India has been the talk of the investment community for a number of years now. But no matter how much the opportunity is explained and analysed, Western foreign investors still seem unsure. Why the reticence to embrace such a huge opportunity, especially in the tech sector?
The first stumbling block for investors to overcome is their own perception of the Indian economy. A decade ago, they would have been right to be cautious. But now? Macro-economic stability in India has been vastly improved by the greater credibility of the Central Bank. But more than this, the new government administration, led by Prime Minister Modi, has generated a great deal of positive market confidence. This confidence comes from the government's very strong mandate and the fact that this administration has managed to inspire even opposition politicians; getting them on their side and gaining their co-operation.
There's no shortage of demand either. India's urban population is projected to reach 500 million by 2017 and the potential aggregate demand in India is massive. Currently the majority of people's incomes in India are, on a global scale, relatively low or very low. But that's changing fast. It's estimated that in India there are already 350m middle-class people - more than the entire population of America. And this is set to grow exponentially. So there can be no dispute that there is a huge untapped market in India.
So far most of the Indian investment discussions have been dominated by the potential offered by the e-commerce industry; I call the phenomenon 'Flipkartisation', named after the hyper-successful Indian online shopping site, Flipkart. According to IAMAI and IMRB International, in 2014 the e-commerce industry in India was worth $13.5bn; a long way behind America. But the internet penetration level is projected to rise to only 19 per cent in India in 2015, versus 84 per cent in the USA. So you can see the investment attraction, which is why a number of high-profile investors have already secured substantial returns on their stakes.
But rising rates of connectivity offer Western investors other potentially high-yield opportunities. In particular, the hot Indian investment right now is in the financial technology sector. Here's the investment case: India has millions of unbanked people, so there is significant room for growth. According to the Bank of India, more than 40 per cent of the Indian population does not have access to any banking facilities at the moment, rising to 61 per cent in rural areas. In addition, only 11 per cent of the Indian adult population have access to a loan facility.
Unlike in the West where people are loyal to their bank, Indian consumers aren't tied into traditional banks, so there is huge potential to leapfrog Western models and go directly to newer financial models: mobile app-based banking, mobile wallets, and peer-to-peer loans. Unlike other areas of the app industry which are largely dependent on advertising, this is also very easy to commercialise through fees. In addition there is strong consumer demand for micro-payment technology due to the large number of micro- and small businesses in India.
However, because of a number of recent high-profile failures, there will still be reticence on the part of Western investors. But there are clear reasons for many of these failures. As a successful investor in India myself, I can see at least some of the fundamental mistakes they made: many foreign investors try to manage their investments from the US or UK, leaving the Indian companies to get on with it alone or micro-managing from a distance with little knowledge or understanding of the culture and systems. They try to impose Western solutions onto Asian culture. Frankly, they try to paint their house through their letterbox. This strategy is utterly wrong.
In my experience, investing in India can just never be about short-term financial gain. This is why New Call Telecom is now raising more than $100m to scale up operations in India and roll out digital services across the country. Venture capital and private equity firms need to partner with companies who have experience on-the-ground managing and scaling Indian and Asian investments. To be successful you need to be a close, working partner with the company in which you invest. You need their local knowledge and you need to be in-country as much as possible. It's those Western investors who commit themselves to really getting involved with the local companies and trusting the in-country teams that will ultimately be successful in India.