Investing in India E-Book

Rahul Saraogi

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 352

Veröffentlichungsjahr: 2014

Beschreibung

A practical, real-world guide to investing in India India's rapid economic growth offers obvious opportunities for foreign investors, but making wise investing decisions can be difficult for any investor without a deep knowledge of the country and its culture. With a vibrant democracy and an active press, India can be a complex and chaotic place in which investors can find it difficult to make investing decisions with confidence. This book offers an on-the-ground perspective on India from one of India's most successful value investors. Looking deeply into the internal realities that impact India's investment climate, Investing in India helps investors both inside and outside the country cut through the noise and find the facts that truly matter for anyone who wants to invest there. * Features charts of stocks, markets, and other helpful Indian economic indicators * Offers a real-world look at India's politics and governance; its financial system and capital markets; its asset classes and equity markets; the private equity scene; and the real estate market * Written by Indian value investing guru Rahul Saraogi

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Investing in India

A Value Investor's Guide to the Biggest Untapped Opportunity in the World

RAHUL SARAOGI

Cover image top: © iStockphoto / RogiervdE middle: © iStockphoto / HendrikDB bottom: © Travel, Landscape and People photography / Getty Images Cover design: Wiley

Copyright © 2014 by Rahul Saraogi. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 9781118756096 (cloth) ISBN 9781118755945 (ebk) ISBN 9781118760192 (ebk)

For Ruchita and Miraya, You bring out the best in me.

CONTENTS

Foreword

Preface

CHAPTER 1: Understanding India

AGRARIAN ROOTS

INDIA'S VILLAGES

THE ROLE OF THE FAMILY

SEVEN GENERATIONS

COLONIALISM AND ITS IMPACT ON INDIAN VILLAGES

DEEP-ROOTED BELIEFS AND ASPIRATIONS

SPIRITUALITY AND SUPERSTITION

VILLAGES ARE NOT THE SAME ANYMORE

URBANIZATION IS CHANGING INDIA

SUMMARY

CHAPTER 2: Government, Politics, and the Media

IS INDIA ONE COUNTRY?

DEMOCRACY

THE RISE OF REGIONAL PARTIES

COMPETITION AMONG STATES IS HEALTHY

THE GOODS AND SERVICES TAX

IS DEMOCRACY HOLDING INDIA BACK?

STATE OF POLITICAL AFFAIRS IN INDIA

BUREAUCRACY

CORRUPTION AND RENT SEEKING

WAR, TERRORISM, AND VIOLENCE

ROLE OF THE FOURTH ESTATE AND ACCOUNTABILITY

THE ULTIMATE FREE MARKET

SUMMARY

CHAPTER 3: The Economy

OVERVIEW OF THE INDIAN ECONOMY

INDIA'S UNIQUE ECONOMIC MODEL AND ITS LEGACY

INDIA'S PUBLIC-SECTOR UNDERTAKINGS (PSUS)

MONSOONS AND WHAT THEY MEAN FOR INDIA

THE PROBLEM OF INDIAN AGRICULTURE

MANUFACTURING IN INDIA

INDIA'S INFRASTRUCTURE DEFICIT

INDIA'S SERVICES ECONOMY

INDIA'S NATURAL RESOURCE WEALTH

SAVINGS, LAND, AND GOLD

THE MACROECONOMY

SUMMARY

CHAPTER 4: Financial Architecture

HISTORY

THE BANKING SYSTEM IN INDIA

NONBANKING FINANCE COMPANIES

FINANCIAL INCLUSION

THE RESERVE BANK OF INDIA

EQUITY MARKETS

MARKET PARTICIPANTS

BANKRUPTCY AND FORECLOSURE

RISK AND CAPITAL

SUMMARY

CHAPTER 5: Value Investing in India

RISK ON, RISK OFF, AND GLOBAL CAPITAL FLOWS

LIQUIDITY, VOLATILITY, AND RISK

VALUE TRAPS

CORPORATE GOVERNANCE

CAPITAL ALLOCATION

BUSINESS FUNDAMENTALS

FINANCIAL STRENGTH

RELATIVE OPPORTUNITY

SUMMARY

CHAPTER 6: Looking Back

REAL ESTATE

PRIVATE EQUITY

EQUITY MARKETS

FOREIGN DIRECT INVESTMENT

DEBT MARKETS

ENTREPRENEURS AND BUSINESSPEOPLE

SUMMARY

Afterword

About the Companion Web Site

About the Author

Index

End User License Agreement

List of Tables

Chapter 3

Table 3.1

Table 3.2

Guide

Cover

Table of Contents

Foreword

Preface

Chapter

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Foreword

Steve Sjuggerud

Editor of True Wealth

“Get over here to India now,” my friend Rahul Saraogi told me in late 2008. “Now is the time to invest.”

I went. I was convinced. I invested.

Long story short, I personally pocketed a triple-digit return in Indian stocks in just over a year, following Rahul's advice.

In my decades in the investment business, I have been fortunate to meet many great investors. I think Rahul will become known as one of those great investors.

When we first met at an investment conference in the Caribbean, I was so impressed with Rahul, I kept asking him questions over dinner. In just a few questions, I can tell if a guy doesn't really know what he's doing. But Rahul kept knocking it out of the park with his answers. Impressed, I kept going.

His wife eventually said, “Have you gotten to twenty questions yet?!?” I didn't realize I was quizzing him so intently. He kept saying the right things, and I kept looking for the hole in his story. It didn't exist. He is solid. We became friends.

A few years later (in 2008), Rahul told me it was time to get over to India. I'd never been there before.

Rahul took me around the country to show me some of his favorite investment ideas. We went to a variety of different cities and visited many different businesses. These were incredible businesses, priced dirt cheap. In many cases, Rahul was the only investor that had ever gone to see the company before.

I was impressed. I didn't just put money in India in general … I actually sent it to Rahul. The triple-digit profit I pocketed was with Rahul's hedge fund.

For me, there is no better person to guide me as a foreigner looking to understand investing in India. You see, Rahul fully understands Indian culture AND American culture. …

Rahul graduated from an Ivy League school in the United States, fully expecting to find his career in the States. But while in the States, he realized the REAL opportunity was back home in India where he grew up.

He truly understands both places. He also really understands investing. I found this out on Day One (much to the dismay of his wife!), and time with Rahul over the years has confirmed that.

In short, I really can't imagine a better guide than Rahul if you want to understand investing in India.

You are in good hands. …

Preface

I've wanted to write a book about India for a long time. Persistent encouragement bordering on threats by my business partners, Pratik Sharma and Vedant Mimani, and unwavering support from Laura Walsh and her team at Wiley finally helped me complete the book.

I was born in India into a business family and grew up there. My great grandfather migrated to Burma (now Myanmar) from what is now the Indian state of Haryana in the early twentieth century. He went to Burma as a penniless trader and slowly built up a business in textile trading and pulses processing. He had become the proud owner of an automobile by 1934, the year before my grandfather was born. This, according to my grandfather, was a big event during that time and was a declaration of wealth and prosperity.

My family fled back to India as refugees in 1942 during World War II when the Japanese started bombing British forces in Burma. In 1952, my family moved back to Burma and my grandfather built up a successful business in pharmaceutical trading from scratch. My father was born in Burma in 1955. In 1959, Burma nationalized all assets belonging to foreigners and my family came back to India as refugees for a second time. My grandfather once again built up a business from scratch. This time he saw opportunity in wheat flour milling. He built a successful business that was geographically spread all over India. Things were good for a time. I was born in 1979 into economically happy times in my family. However, by 1987 India had changed its policy of controlled licensing, and the flour milling industry was decimated. In 1989, my father started a readymade garment manufacturing and exporting business. By 2000 he had built a meaningful business and our family saw happy economic times again.

I grew up in an environment where business was discussed almost every night at the dinner table. In my early years, India was still a socialist economy, and my father would tell me stories about America and about its fascinating free market economic system. I was determined to study in the United States, and in 1996, I had the opportunity to pursue my undergraduate education in the United States. I chose to study engineering, at Northwestern University in Evanston, Illinois, because my father and uncle are engineers and I wanted to maintain the family legacy. However, I found myself spending countless hours in the library studying John Maynard Keynes and Ludwig von Mises. My heart was not in engineering, and I transferred to the Wharton School at the University of Pennsylvania in Philadelphia after my first year at Northwestern.

As I studied and learned about economic history, market cycles, and the creation and destruction of wealth, I was fascinated. I discovered that the study of money was the key to understanding human society and its evolution. I was no longer interested in any trade or industry and instead became interested in learning how money and markets influenced and determined the fortunes of different industries.

Ironically, while I had gone to the United States to learn about its economic system, the very study got me interested in India's economic history. The study of the U.S. economic system became the backdrop of my study of India's social, political, and economic system. I wanted to find out what had made India one of the richest economies in the world millennia ago and what had transpired during the past 500 years that made India one of the world's poorest countries.

The more I read, the more I spoke to people (including my extended family, friends, and business associates), and the more I studied, the more I discovered.

I realized that there was a huge gap in the understanding of India, its markets, and its economy. I realized that Indians in India, including business owners, financial investors, economists, academics, civil servants, and politicians, were looking at things in silos. They were not looking at things in the context of India's sociology or the value systems, the religious beliefs, and the aspirations of its people. They often had an incomplete understanding of free market systems and what led the United States and western Europe to adopt the systems that they follow today.

I also realized that Western academics, researchers, businesspeople, and investors were clueless about India's history in the context of its economy. I became convinced that there was no way for a Western observer to empathize with and understand India's value systems, compulsions, and aspirations since they had not been immersed in it. My conviction continued to strengthen as I had detailed interactions with second-generation Indian children of immigrant parents in countries like the United States, Dubai, Singapore, and Hong Kong. Although they were born in and lived in Indian families, they had lost contact, context, and the importance of the extended family and the community in India. They were even more confused about India than Indians living in India and Westerners studying or interacting with India.

I am a pure capitalist at heart, and my goal is to succeed and become wealthy in life. I am not ashamed about it and I state it up front. All my study, research, and work had a single motivation—the pursuit of an edge that would help me make more money. My goal was neither to publish academic papers nor to solve the complex socioeconomic problems of the world.

I realized by pure serendipity that the stock market is the best place to learn about and to apply the learning from multiple disciplines. I discovered Warren Buffett, Charlie Munger, and Benjamin Graham (in that order). I spent countless hours reading and learning about everything I could from these investment greats. Through Charlie Munger I discovered Phil Fisher and Robert Cialdini. Through my business partner, Vedant Mimani, I discovered Jesse Livermore and his book Reminiscences of a Stock Operator under the pen name Edwin Lefevre. Through Charlie Munger and Phil Fisher I realized the importance of time and the role it plays in determining the success of a good business and the demise of a mediocre business. Through Robert Cialdini and Jesse Livermore I learned the importance of psychology in human decision making and in the markets. About 10 years ago a friend of mine gifted me a copy of Nicholas Nassim Taleb's Fooled by Randomness. Taleb validated a lot of things I had learned by practical experience in the markets but had struggled to articulate.

Over the years, I've spoken with my business partners, Vedant and Pratik, about my understanding of India and about the gaps that I believe exist in people's perception and understanding of the country. I've also written many of my thoughts on a blog. However, I had been able to find neither the time nor the motivation to put it all into a structured and organized book.

I've finally managed to complete what I've wanted to do for a long time. This book is a compilation of my understanding of the underlying reality of India from the perspective of a practitioner who has had the privilege of being immersed in two distinct environments and has been able to bridge the knowledge gap between the two.

I hope you enjoy reading this book as much as I have enjoyed writing it.

CHAPTER 1Understanding India

India is one of the biggest untapped investment opportunities in the world today. However, for many of those investors who have tried to participate in the India story in recent times, the experience has been one of disappointment. Some of the disappointment has been caused by the fact that India has been in the midst of very large transitions in its economy, society as well as politics during the past two decades and the rest of it has been caused by the lack of sufficient understanding of India on the part of investors themselves. Before we explore the challenges and investment opportunities that India presents, it is important to understand where India and Indians are coming from.

AGRARIAN ROOTS

India is one of the great civilizations of the world. Almost everything about India can be linked back to its agrarian roots. India is one of the unique regions of the world that is called a subcontinent.

The mighty Himalayas together with the Tibetan plateau, often referred to as the roof of the world, cut India off from the rest of the northern hemisphere and create a subcontinent that is one of the most fertile agricultural regions on the planet. Like Egypt is called the gift of the Nile, India can be called the gift of the Himalayas. From the north, the Himalayas cut off the subcontinent from the cold Siberian winds that ravage the rest of China and central Asia during the winter. From the south, the Himalayas act as a wall that forces the moisture-laden southwest monsoon winds to precipitate on the subcontinent. The Himalayas act as such a formidable barrier that they force the winds to turn back south and continue precipitation on the subcontinent as the retreating northeast monsoon winds.

The snow-capped Himalayas are the source of perennial rivers that are the lifelines of the great plains of India. The Indus, the Ganges, the Yamuna, and the Brahmaputra all have their sources in the Himalayas.

One statistic can quantify the fertility of India's landmass. About 46 percent of India's landmass is cultivable compared to 18 percent for the United States and only 13 percent for China.

Geopolitically, the Himalayas together with the Indus in the west and the Brahmaputra in the east create formidable natural barriers that kept away many invaders from India for millennia.

To understand India, one needs to understand the role that family, community, religion, and spirituality play in the lives of Indians. And to understand these, one needs to understand India's agrarian roots and India's villages.

INDIA'S VILLAGES

It is often said about Americans that they are among the most insular and provincial people in the world. Fewer than 30 percent of Americans have passports and even fewer have traveled overseas. Foreign visitors often mock what is considered news on American television. For most Americans war is no different from a television show. Prior to 9/11, the only modern warfare experienced by the United States on its soil was the attack on Pearl Harbor during World War II and even then it was on the remote islands of Hawaii.

One cannot blame Americans for being the way they are. It is a country that spans an entire continent from west to east. The United States' soil is so naturally rich and its economic system so powerful that most people can enjoy a very high standard of living no matter where they live in the country. India is no different from the United States, and inhabitants of Indian villages are no different from Americans in that context.

India's landmass is so fertile and India's climate is so conducive to the survival of people and domesticated animals that villages in India have been self-sufficient in whatever they needed for millennia. The relative security provided by India's natural geographic boundaries, left its villages insular and undisturbed for centuries. The self-sufficiency of Indian villages left India open to political invasions over the centuries. Indians did not care who crowned himself king and who ruled the country as long as the basic fabric of village life was left undisturbed.

What is fascinating about India is that despite being ruled by Muslim rulers for eight centuries and by Christian rulers for two centuries, 80 percent of Indians are still Hindu. This illustrates how tightly knit the fabric of India's village society is.

With basic survival not a concern, India's village society over millennia and centuries evolved practices, rituals, and beliefs that perpetuated their desired way of life and made the system so rigid that nothing could dislodge it.

THE ROLE OF THE FAMILY

India is a paternalistic society. In villages, agricultural land belongs to the family or the patriarch and is passed down to sons over generations. Sons and their families live together with their parents in the same house and work together on the family farm. Women are usually responsible for the cattle and dairy farm together with raising the family and taking care of the household.

In northern India, at the time of marriage, the girl leaves her parents' house behind and moves into her husband's joint family house. The girl severs all economic ties with her parents and brothers at the time of marriage. At the time of marriage, the girl brings with her a dowry from her parents' home to her husband's home. Many different theories exist to explain the origins of the concept of dowry. One theory that resonates with a large number of people is the idea that since the girl severs economic ties with her parents and brothers, she takes her economic interest in the joint family with her to her husband's household as dowry. This practice has become very corrupted over centuries and has put girls, especially in poor households, in such hardship that the government of India has banned the practice by law. Dowry, however, remains widely accepted and practiced throughout India.

Weddings play a very important role in Indian villages. It is almost always considered a marriage of two families. In some tightly knit communities, it is even considered a marriage of two villages. In times past, weddings would last for weeks and all members of the village would work together to welcome their guests from the other village for the wedding and would participate in the celebrations and festivities.

SEVEN GENERATIONS

Given that village life was quite stable, static, and did not change much from generation to generation, the concept of lineage and family name became very strong. If one is successful in one's ventures, it is believed in India (and often true) that one's seven succeeding generations live well and prosper. The reverse is true as well. Debts in Indian villages are not forgiven at death and are considered the burden of successive generations. It is believed that if one fails in one's ventures, then the burden of the misfortune haunts one's seven succeeding generations.

Family name and reputation became a strong anchor in India's value system. Feuds between families and associated revenge across multiple generations became part of folklore.

Property rights and property ownership became closely integrated into the fabric of the Indian family system. Since property continued to be owned by families through multiple generations, the title and ownership of property was conventionally associated with family and family name. Confiscation of property by the crown or the state was not possible, and the entire village system would rally behind such blasphemy.

Indians in villages lived in joint families and sacrificed many of their independent freedoms to fulfill the wishes of their elders. The unwritten rule of the joint family system was that one's children would do for one what he or she did for his or her parents. Elders provided support, stability, and counsel to their younger generation, and the younger generation cared for their elders in their years of need.

Given that families shared joint fortunes, getting one's son settled in work or business was the equivalent of investing in a pension plan or investing for retirement for most fathers. And caring for one's elders, especially in sickness and old age, was a very important attribute of the Indian value system.

There is a popular joke about the Indian farmer who is toiling away on his field in the hot sun when he hears the news about the birth of his son. On hearing the news, he puts away his implements and decides to sleep under a shady tree. A passerby asks him why he is not working and he replies that he no longer needs to; he says that he is the proud father of a son and his son will now carry his burden.

Sibling rivalry is also a historically well-documented attribute of the Indian joint family system. Families in their unity would routinely shield the incompetent members of the family, and the competent members would carry the burden of the entire family. Occasionally, the competent sibling would challenge the burden of the incompetent one and families would break apart. Indian folklore sympathizes with the underdog, and popular opinion always divides individuals into two categories: the incompetent and kind sibling, and the competent and callous sibling.

Sustaining the joint family system is becoming difficult in modern India. As India urbanizes, the joint family system is breaking down. Since incomes in urban areas are often the outcome of individual effort and not derived from a family estate, cross-subsidization of nonperforming members of the family is often unacceptable and results in family splits. Cost of housing in urban areas also makes it hard to build and live in large dwellings that can accommodate a joint family. Joint families in urban areas have therefore become the privilege of the rich.

As Indians become more educated and experience demand for their talent from around the world, families have started splintering. One very frequently finds elderly couples with empty nests living in urban India, while their offspring study or work and live abroad. Parents seldom wish to follow their children and usually prefer staying behind in familiar surroundings.

CASE STUDY: The Saga of the Ambani Brothers

One of the most spectacular family splits of recent times was that of brothers Mukesh Ambani and Anil Ambani of the Reliance Group that broke into the open in November 2004. The feud had been simmering in private since the death of their father and patriarch, Dhirubhai Ambani, in July 2002.

Reliance Industries Limited (RIL: IN) at the time was among India's top five companies ranked by market capitalization as well as profitability. The publicly fought battles between siblings had significant relevance to financial markets as millions of minority shareholders, including institutional investors from India and outside India, were impacted by the mudslinging and media battles fought by the brothers. It took the intervention of no less than the finance minister of the country to sort out issues between the brothers and to help them arrive at a workable settlement.

What amazed observers was that assets worth billions of dollars changed title between siblings and not a dime in taxes (estate, wealth, capital gains, or income) was paid in the process.

The feud lasted for several months in the public domain, and an official settlement was reached only in August 2005. Several large investors exited their investments in stocks of companies belonging to the group during this time. Some were genuinely concerned about the potential value destruction that would take place in companies of the group as a result of the public feud, and some others were disgusted by the blatant disregard for corporate governance and minority shareholder interests that was exhibited.

However, for those who understood India and understood the motivations behind the feud, the feud itself was the biggest reason to invest in companies of the group. The brothers were fighting (at least apparently) over different points of view related to unlocking of value in companies that were embedded inside Reliance Industries.

The messy process aside, there were a few bets that one could easily make. First, there was unlikely to be any value destruction in the process, as both brothers were focused value creators. Second, having gone down the path they did, a split was inevitable and likely to be reached sooner rather than later. Family splits in India have happened for centuries and are par for the course. Third, whatever the eventual split combination, the sum of the parts that emerged was likely to be greater than the whole that existed presplit.

It turned out that the demerger of the subsidiary companies from Reliance Industries was one of the biggest value-unlocking events in the history of corporate India. In November 2004, Reliance Industries stock traded around INR550 per share. By August 2005, when the split was formally announced, the stock had moved up to INR750 per share. Shareholders who weathered the uncertainty surrounding the family drama were rewarded for their patience. However, even for those investors who bought the stock once the split was announced, the family settlement created tremendous value.

The demerger was completed in February 2006 and by April 2006 the value of the shares of Reliance Industries and the market value of the shares of the demerged companies that were given to Reliance Industries shareholders aggregated INR 1,300 per share.

Events that might have concerned distant observers became big value-creating opportunities for investors who truly understood the motivations behind India's family systems.

COLONIALISM AND ITS IMPACT ON INDIAN VILLAGES

The British came to India as traders. They were surprised at the ease with which they were able to divide and conquer India's small and prosperous princely states. The English East India Company became one of the earliest corporations in the world to have a standing army. It wasn't until the armed mutiny of 1857 that the British Crown took over the administration of India.

The British were great administrators. While they were able to overthrow rulers and bring the entire country under the British Crown, the rigidity of India's village systems frustrated them and posed immense challenges. They were able to shake up the system in some places and miserably failed in several others.

They surveyed the entire country and established undisputable land rec­ords and titles that had not existed before. They also created a land-owning noble class called zamindars that were endowed with the ownership and administration of large parcels of land often spanning several villages. This made the villagers landless laborers and created tremendous resentment among them.

Land has been a very sensitive subject in India for millennia. Since villages were insular and subsistence oriented, the importance of land in village life was immeasurable. Alienating one from one's land was probably the biggest punishment one could give an individual and his family and most often resulted in destitution and abject poverty for them.

In fact, land redistribution among landless farm laborers was one of the big reform activities undertaken immediately after independence by the government of India. However, the government wasn't able to do enough. The eastern part of India with the state of West Bengal at its center was at the heart of the zamindari movement in British India. It was here in a tiny village called Naxalbari that Marxist revolutionaries started armed agitation for land redistribution among landless labor. The movement was called the naxalite movement and gave birth to the Communist Party of India. The movement has since morphed and has become a big menace for law and order in India.

CASE STUDY: Tata Motors and the Singur Protest Movement

When Tata Motors (TTMT: IN) announced the Tata Nano in 2006 as the middle-class Indian's entry-level car with a previously unthinkable price tag of US$2,500, the company's chairman Ratan Tata and stories of frugal Indian engineering made it to the cover of every business and engineering magazine around the world. The Tata Nano was hailed as the innovation of the year in 2006 and in 2008 Time magazine named it among The Dozen Most Important Cars of All Time.

However, by 2011, Time had written an article about the Tata Nano titled “The Little Car That Couldn't.” Behind this dramatic turn of events was one of India's most infamous land protest movements, centered in the tiny village of Singur in the Indian state of West Bengal.

West Bengal is one of India's poorest states and one of its least industrialized. Ratan Tata had wanted to play the role of benevolent captain of Indian industry and had decided to gift the Tata Nano project to the state of West Bengal. For its part, the state government had rolled out the red carpet for the company and for its army of component suppliers and subcontractors.

The site chosen was the village of Singur on the outskirts of the city of Kolkata (previously known as Calcutta). By his own admission, Ratan Tata had highlighted that Singur was an inhospitable area to locate a mega car factory. Like much of the state of West Bengal, Singur was flooded under water for half the year and the level of the land had to be raised significantly and at great expense to enable the construction of the factory complex.

However, within a few months of the nomination of Singur as the site for the Tata Nano plant, the village erupted into protests against the setting up of the car factory. At first, it seemed like expected clamoring by villagers for higher compensation for their acquired land. But the protests refused to die down. In fact, within a short time, the protests became so heated that it brought in the involvement of the political opposition in the state. The issue became a media circus and baffled India and the rest of the world. No one was able to understand why the people of the region were protesting against one of the biggest employment-generating opportunities to come their way in decades. Only 1,500 farmers were affected by the dislocation, and their land was being cropped only once per year compared to three times a year elsewhere in West Bengal. One could clearly see that the potential employment that would be generated from the factory would far exceed any loss of farm livelihood.

The government of West Bengal used the archaic 1894 imperial law called eminent domain to acquire land in Singur to hand over to the Tatas and did it in a forceful manner. This touched a raw nerve in the population of Singur and the state of West Bengal. The poor and illiterate farmers of this sleepy village were willing to fight to any extent and were willing to sacrifice all future employment and prosperity opportunities in order to safeguard the right to their land and to their property. To them, it was not an issue about economic benefits and development but rather one about their individual freedom and their rights to their property.

Tata Motors subsequently decided to shift its mega factory from Singur to the Indian state of Gujarat. The Singur episode doomed the Tata Nano, and Tata Motors and its suppliers incurred significant losses in the entire process. Tata Motors' stock price declined from INR180 in early 2006 to INR80 in September 2008, even before the Lehman Brothers crisis erupted. By the end of 2008, the stock was down to INR30 and had fallen by 84 percent since the announcement of the Nano project.

People took away different messages from the happenings in Singur. Foreign investors looked at the drama wearily and wondered what chance they stood of investing in India if one of India's most respected business houses had faced such trouble in making a transformational investment. The events no doubt cast a long shadow on India's credentials as an investment destination. In my opinion, they failed to pay sufficient heed to the underlying reality behind the events at Singur.

However, my bigger takeaway from the Singur protest movement was that of the sanctity of property rights in India. The protests clearly demonstrated that property rights in India are inviolable. No government or private party can forcibly steal property that rightfully belongs to someone else in India—at least not en masse. This single fact gives me tremendous comfort as an investor in India.

The British also established a strong judicial system with a civil and criminal code based on English common law. While in earlier times disputes in each village were resolved by the elders of the village based on traditions and beliefs of that particular village, the establishment of a uniform code gave people a chance at natural justice. This did not go down well with the rigid Indian village system either. The British rulers succeeded in a limited way in enforcing the criminal code; however, in civil matters, the individual decisions of the village governing council continued to reign supreme.

In the India that emerged post-independence, land titles, together with an independent judiciary, for the first time empowered landowners in villages and gave them the ability to trade their property and to leave their village for a life in cities that were being newly built.

Although the process was slow, the changes had slowly but surely started altering the status quo that had existed in India for centuries.

DEEP-ROOTED BELIEFS AND ASPIRATIONS

It is often said that one can take the boy out of the village, but it is very difficult to take the village out of the boy. The story of the belief systems and aspirations of Indians is somewhat similar. After centuries of having nurtured value systems that sustained village life, Indians, even those who live in urban areas, have deep-rooted beliefs and aspirations that resonate with their past. While urbanization has affected these belief systems in significant ways, in many ways the belief systems have remained the same.

For investors, it is very important to understand these belief systems in order to understand why things happen the way they do and in order to make better-informed guesses about future outcomes.

Affinity for Land

Having lived in agrarian villages for millennia in rigid joint families and having survived on subsistence agriculture, people in India realized at a very deep level the importance of owning land. Every family owned and was expected to own land in the village, which was cultivated by them and was the source of the family's livelihood. Land was not only a source of income and livelihood but also an insurance policy against unforeseen difficult times. One of the manifestations of difficult times was when a family was forced to sell its land for extraordinary circumstances. The family was then considered bhumiheen, or landless. Being bhumiheen was considered a big stigma in Indian villages.

If a son sold his family's land to pay for his misadventures or to provide capital for a venture, his father would chide him that he had made his father bhumiheen. This was a big burden on the son and a big source of grief for the father.

This affinity for owning land manifests itself in interesting ways among urban Indians. While in most parts of the world, land is treated as the raw material for building a usable real asset like a home or a commercial building, in India, a large part of the time, land is treated as a consumption item that provides its buyer satisfaction in ownership, never to be used for any purpose whatsoever. Urban Indians, without regard to their income level and wealth, exhibit a strong desire to own vacant land. This desire to own vacant land is in addition to their desire to own a home to live in.

Driving along highways in India, one often finds developments that are nothing more than large parcels of land that have been plotted into smaller housing lots with internal roads and basic infrastructure built out. While these are often marketed as potential housing sites, their strange locations with large distances from existing inhabitation clearly give away the fact that their buyers have no intention of building homes there for a long time to come. Developers of these sites create projects that serve all income strata of Indians. It does not hurt that large amounts of unaccounted or black money is used in land transactions and that it permits individuals to stash away their illegal income as savings for the future (more about that later). The wealthiest Indians, for their part, tend to own vacant parcels of land in prime locations in Indian cities without any intention of selling or developing them.

The ownership of land for consumption distorts the market for homebuyers on the fringes. One often hears people complain that homes in India are unaffordable for the average Indian and that home prices are far higher than affordability based on income levels would suggest. Observers have warned of bubbles in Indian land prices for decades. The warnings have become especially loud in recent times.

In my opinion, there is no bubble in land prices in India. This is because there is no leverage used in the purchase of land. The Reserve Bank of India prohibits banks and financial institutions from making loans against and for the purchase of vacant land. I agree that a certain amount of concealed leverage does find its way into the land market, but the amounts are not alarming or significant.