India Business and Finance, December 19th

What happened in Indian business and finance last week

Failure of law? Culture? Faith?

Notwithstanding the remarkable educational achievements of the Indian graduates emerging from its brutally competitive IITs and their global role as architects of the new technological order, spending by Indian companies on research and development (meaning the investment to augment their talents) is almost non-existent. A study by The Business Standard using data from Capitaline, a domestic data base that draws information from public filings, showed that 0.3% of corporate spending in the most recent year was on R&D, compared to 0.6% in 2017. Data from other countries is not entirely comparable but it does suggest vastly higher percentages, starting with Israel, then South Korea, then Sweden, Japan, China, America and so on. That leaves the question of why India lags. Possible reasons include limited protection for intellectual property, current and long-term taxation, limited resources and a culture of frugality. Not entirely suffices. A deeper understanding, and response, is needed, if India is to grasp its enormous potential.

Encouraging divestment

One of the great impediments to investment in India - meaning putting money into India - has been constraints on getting it out. Until recently, public offerings have been scarce, as have been acquisitions. Quietly, this year, an alternative has emerged. The strength of the Indian stock market and perhaps changes in how big funds are operating have allowed major global private equity firms including Warburg Pincus, Blackstone, and Everstone to exit through large block trades worth billions of dollars. None of the transactions have been for portfolio companies that are particularly notable. That is oddly encouraging, in as much as it suggests an exit is possible, even the returns are less than staggering.

Diamonds

A new diamond bourse opened in Surat that claims to be the largest office building in the world, topping the Pentagon. It is spread out over 35 acres with a sculpture of a diamond in front (in case anyone misses the point about what might be going on inside). The complex reflects India’s remarkable success in the diamond industry – it is widely estimated to polish in excess of 90% of the world’s rough stones. Buy a diamond ring at the most exclusive boutique or the most plebeian shopping mall and the one constant is that it likely passed through India on the way from a mine to a sale. That said, the new bourse opens at a moment when the industry faces two enormous challenges. The first stems from the emergence of increasingly perfect lab grown diamonds, the second from sanctions on diamonds mined in Russia which, after being routed through various intermediary countries, are a huge component of the Indian business. India’s diamond exports are expected to decline by more than 20% this year and if a single word can be used to describe the country’s diamond traders at the moment, it is “grumpy”.

Rise of state business

The great surprise of 2023 has been the performance of India’s state-controlled companies. Profits and stock market returns for state-controlled firms have soared this year. The Financial Express calculates that the total market capitalization of 85 listed firms has grown 58%, to Rs46.64 trillion ($6bn).  Among the big winners are fertilizers and chemicals, electrification, aerospace, ports and, inevitably, coal, among other areas.

The large returns are a reflection of India’s higher growth and the turn-around in how these entities are managed. Their success is a good thing; they have ceased being a drain on the government till and now make a positive contribution. But with this success there will be less pressure to privatize and thus they will be subject to what now appears to be well-known constraints in public management. The ownership-managerial structure undermines accountability except when a crises demands attention. The very long-term nature of the government holding means there is little accountability from the most important shareholder and the very short-term decision parameters of senior managers, who typically serve very brief tenures on top, means they have no incentive to launch long-term projects. India seems to be moving, haltingly, to an approach where the advantages of being a government entity, notably in eminent domain, are used to acquire the land and labour permissions to start projects which are then, maybe, passed to private hands, which would be a clever evolution. This approach, however, is just beginning and requires a kind of orderly, transparent, bidding process that is a test for even the cleanest governments..

Is India’s central bank any good?

Shaktikanta Das celebrated his fifth anniversary in charge of the Reserve Bank of India (RBI) and one testament to his success is that no one is asking him to leave. The turn-around in India’s state-run banks and inflation that no longer seems abnormal in an inflationary world has raised the stature of the RBI - sort of. Inflation numbers released last week show a jump from under 4% to almost 6%, a trigger point under the bank’s operating rules. And there seems to be no plans to reduce Indian inflation significantly, which would have the benefit of cutting the high costs businesses pay for credit. Many feel this is the single biggest factor holding back Indian investment, and thus India’s growth. Perhaps Mr Das’s greatest failure has been an inability to capture this sentiment and use it to push for a genuinely credible India, along the lines of a Singapore or Hong Kong or, simply, a country that rating agencies would assign an A rating. But that may be pushing for too high a standard. He could have done worse. Many have.

What the stock market is saying

The series of records set by the Indian stock market has given rise to a series of observations. Among them:

·       The market’s rise has come as the percentage held by foreign portfolios has fallen to 18.4%, the lowest level in a decade. Replacing outsiders on the margin have been domestic mutual funds.

·       There are now 500 Indian companies which have a market capitalization of $1bn, up from 200 a decade ago, a result of rising share prices. Indian groups with collective market caps in excess of Rs1 trillion ($12bn) now include Tata, Adani, Birla, HDFC and – the most recent entry –Bajaj (motorcycles, finance and electronics).

New India

India is on pace to create a record number of new companies, topping last year, with 110,000 registered since the fiscal year began on April 1^st. While most companies still choose to set up in Mumbai and Delhi, Mint, a newspaper, observes that the dominance has dropped a bit in the past four years from 30.6% to 26%, with a percentage-terms large jump in Bihar (3.1% to 3.9%). The second biggest jump is in Gujarat, home to Prime Minister Narendra Modi. Its share rose from 4.6% to 5.6%. A particularly interesting increase is Uttar Pradesh, from 9.8% to 11.3% - reflecting the fact that it is an emerging giant that receives little attention. 

Lightly reported possible scandal

In response to a story by Britain’s Daily Telegraph about illegal organ sales at an Indian hospital, the government has announced an investigation and The Indian Express captured the story with the jarring headline: “Why organ trade continues to flourish despite the ban.” It is a question that remains largely unanswered.

The past year for two countries reduced to film: Bollywood up, Hollywood down

The Indian film industry is having an excellent year with numerous popular domestic hits and The Business Standard predicting a box office exceeding the pre-pandemic era by at least 10%. Interest in American films, however, is expected to be flat with their share of the Indian market declining to 13% from in excess of 20% prior to the lockdown.

Why bother with Bollywood when you can see the real thing

Increasingly, weddings are replacing movies as big ticket productions in India and according to the Bombay Times, an entertainment publication, the obvious has happened: couples are now selling tickets for their nuptials to foreigners who might want to participate in the real thing. More than 900 sold access this year with prices depending on the scale of the wedding and the number of events attended.

For distribution in America