Gir's Sons have India Roaring, on the Cricket Pitch… and Off it Too!

Investment advisors have been selling the potential of 100 crore Indian consumers to investors across the globe for the past 20 years with excellent success – for the advisor. But, investing in that potential has always led to investor gloom and doom. The potential was always there but somehow India always found a way to overpromise and underdeliver, just like the Indian cricket teams that left with tremendous promise for Australian tours, but those expectations almost always came crashing down like a house of cards.

However, today’s India is writing a new script, in cricket and as an economic powerhouse. The potential of 100 crore wallets that was entangled in the web of black money, oppressive taxation, poor infrastructure and expensive logistics in finally unlocked. Demonetisation, Digital Payments, GST and Tax Compliance reignited the hope that this was finally India’s moment but building out rural consumption points was expensive, and it took years if not decades. Unlike the previous failures, this time the economy and the cricket team had those two pieces that have alluded an Indian victory. Interestingly both of those pieces, whether it is the economy or the cricket team, find their roots in Gujarat.

The ability to battle ahead on the trickiest of pitches, facing the most abrasive oppositions and weathering the relentless media attack requires grit & determination. That role has been perfectly essayed by Cheteshwar Pujara who not only blunted the opposition but took the fight to the opposition while the others built around him. Prime Minister Narendra Modi did the same for the economy. The PM’s economic policies improved throughput of government subsidies to the neediest through the smart utilisation of Aadhar. He filled the government’s empty coffers by increasing tax revenues through higher compliance and bringing in the fear of evasion. He also took the fight to the opposition by calling out their “Accidental PrimeMinister” and allowing his team to build better infrastructure, bail out the near bankrupt banking sector and amicably improving or destroying the relationships with our neighbours.

All this gunpower required a spark to explode from someone who would have the planning, intelligence and the pace to bamboozle the opposition. Jasprit Bumrah did that to the Australian batsman, while Mukesh Ambani’s Jio did that to the telecom sector, forcing into submission. Jio’s introductory offers were like Bumrah’s deadly bouncers, Jio’s fast and extensive network like Bumrah’s yorkers and their strategy to hook a user to their content ecosystem was like Bumrah’s slow yorker to Shaun Marsh, it bamboozled them.

The results that India and the world has been waiting for are finally here. The cricket team is 2 wickets away from winning their first Boxing Day match in history. It is a moment that 560 million Indians can watch tomorrow on their Internet-connected devices, a first too. This maturing of India’s potential has driven a record amount of FDI into the country, almost $40 billion flowing in 2018, a whopping $7 billion more than China, a first again, in 2 decades.

The results have taken time and we have endured pain, but the victory is near and will be comprehensive.


Rewriting the India Investment Narrative

Over the last 3 weeks, I attended 3 family office conferences, where I was one of the very few Indian (India-based) family offices/venture capitalists representing our nation.

At these events, I noticed that many global investors are keen on investing money in India, but sceptical from having burnt their fingers the last time around.  Some of the reasons (verbatim or paraphrased) for their scepticism include:

  1. Investment managers who deviated from the investment idea that was originally pitched and subsequently lost money
  2. The complicated and tedious procedure to get money out of India for winning investments
  3. Overzealous tax authorities that terrorized investors
  4. A lack of strong legal recourse to bring Investee companies who siphon off money and fraudsters to task
  5. India being a tough place to do business and an even tougher one to make money

Although I agree that India is one of the toughest places to do business, I can proudly say that over the last 5 years the government has made significant structural reforms to make it easier to do business, invest, realize returns, curtail the proliferation of black economy and most importantly, bring economic offenders to task.

While these messages are clear to those who continue to maintain a presence in India despite the hardship of previous decades, they have not been effectively communicated (or if at all) to the investors that are generously pouring money into China and other competing nations purely based on hygiene factors.

So, I continue to make my impassioned pitch about how there might never be a better time than today to invest in India- the largest democracy and fastest growing economy in the world. Despite all its hardships, India has independent institutions, a robust banking ecosystem, a free-floating currency, and an equity market that has delivered 600% returns since January 2000 (Shanghai has returned 44%). Bottom line being: India cannot be ignored.


PSA: On the lookout for Consumer Brands

The Indian wallet is growing larger. A recent estimate predicts that the per capita income for India will rise to $4,000 by 2030 from the current figure – $1,650. The consumption habits, as well as the points of consumption, will undergo significant transformation due to 3 major factors i.e. better supply chain infrastructure, ease of doing business under GST and penetration of the internet.  
Internet penetration will hit a significant milestone in the next 12-18 months when over 50% of Indians will be connected to the internet, primarily through a mobile device. These mobile internet connections are quickly transforming into consumption nodes through which the Indian wallet gets access to new consumer brands that provide alternatives to the brick and mortar brands that are available offline in Tier 2, 3, 4 towns.  
Although the demand for alternative brands has existed for a long time, poor infrastructure and complex inter-state trading laws prevented entrepreneurs from pursuing such ventures. As an early stage investor, I too avoided investing in such ventures as these companies required significant capital expenditure to create the framework to supply goods across the country. Secondly, founders had to generate a ton of illicit funds to pay-off tax & bureaucratic terrorists that always found fault in operations.  
GST broke down these barriers and made it easy for start-ups to set up a warehouse in one state and supply their products across India. In addition, the improvement in supply chain infrastructure & connectivity, help in paying off rich dividends for ventures. Therefore, our fund team is actively looking out for consumer brands to invest in, from mattresses to packaged food. 

Book Review: Kranti Nation: India and the Fourth Industrial Revolution

While attending the Web Summit in Lisbon I met Pranjal Sharma, the author of Kranti Nation: India and the Fourth Industrial Revolution, for breakfast. As passionate students of economics, innovation & start-ups we immediately got engaged in deep conversation about Indian consumer’s behavioural shift and how that was significantly changing the start-up ecosystem in India. As we were getting ready to leave for the summit, he handed me a personally signed copy of his book. Interestingly enough (at the time), I was reading The Fourth Industrial Revolution by Klaus Schwab. Prof Schwab has also written the preface for Kranti Nation.  
 What I like about this book: 
Indians tend to underestimate the tenacity of the Indian entrepreneur – new and old. Kranti Nation provides ample examples of Indian entrepreneurs who have not only kept pace, but also led evolution during the fourth industrial revolution. The stories about age-old businesses, like the Kirloskar Brothers, Mahindra, Marico, Reliance, Honeywell, etc which I would imagine as having outdated, out of sync management systems pleasantly surprised me. The stories of Kirloskar Brothers implementing 3D printing, Marico’s utilisation of IOT and especially the one about Renault Kwid were exciting to read.  
Some of these stories completely negate the story line that the industrial IOT or 3D printing start-ups put out in their pitchbooks.   
What I didn’t like about this book:
The book is written as a collection of essays of 10 different sectors, and in many places, there are overlaps of the same technology influencing different industries. I felt that it would have been a tighter read if the author had focused on how each new technology was changing the dynamics of multiple different sectors and structured the longer essays around the technology instead of the industries.  
 The chapters towards the end reflected the fatigue of trying to cover too many points in too little space. There are outdated facts with companies like Educomp being profiled as leaders of the education sector tryst with revolution, even though Educomp has been in a downward spiral for the past 7 years. Some company profiles read like sales brochures with too many unnecessary details & histories that are not relevant to the objective of the book. In some ways I think the second half of the book disappointed the promise that the first half held.  
 Who should read it? 
 This book is relevant for all readers especially those investors or entrepreneurs who are seeking to enter the B2B space. India is changing, and this book provides an ample number of examples of it.  

Cross Subsidy Surcharge: A Dacoit in Robinhood’s Clothing

Robin Hood
The verb “cross subsidize” as defined by the Oxford dictionary is “Subsidize (a business or activity) out of the profits of another business or activity.” But what happens if that industry is facing the awesome prospect of losing $27 billion per year from 2017 onwards as reported by the World Bank? To put the number of $27 billion into perspective, it is equal to the entire nominal GDPs of Nepal and Zimbabwe… combined!
In my honest opinion the in-sync folks at Wikipedia have defined “cross subsidization” aptly, as “the practice of charging higher prices to one group of consumers in order to subsidize lower prices for another group.” When I read that definition is immediately reminded me of a heroic outlaw in English folklore, Robin Hood, who is famously known for “robbing from the rich and giving to the poor”. In this post and the many more that I intend to write, it is my intention to bring to your attention the malaise that has spread in the Indian Power setup from the introduction and the subsequent revisions in what many of us see as a harmless line item in our electricity bills.
The current scenario in the Indian power sector is very grim when one concentrates on the sheer magnanimity of the numbers.

  •  India possesses the 5th largest power system in the world
  • 21% of the power generated by the India power generation companies is lost during transmission
  • Bangladesh loses a mere 10% in comparison
  • A World Bank report on June 24, 2014 stated that more than 300 million Indians (the entire population of the United States) still live without electricity today
  • 200 million of them live in villages that are supposedly “electrified”
  • The same report also stated that the sector was bailed out in 2011 with 1,90,000 crores
  • That number exceeds the GDP of Bahrain by 10%!
  • The sector was bailed out in 2001 with 35,000 crores of the tax-payers money

These poor metrics and massive bailout could have all been forgotten if the sector was aiding in “amp”ing up India’s GDP but when a FICCI report in 2013 points out that India loses $68 billion or Rs. 4,14,800 crores of its GDP due to power outages – it is time to sit up and take notice.
In my opinion the CSS (short form for Cross Subsidy Surcharge) is a dreaded dacoit that keeps raids the rich to buy narcotics and give it for free to the poor which give them the temporary high but the dacoit maintains its stranglehold. It should be noted that CSS was introduced by the previous BJP government when it passed the Electricity Act of 2003 and opened the power sector for competition. The intention at that time was to give the government run power companies some compensation for losing its customer base to cheaper and more efficiently run private power producers while they restructured themselves for this competition.
However this well intentioned move, atleast in hindsight, acted like treating a heroin addict by feeding him some more heroin and asking him to cure himself by reducing the amount of heroin he takes… such an approach rarely works! The government run entities latched on CSS like a lifeline and 6 years after CSS was to be abolished it is being used as a ploy to keep out competition and to harass consumers of power that can get cheaper power but that will not be in the best interest of the utility. The utility will tell you that they need CSS to provide free or low cost power for the agriculture sector and residential consumer but subsidization for one industry while upsetting the apple cart for all other industries is preposterous if not just plain illogical.
In certain states CSS is more than the cost of making power! For example TANGEDCO now charges a CSS of Rs. 3.40 to Rs. 3.61 per kwh while Maharashtra charges a CSS of Rs. 2.30 to Rs. 2.75 per kwh and both have increased their CSS in the last year. To see how ridiculous and anti-competitive these tactics are, just open the last annual report of Tata Sponge as available on its website. Their cost of power when they generated it for themselves was Rs. 1.47 but when they buy it from the open market or the utility the cost is upwards of Rs 8 – a large chunk of it attributable to the enormous CSS charges that are forced onto the customers.
This anomaly has led to a deathly downward spiral, one where the large users of power find it more feasible to own and operate captive power plants versus buying power from the open market or the utility. This leads to loss in valuable and profitable revenue for the entire industry – the power generator, the power transmission utility and the power distribution utility. The 3 are then stuck with power consumers that get power ridiculously cheap and below cost rates ranging from 0 (yes nada) to Rs. 2 per kwh and in the effort to balance their budgets they have to keep increasing the CSS charges and therefore driving out competition and customers too. This also has an adverse affect on inflation as electricity is a key cost for most industries.
In conclusion new government would serve the nation by ending this madness and abolishing the practice of CSS once and for all. If states want to subsidize power for residential and agriculture they should use their state subsidies budget to do the same and not lay the burden on other industries by charging them what is in effect an agricultural tax. Abolishment of CSS will give power and other industries the much needed shot in the arm (pun totally intended) to spur growth in the industry through an increase in power generation plants which will increase long-term employment and generate an affordable and growth filled future for our country.