When a new investment opportunity is discovered, it's obvious that excitement runs high. However, one must tread with a special kind of caution while speaking about emerging markets like India -- especially India, in fact.
It seems logical to group all the emerging economies like China and India together under a single umbrella. The reality, however, of the Indian markets and its administrative system is comparatively much different from that of China, Brazil, or Russia. For Foolish investors, this calls for a different set of approaches and strategies.
Consider the power sector in India. My colleague Tim Hanson, in one of his articles a couple of months back, identified the power sector as the single largest potential opportunity for American investors looking to capitalize off of India's fast-growth. While all of that is very much true, there is a long way to go before dreams can actually turn into reality. The whole process of setting up things and becoming operational in India can be cumbersome and, at times, very frustrating -- far more so than many people might think.
The lack of a proper energy infrastructure in place is probably the biggest hindrance that foreign investors are going to face in India. Companies will have to start from scratch before they can actually become operational. Allotting a piece of land to a company is simply not enough. The location in itself will, in all probability, be in rural areas with little or no development to count on. That means access to even the basic amenities can easily be ruled out. This may even start with building roads and setting up health-care facilities in the lead-up to the actual building of the plant.
Public-private partnerships are badly needed with the onus on the government to ensure that facilities like banks, hospitals, and airports are up and running. This is generally where things go awry: The wait can become interminably long, and the huge labor force available might not be fully utilized for a significant period of time.
Investing in the lucrative power sector has to be, therefore, graded on a sliding scale. Companies like Siemens
But power is only the tip of the iceberg. In addition to raw power needs, there is the requirement of communications infrastructure, especially the Internet. This is where two significant players in India come into the scene: Tata Communications
Water management is yet another crucial area in which vast improvement is necessary. India has huge resources of water which have yet to be fully exploited. Considering the huge climatic and geographic variations in the country, it would not make sense to rely solely on freshwater stores given the annual monsoon season. This is where government action comes to the fore. Setting up dams and water-treatment plants can take excruciatingly long periods of time. This can worsen when different states start disputing over the amount of water released from the dams if the river happens to pass through various states. Corruption and red tape hinders the various projects already in place, which translates to a significant amount of time lost leading to a delay in becoming operational.
The bigger picture in the long run
Few companies are willing to take the leap and jump into a market when several or all of these problems already exist. Once the platform has been laid for greater growth in the future, however, it's more than reasonable to expect that things will only get easier and rates of growth will accelerate. Potential spin-off plays from a developed power sector in India are huge, for example.
The demand for household and industrial lighting and other household appliances will grow as consumer spending will only rise. Philips Electronics
In all, the number of opportunities in India are vast, but right now they should be availed with a pinch of salt. It's always Foolish to consider both sides of the coin.
Isac Simon doesn't own shares of any of the companies mentioned in the article. Vodafone Group is a Motley Fool Inside Value recommendation. American Tower is a Motley Fool Rule Breakers selection. ABB is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.