Why India is hip for venture and private equity investors?

It’s hard not to feel a tremendous sense of optimism about India’s economic future considering the dramatic pace at which India is progressing. This is why I like to compare India to a rocket ship that has taken off - a country transformed from a third world, agricultural-based economy to a high growth services-led powerhouse. Indeed, the numbers prove that India is one of the fastest growing economies in the world. Its GDP grew a whopping 9.4 percent last year to U.S. $1 trillion and is projected to grow at 8 to 9 percent over the next 5 to 10 years. The Indian stock market has grown 400 percent over the past 5 years. At the same time, India is also experiencing exponential domestic demand due to a growing middle-class that is 300 million consumers strong now. Of India’s 1.1 billion people, half are under 25 years old and 65 percent are of working age, which is an asset in itself.

Still, too many people equate India’s economy with the strength of its IT and IT enabled services (ITES) industry, looking at the leaders like Infosys, TCS, and, Wipro. Analysts estimate that the market for offshore IT and ITES will grow to U.S. $140 bn by 2014 from its current U.S. $50 bn base. While India will remain a powerhouse in IT and ITES, the past five years have brought a raft of new businesses that have risen to global prominence in several other sectors including: manufacturing (Bharat Forge), pharmaceuticals (Ranbaxy), infrastructure (Reliance), energy equipment (Suzlon), retail (Pantaloon), telecom (Bharti), financial services (ICICI Bank), CD-ROM manufacturing (Moser Baer) media (NDTV), and hospitality (Taj Hotels).

It’s not commonly known that India is the largest manufacturer of motorcycles, second-largest maker of small cars, and third largest manufacturer of automotive components. In the pharmaceutical industry, India has quietly become the fourth-largest producer of pharmaceuticals, while also showing the ability to innovate with the second-largest number of drug master filings. It is also one of the largest exporters of steel, has one of the largest forging facilities in the world, is among the largest consumers and producers of energy in Asia, the second-largest manufacturer of CD ROMs, and so on.

Additionally, India’s limited infrastructure has continued to pose immense challenges and opportunities. India’s infrastructure requires massive investments in airports, roads, dams, railroads and power, which is happening at the moment. While power reliability, living conditions, and road congestion are improving, they are still nowhere near the levels that businesses enjoy in the U.S. India is only at the beginning of an enormous infrastructure build-out, and spending is expected to rise to 13 percent of its total GDP by 2008-2009 from 10 percent in 2004-2005.

Finally, India has a strong liquidity environment for companies. All told, there are 9,000 publicly listed companies on the BSE (Bombay Stock Exchange) in India. It’s easier for companies to go public in India today than it is in the U.S. The IPO environment in India today is reminiscent of that in the U.S. from 1980-1994. India also boasts one of the largest M&A markets in Asia with U.S. $50 bn spent on deals just in the first half of 2007. Private equity and venture investment tripled to U.S. $7.5 bn in 2006, and the first half of 2007 has already seen U.S. $5.6 bn in new investments.

Yet to make this happen means accepting the challenges of doing business in India. First, there are cultural differences between India and the U.S.-based entrepreneurs that need to be overcome. Then there are differences in accounting, tax, legal standards, and government policies to consider. The time-zone differences and geographic distance between India and the U.S. make running a successful venture capital or private equity practice remotely no simple a feat and it requires a local presence in India to do business efficiently.

Despite these challenges many advances have been achieved due to the following advantages that will provide ample future opportunities for investments:

* The abundance of well-educated and trained human talent,
* Low capital requirements,
* India’s global competitive advantage not only in IT services but also in discrete manufacturing, knowledge services and pharmaceuticals,
* A wealth of opportunities to create new companies providing goods and services for the emerging consumer middle class, and
* The associated domestic infrastructure build out.

With a healthy and well-regulated exit environment, adherence to U.S.-style GAAP accounting standards, IP and corporate law investors will continue to see significant returns. For investors brave and savvy enough to navigate the crowded streets of Indian cities and patient enough with the red tape (which is any way less tight nowadays), India brings incredible opportunities and tremendous rewards.