people lived, 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. By 2018, the population had reached 1.35 billion and the total GDP was approximately 293 trillion yen, showing the rapid growth of the economy. During that interval, skyscrapers rose in major cities, highways were developed, and several regional cities 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 evidenced by the 17 official and semi-official languages printed on banknotes, cultural differences between regions were vast, and systems and infrastructure varied from state to state. Furthermore, discrimination based on the caste system, which was supposed to have been banned by Article 17 of the Constitution in 1950, remained deeply rooted, and there were major problems in terms of employment. As a result, India's talented human resources flowed overseas, primarily to the United States and the United Kingdom, making a name for 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 IT companies and real estate-related companies within India among our potential investment projects. The Modi administration, which is proactive in attracting foreign capital, has been promoting the relaxation of investment regulations, simplification of corporate establishment procedures, and infrastructure development. I hear that some international companies are considering moving their manufacturing bases to India, partly due to the impact of rising costs in China.

Furthermore, while IT companies dominate the top market capitalization rankings in the U.S. stock market, the ratio of employees from India in major IT companies is increasing, and the emergence of Indian CEOs is becoming prominent. 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, falling to about half of its peak in 2017. The decline in investment in startup companies is particularly noticeable.

Thinking about the reasons for this in my own way: (1) Many IT businesses in India are transplantations of business models already established in places like China. Since competitors from other countries were also eyeing entry into India, the situation is tough for domestic startups. (2) Unlike China, India uses English as an official language, making it difficult to create a walled garden using its own language as a differentiator—as seen in China (Korea, Japan)—and making it easy for foreign companies to take the lead. (3) Because the Indian market is so huge, there was a tendency not to look abroad. (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 monitoring, those whose performance has been strong recently are the ones that have succeeded in capturing market share within the Chinese domestic 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 any other in the world. However, investment opportunities in India, which is destined to become a great power, are likely to increase rather than decrease in the future, and it is something we cannot afford not to know. And above all, India is interesting.