India Business and Finance, August 8th
What happened in the Indian economy over the past week
The most important business story of the week disappeared
Infosys, the IT giant, was hit with a massive $3.9bn bill for not paying a goods and services tax on services it essentially provided for itself overseas. As with all of these things, the details are bewilderingly complex. The assessment shows the reach and aggressiveness of India’s revenue service and how it can impose a destabilizing hit. Infosys’s share price seemed to take a genuine hit.
For an individual or ordinary business, the next step might be years of litigation and possibly a partial settlement. Even tycoons like Mukesh Ambani have tax cases that go on for years (though he always seems to win in the end). The attack on Infosys followed a different path. Infosys denied the validity of the claim and it was joined by NASSCOM, the industry trade group. Implicit in the objection was the threat that the tax can gut the IT services industry, one of India’s most important and one whose growth has often been ascribed to the notion that it is too complex to attract the meddling of the government (and the revenue service). Nasscom reportedly said the claim reflected a lack of industry understanding by the tax authority.
Complaints in India are common; fast results are not. This time was different. The revenue service put out a muddled message revising the claim radically downward with vague statements about more information requests to come. This is widely interpreted as a face-saving retreat. The message for any company doing business in India is to be prepared for what can happen and understand what comprises an effective response. It is possible that Infosys is one of the few Indian companies that could have pulled this off. No sooner had this matter gone away than a report emerged of a tax case against Mahindra & Mahindra, a conglomerate producing tractors and cars among other products and services. It has reportedly received a notice from the revenue service for taxes due from the value of allowing its name to be used by subsidiaries.
Total number of taxpayers
Even if resolved amicably, these tax issue will continue if only because of the squeeze India finds itself in. This year, according to information released last week, a record 73m income tax returns were filed, up from 68m in 2023. The gain is significant but the overall number, in a country of 1.4bn, is tiny. The country’s poverty and the expansive goals of its government are incompatible, resulting in constant pressure to extract ever more revenue out of the very few entities that can pay.
Asking the big questions
Has the Modi Administration lost its mojo? Since the election big proposals have been all but missing as have key details to enable ones raised in the past to go forward. In India getting things done in the best of circumstances is hard. There are reasons to be happy about a coalition government but expedited reform may not be on the list.
Employment
A new government survey of informal business shows a slight expansion in the number that are headed by women–22.9% in the fiscal ending at the conclusion of the 2023 fiscal year compared to 19.5% in the year end in March of 2016.
Formal business
The number of new businesses registering with the Employees’ Provident Fund, a measure often thought to reflect the growth of formal companies, reached 294,256 in the most recent fiscal year, concluding at the end of March. That is certainly the best result in five years and may be a record.
Family business
McKinsey reports that Indian family-controlled businesses, which are most businesses, have higher than average returns. That is somewhat surprising and requires closer examination but is interesting if true. Slowly, many families are bringing in merit-based outside management to replace entitled children but it is a long process. Ultimately, it is hard to imagine many of the largest family businesses will stay in family hands. The largest question hangs over the Ambani children. The wedding of the youngest of the three, Anant, has been endless. Do the children even want to run a company or will Reliance shift to outsiders, as with what happened with the Rockefeller’s as they moved out of Standard Oil. Gautam Adani, patriarch of the other major conglomerate, disclosed that his vast empire will remain intact under the succeeding generation after his retirement, though no one really expects him to retire. Other families, notably the ones controlling the large TVS and Godrej industrial empires, have recently split to enable different branches to have their own operations.
Chinese steel dumping
Steel imports rose 38% in fiscal 2024. The domestic steel industry is investing heavily and contends cheap imports from China will derail their efforts. This is merely the most recent flash point in trade and business between the two countries with the added twist that the steel, though originating in China, might be routed through South-East Asian countries - further complicating trade relationships.
Where capital is going in India
The real estate sector has been hot and global money has played a role. A survey by Knight Frank says India has a 9% share of all money going into APAC, trailing Australia, Japan, Singapore and Greater China. The biggest single recipient has been Mumbai, largely for warehouses. Bangalore has received the largest residential investment and Hyderabad the most for offices.
Stockmarket
Another record (followed by a slight slip in the global route), another big round index number exceeded if only briefly, in this case 25,000 for the “nifty 50”, which includes the largest Indian enterprises. The index crossed the 20,000 mark in September, 2023. So far this year, the biggest changes have come from the auto sector, up 43%, followed by realty up 37% and then energy, up 34%. The index overall has been up 15.1%, with lagging sectors including IT, up only 14.5%, financial services, up 9.1%, consumer goods, up 9.1%, and banks, up 6.8%. Writing about things like cars and motorcycles seems like it is business coverage from a different era but as the sharp price appreciation shows, these companies are dynamic components of the Indian economy.
Gridlock
Or maybe too dynamic. The Economic Times reckons there are now 4.8m vehicles in Mumbai, with another 721 being added every day. Much of this is because of the poor alternatives. Passenger trains are famously overcrowded with riders often waving at each other across the tracks (see picture above) but also reports of people falling out of carriage doors to their deaths. In the face of this, the local government is introducing, or reintroducing, another mode of transportation, by revising a 2018 effort to bring back the horse mounted police unit that was put to rest in 1932. They will now need to squeeze onto the roads along with the cars, pedestrians (who often lack sidewalks) and, of course, the cows, goats and stray dogs.