Investment in Mumbai and Shanghai (page 1 of 2)

The reason for this lack of development of the infrastructure in the inner city is a maze of totally antiquated property laws that have prevented landlords increasing the rents on the premises they let out, with the result that they have no incentive to maintain their properties in good condition.

Furthermore, tenants have the right to stay in their apartments for as long as they wish, and the children of tenants can even inherit the leases taken out by their parents, many of which date back to before the Second World War.

A friend of mine told me that years ago he inherited an apartment building in the city for whose apartments he is collecting a rent of less than US$1 a month! This lack of any property development over the last 25 years, unlike elsewhere in Asia, is also interesting given that economic activity is shifting to the outskirts of the city and to other regions of the country. Here India's totally incompetent government is unable to hamper economic development to the extent that it has in Mumbai's inner city

Still, what is reassuring about India is that, despite its horrendous bureaucracy, entrepreneurs have thrived and India is now home to many very promising companies doing business in all kinds of sectors, but especially in the fields of pharmaceuticals and software. The good news, not only for India but for the entire global economy, is that entrepreneurs are like rats who manage to survive in just about any environment, no matter how difficult. And that they show an impressive ability to adapt to even the harshest commercial and legal infrastructures by developing a high degree of immunity to these unfavorable conditions.

Moreover, entrepreneurs can mutate rather quickly in order to take advantage of opportunities in sectors such as software, for which there were no government impediments or regulations in India. Such is the power of free markets over bad governments and governments' interventions in the economy.

Yet it is discouraging to see Mumbai, the business capital of the world's second-most populated country, lacking a large foreign business community, such as we find in New York, London, Tokyo, Singapore, and Hong Kong. This is because of the government's inability to provide an efficient infrastructure and a more conducive business environment.

The Indian tragedy is that, in the absence of its bureaucracy and with, to paraphrase Adam Smith, a tolerable administration of justice (an efficient legal system with straightforward commercial laws and property rights), the country could easily grow at around 8-10% per annum - admittedly from a low base. This would boost per capita incomes significantly compared to the present level, which allows the economy to grow at only around 5% per annum while per capita incomes hardly budge.

Still, this may be an opportune time for investors to purchase Indian shares. The Indian stock market, which shouldn't have a meaningful correlation to foreign markets since India's economy doesn't depend too much on foreign trade and foreign portfolio flows (exports amount to just 10% of GDP), is at present extremely depressed. In my opinion, it is discounting to a large extent the country's problems.

In addition, time deposits as a percentage of total market capitalization, which has declined to just 21% of GDP, are now at an all-time high. The various listed India Funds, such as the Jardine Fleming India Fund (JFI), the MSDW India Investment Fund (IIF), and the India Fund (IFN), all sell at discounts of around 20% from net asset value.