India's Good Karma

It's the world's largest democracy, its technology sector is going gangbusters, and its stock market returned 34% annualized over the past five years. What could go wrong? As it turns out, plenty. So before you commit a nickel to investing in India, you'd best read In Spite of the Gods: The Strange Rise of Modern India (Doubleday, $26).

Smart investors know that stability, not profits, is the prerequisite for success in emerging markets. But you won't find a quick answer to the question of India's stability -- it's built neither on quicksand nor bedrock.

Unlike homogenous China, India is formidably complex -- an amalgam of Hindu, Muslim, Sikh and Christian populations layered in a fading caste system. Some 750 million of India's 1.1 billion people live in villages with inadequate health care and no schools, reports Edward Luce, the author and a Financial Times writer who spent five years in India.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

The country's economic upswing began in 1991, when it ended a stifling system of controls and permits, the so-called License Raj. Since then, technology businesses, in particular, have taken off, although they still employ only one million people. In fact, only 35 million people in India have formal income to pay taxes on.

India has both powerful advantages and big disadvantages, says Luce. On the positive side: diversity, democracy, a young and hungry workforce, and a free media and judiciary. On the negative end: poor infrastructure, pollution, a growing AIDS epidemic, heavy-handed government regulation and corruption.

So India is a shifting mosaic, and Luce won't hazard a guess as to how the pieces will fall into place. But investing in India is worth the risk, long term, despite the volatility. The book's key takeaway for investors: "India's growth potential is even more striking if you consider how much has been achieved with so little."