India Business and Finance, February 6th
What happened in Indian business over the past week and what that may mean for what lies ahead.
Bigger Bharat
Chief economic advisor to the Indian government, V. Anantha Nageswaran, predicted the country’s economy, currently the fifth largest in the world with a GDP of just under $4trn, could reach $7trn by 2030. In the process it would pass Germany and Japan, trailing only America and China. There are many questions about this number, including about the accuracy of the GDP calculation, but perhaps the largest is the impact of fast economic growth on India’s vast population. On a per capita basis (to use the standard terminology), India’s standing currently? sits to 120 or so. The government is acutely aware of this issue. The desire to raise that number is a driving force in its current spending on capital projects like road and rail aimed at boosting the kind of manufacturing that could provide mass employment for a population that is still heavily engaged in low-paid agriculture.
Which explains the all-important budget
The Modi administration released the annual budget on February 1, a document that spells out government priorities and thus is of tremendous significance in understanding intentions. It was widely hailed as bold because it was boring–there were none of the populist measures that any government running for re-election would be tempted to throw in, regardless of their long-term consequences. India’s large annual spending deficit, which must be financed through borrowing, was projected to dip significantly from 6.4% in the fiscal year that concluded at the end of last March to 5.8% in the current fiscal year and 5.1% over the coming year. Mr Nageswaran said the goal was a deficit of 4.5% in the year after and the administration’s clear goal is clearly not to stop after that.
Reaction in the stockmarket was muted. Prices wiggled a bit and, overall, rose slightly. It was a different story in the bond market which had its best week in 15 months as interest rates fell slightly in response to the prospect of reduced government borrowing. Were this trend to continue along the lines Mr Nageswaran outlined, the consequences for India’s economy would be profound. Perhaps the single greatest factor holding back its businesses are high capital costs, which have surely been driven up by the government’s heavy borrowing.
An improved approach to credit may provide a boost to another shift which, initially at least, is finite. In response to the inclusion of India’s government debt in JPMorgan’s bond index, foreign investment into Indian debt in January amounted to Rs200bn ($2.4bn), the most in six years. If the country’s central government borrowing declines and credit profile improves, India’s allocation in this index and others as well will expand, providing added, and possibly lower cost, credit..
The budget was not entirely devoid of new spending. The allocation to capital investment continued to grow, though not at the same pace as in recent years, and will be at record levels. A particular target is the railways, which are considered essential for industrial development. Under the government’s production-linked incentives – payments made to companies in order to kickstart development – there will be increased allocations for toys, leather and footwear, electronics, vehicles and pharma. Leading up to the re-election of the current administration in 2019, many questioned whether it genuinely leaned toward economic development, which had been pivotal in Mr Modi’s prior role as governor of Gujarat. Now, while there can be a debate about the approach, there can be little argument about intent.
India’s newspapers ran numerous charts with their budget coverage, along with various associated facts that provided perspective. Among these, I was struck by two. The first was that among India’s vast population of more than 1.4bn, only 64m people pay taxes, which may explain the high rates (and the eagerness of many with the kind of formal employment that is taxed to emigrate to lower tax countries). The second was a chart that appeared in Mint, a financial publication, comparing in percentage terms the new budget with the one in 1947, following India’s independence. The numbers are summaries, mingling categories, and thus should presumably be understood in broad terms rather than in a nuanced way. In the initial post-independence 1947 budget the largest expenditure was for defense, at 47%, followed by subsidies on imported food, 11%; and then refugees, 11%. In contrast, the highest expense today is interest payments (a consequence of consistent deficit spending) at 20%, then defense at 8%, then subsidies, at 7%.
A significant change that could have been in the budget but was announced before it
Tariffs on handset components were reduced from 15% to 10%. The change reflects the government’s ongoing efforts to balance the benefits of free trade and protectionism - philosophically i think its position could be described as “conflicted” - and was the source of tremendous lobbying by different interest groups.
Consolidation
Numbers provided by Bain, a consultancy, on Indian mergers showed that the total value in 2023 was $21bn, the lowest number since 2015. Most of the deals were small and none transformative. The recent Indian growth story is about selling more stuff rather than corporate restructuring.
Possibly important
And to the extent there has been a new source of investment into Indian companies, it has been individuals investing who may be going through a profound shift in approach. India’s gold consumption fell 3% in 2023, according to the World Gold Council. The number is really flaky for many reasons (including shifting prices) but the increase in equity investing and decrease in gold consumption could suggest a shift in personal savings from a kind of useless capital (kept in a safe) to catalytic capital (invested).
Could be painful.
For the Indians doing the investing, the shift could be good (investing allows for the prospect of money appreciating) but it comes with real risks. One illustration–the share price of Paytm dropped by 42% in just a few days after its operations were faulted by the Reserve Bank of India, the central bank. One key segment may have to be closed and the prospects for the entire company are cloudy. Paytm had been heavily touted by international banks and described as a pillar of India’s move to digital payments – a shift now seen as contributing to economic efficiency of the country but not the success of a key provider. In November, 2021, shortly after its initial public offering, Paytm’s shares traded at just under 1800 rupees and recently slid to an all-time low below 440 before a tiny bounce.
And it isn’t the only big name company to be slammed recently, although it is the most prominent one that is publicly listed. The valuation for Ola’s heavily promoted cab hailing entity (which competes with Uber) was cut sharply by Vanguard, the American fund management company, to $1.9bn. It was valued at $7.3bn in fund raising round that took place in December, 2021. Litigation and a difficult time raising cash to pay immediate expenses has raised concerns about even the short-term future of Byju, an edtech company that had been the country’s most highly valued startup.
The biggest Indians agree: the country is too noisy.
The sleep of elephants residing in a park near the famous Amer Fort in Jaipur has been wrecked by the squealing of a growing adjacent pig population, according to on-the-ground reporting by The Times of India. An official was quoted as saying that sleep is crucial for elephants and the noise could make them “unfriendly”. Many readers throughout India doubtless related to the experience of the elephants, though perhaps as a result of different squealing things.