India Business and Finance, December 11th
What happened in Indian business and finance last week
As this weekly blog often reflects, India’s economic future depends on events that support its growing credibility and events that undermine trust. These often play out in small incidents which, because everything in India seems to be tied to everything else, have large repercussions. Begin with setbacks during the past week, then advances.
Non-credible India
Debt. The country has been given a negative rating by the Aviation Working Group, a global consortium of entities on the supply side of the market, based on the failure, despite much effort, of airplane manufacturers and leasors to repossess planes used by bankrupt Go First. This small action says big things. First, on a practical level, it will raise the financing costs for Air India and Indigo, which have record-breakingt orders for new planes that are needed to alleviate transportation bottlenecks Second, on a broader level, it means higher capital costs in a country that already suffers from high capital costs and it is yet another sign that the India’s much lauded new insolvency regime remains insufficiently responsive to needs of the country.
Equity. Only $7bn has been invested in India’s startups this year, compared to $26bn last year and $42bn in 2021. The current numbers are the worst since 2015. Write-downs on the valuations of prominent companies come weekly. The most recent number for Byju, once said to be worth $22bn, is $3bn and there is open speculation about the possible impending bankruptcy of the education technology firm. A genuine crack, involving the failure of both companies and VC firms, is inevitable. At the very least, this would result in the end of fanciful valuations which in turn could allow the process of investment to begin.
Credible India
India’s merit-driven takeover of capitalism’s brain
The rise of people born in India to top jobs at the world’s largest multinationals is well documented. Lesser known is the fact that companies delegate increasing amounts of responsibility to “global capability centres” in India – places that once filled in forms but now house the technology engines that increasingly run everything companies do. As 2023 began, there were 1,580 of these in India employing 1.7m people; by 2025 there will be 1,900 employing in excess of 2m, according to estimates by Deloitte. Western companies are sensitive about disclosing how many people they employ in these centers and the importance of what they do, often going so far as to lie about their relevance. That masks a genuine transformation. An old metric for identifying the core of a company would be to look at where the chief executive is based. That may no longer be true because in the new technology-driven structure, eg zoom, top bosses can live in low-tax, pollution-free, golf-heavy, culturally-rich jurisdictions while the heavy intellectual lifting is done by anonymous, brilliant engineers in modern, bland, glass buildings in India’s polluted, traffic-clogged cities.
India’s new advances in capitalism’s factories.
The expansion of iPhone production in India is proceeding at a staggering rate. Factory after factory is opening or expanding. Some estimate that iPhones account for as much as 80% of Indian handset exports, with Samsung a distant second. Tata has gone from a tiny pilot production project for Apple back in 2021 to a major assembler with bigger plans ahead – 50m phones assembled annually within the next two to three years. It is this growth and share of exports, rather than the usual market share metric, that the Modi Administration cares about. Numbers for the April-October quarter released by the government show that electronics exports rose by 28% over the same period last year. While this gives Apple tremendous leverage for government support in coping with red tape and the use of suppliers from China who would otherwise face impediments, companies not in Apple’s supply chain are being slammed. A recent report in the business newspaper Mint says India’s feared Enforcement Directorate has charged Vivo, a Chinese handset manufacturer that has played a large role in the Indian economy without building it, with illicitly remitting Rs1 trillion (US$12m) between 2014 and 2021. A number of people have already been jailed because of various aspects of the case, though none have been convicted. A lawyer for one was cited in Mint’s report as saying the various charges would not withstand judicial scrutiny.
And at some level, the government continues to run everything
New areas of the economy. India’s handset producers urged the government to remove tariffs on components to enhance cost efficiency, an approach that is both consistent with government goals (encourage more assembly) and contrary to it (create import barriers to allow for a local supply chain to emerge). The conflicting goals will likely lead, after much genuine consideration, to a muddled response. Tata, along being a key player in the handset tariff debate, is also reported to be pushing back against a possible government move to reduced import tariffs on electric vehicles, which it manufactures in India. By reducing tariffs, the government hopes to produce a carrot to attract high-end foreign producers, notably Tesla, under the condition that over time it shifts production to India and helps foster a new industry for exports.
Old areas of the economy. A sharp rise in onion prices would normally be good news for Indian farmers and encourage more planting. But the Indian government has banned their export, prompting farmers in Nashik (an agricultural community several hours inland from Mumbai) to block roads and go on strike. Distributors with large supplies intended for export will respond in ways that may never be entirely clear. Some large shipments bound for export have been redirected toward the domestic market producing sharp losses. Meanwhile, a 50% import tariff on yellow peas has been removed, which will have its own impact on agricultural planning. The new India remains run, to a striking degree, out of Delhi with all that means on the positive side (presumably government actions will reduce inflationary pressure and improve short-term food affordability) and on the negative side, because of the carcinogenic qualities of statism.
Two investors worth watching
GQG Partners made a fortune this year buying heavily into the Adani Group when a possible scandal tanked the share price of various subsidiaries. A newly disclosed investment is for a 4.7% stake in GMR Airports, which operates airports in Delhi, Hyderabad and Goa. GQG is thought to be unusually independent and brave (meaning it is willing to make big moves) and smart (it is not unaware of the issues surrounding the Adani Group). And its method – big block purchases – means algorithmic traders can’t pick up signals from a series of tiny trades, thus undermining entry prices and eroding large gains. As a result, it has quickly become a model, of sorts, for investment firms that want to make decisive bets on India.
Marcellus Investment Managers. Marcellus is among the best known investment firms in India because of the deep analysis it shares on the Indian market along with a thesis, widely accepted, that growth in India has come from a small number of large companies which turn strength into greater strength. That, in turn, led Marcellus to believe these sorts of companies would provide unusually strong returns, notwithstanding high initial valuations. A story in Mint notes that this strategy worked for the initial three of the past five years but has since underperformed. The market, concludes Marcellus's Saurabh Mukerhjea, has recently been unwilling to pay up for high growth. An alternative take is that the corporate landscape is evolving a bit and the difference between weak and strong firms is expected to be less decisive in the future. If true, that would indicate an important change in the Indian economy.
What the success of Narendra Modi’s BJP Party in recent elections means to business.
Such a complicated topic! There is no shortage of complaints and praise about the administration and there are too many things to read. TN Ninan, chairman of the Business Standard and possibly the most respected of Indian financial journalists, notes that regardless of what business people say in public, many hold strong reservations but he concludes that even with these in mind, share prices rose in the aftermath of recent regional elections because the administration’s merits and benefits of continuity outweigh the virtues of an opposition that offered “welfarism and freebies, translated to mean fiscal irresponsibility…(with) no accompanying pro-business message.”
Incredible/non-credible India in a single anecdote
Entrepreneurs in Gujarat built a fake toll booth on private land and managed to draw traffic from a public highway, including ordinary drivers, law enforcement and government officials, for more than a year before the ruse was discovered. Police filed a detailed report but it isn’t clear that this violates the law.