India Business and Finance, January 17th
What happened in Indian business and finance during the past week
India’s big bet
India’s fiscal deficit is typically viewed using only the central government numbers (it is something in the order of 6.4%), a practice common in many countries. A Times of India editorial notes that the combined state and national deficit was a high 9.4% in the last fiscal year (ends March 31st). A key reason is that government, rather than private industry, has been a key factor in investment even with the state boost is only 32% of GDP, down from just under 39% in the fiscal year concluding at the end of March 2012.
All this is coming under particular focus because the national budget will be released on February 1st. India desperately wants the private sector to step up investment and there are questions over how long the state can carry so much of the burden. Perhaps the best way to view the prospects is to look at consequences of recent projects rather than merely spending. If the recent government investments in infrastructure are successful – the money has gone into roads, rail lines, bridges and so on - India will be a more attractive place for business and thus private investment will come. That is the hope.
But so far, while headline economic growth is good, the most recent economic numbers are patchy in ways that undermine the optimistic scenario. Retail inflation rose to 5.6% in December (year-to-year), a four-month high and industrial output was up just 2.4% in November, compared to 11.7% in October (again, year-to-year). The infrastructure investments are supposed to be enhancing efficiency (thus restraining inflation) while (notwithstanding inevitable base effects) accelerating industrial output.
Optimism, with a hint of impediments
Gujarat, Narendra Modi’s home state and a favoured investment location, held a conference featuring big company after big company announcing big investments for a whopping total of $317bn. These were dutifully reported in local media. Perhaps the most interesting twist was the announcement by Maruti Suzuki, the country’s largest car manufacturer, for an assembly operation intended to produce 1m cars annually. A condition of the project, Maruti Suzuki’s chairman told The Financial Express, was land at a fair price that was – and here is the key point – “dispute free”. A key reason that Gujarat is among the most attractive destinations for investment has been its ability to supply “dispute free” land, something most other Indian states cannot manage. The other states that have begun to thrive have taken note of this, most obviously Tamil Nadu but also in previously difficult locations like Uttar Pradesh.
Bhushan Steel: Nine years after collapse
Bhushan Steel was founded in 1987 and grew by adopting sophisticated Japanese technology. For many years it seemed to reflect the dynamism of Indian business, before it made a major expansion bet in 2005 that failed. It went bankrupt in 2014. Last week, a decade after the company’s collapse, its founder and several family members were arrested for having siphoned away money from bank loans. It has taken years to work through the collapse, with endless debate about whether the failure was a result of criminal activity or simply bad timing. The remains of the company were acquired in 2018 under the new bankruptcy process by Tata Steel and are said to be profitable.
Investment in India by industry:
A report by Bain noted that in 2023 there were 22 private equity deals in Indian health care, worth $4.6bn. To an outsider, the industry is beyond complex, with India imposing numerous top-down controls ranging from price caps on pharmaceutical products to indigent treatment quotas on hospitals. But within the complexity is, apparently, tremendous demand and room for profitable growth. Unlike in the case of manufacturing, private equity firms – which presumably have direct knowledge – are elbowing their way into the industry.
Investment in India 2 by source:
It is not surprising that America and Singapore are the two largest sources for investment into India. Both have deep interests in building business ties. In the recent past, the third largest was Mauritius (population almost zero, domestic companies almost zero), presumably because it offered a favourable legal platform for dealing with India’s difficult tax, ownership and capital issues. Now, according to Businessline, a newspaper, Luxembourg (population almost zero, domestic companies almost zero) has become the third largest source, with total investment rising 30%, while investment from Mauritius has declined 9%.
Tech non-funding
Tech funding collapsed from $26bn in 2022 to $8bn in 2023, and most of that came in the early months of the year. No need to belabour what is well known. The optimism about tech start-ups collided with reality.
IT outsourcing: The industry that refuses to collapse
All four of India’s major IT services companies released quarterly numbers, invariably exceeding expectations. The industry seems to routinely disappoint its doubters, possibly because the ability of the world to function depends on outsourcing increasingly complex tasks to Indian software programmers (Possibly because the rich world has become so dependent on Indian programmers that they have no other capacity?). That said, overall growth was minimal. Only one of the four, HCL, increased the number of employees and that metric, rather than revenues or profits, is often said to be the key to understanding the industry’s near-term prospects.
The Indian consumer market: GS forecasts leap in incomes
For most companies in India, the country is less a cohesive market than very distinct bands separated by income. Average annual earnings are something like $2,500 but no one sells to the average. A new report by Goldman Sachs estimated that the number of Indians with incomes in excess of $10,000 annually will expand from 60m in currently to 100m by 2027. That has big implications for a wide swathe of companies, from ordinary consumer products to vehicles and, perhaps surprisingly, goods that have a particularly high priority in India, such as schools and coaching academies. This flies in the face of naysayers’ belief that while the economy will grow, the income of most people will remain depressed.
Diplomacy: The American government’s curious approach to pushing American business
Unlike many foreign business people traveling through India that I run into, who often have tight ties with their home governments and consulates and find these to be broadly helpful in their commercial dealings, the Americans that I come across seem to view the consulate as helpful only for lost passports. That doesn’t mean the American government is entirely asleep as the switch, though there is a case to be made that it would be better for the world and its citizens were it to be asleep. Consider two examples
An education fair over the weekend in Mumbai drew scores of foreign universities trying to lure Indian students. Along with a healthy number of American institutions was an appearance by a senior American diplomat who made encouraging statements about the prospects for students to obtain coveted American visas. While America should, of course, take the efficiency of its often balky visa process seriously, and it is beyond argument that at least some education has merit, but in this case the educational product is highly varied, costly, difficult to understand, and marketed in ways that certainly involve “puffery”, to cite the legal distinction between exaggeration and fraud. Perhaps the attendees are primarily interested in the visa alone and see buying a possibly useless product as part of the cost but that raises questions about America’s immigration policy.
America has also, according to multiple press reports, been pressuring the Indian government to walk back potential restrictions on laptop imports. The reason, presumably, is that many of the large laptop producers are American companies – Apple, Dell, and HP, most prominently. But the laptops themselves are almost always made in China, meaning that America’s government is perversely in the position of lobbying for Chinese producers at a time when India’s policy, and possibly even America’s interests (albeit not those of some of the largest companies headquartered in America) lie more in shifting production from China to India. The made-in-America content of the laptop – the IP – would presumably not be harmed if this shift took place.
Pushcart capitalism v. the establishment
Perhaps the most elegant hotel in Kolkata, and possibly all of India, is The Oberoi Grand, resurrected in 1939 from The Grand, which had collapsed as a business? after six people died during a typhoid epidemic. The property was subsequently transformed into a landmark. Finding the hotel, however, requires wading through an almost impenetrable forest of hawkers who pack the sidewalk outside and gain protection from the sun through the use of temporary plastic sheets tied to the hotel’s exterior columns. A story in The Times of India notes that there have been numerous efforts over the past 30 years by the government to remove illegal structures but these have encountered a stiff pushback, and a reoccupation. Recently, a court order restored two-thirds of the pavement for the use of pedestrians but the newspaper suggests that this effort, too, is likely temporary. The history of the local hawkers intertwines immigration into the city; job losses from declining industries, notably jute and textile; and the nature of political power in a state that has long been led by left-leaning leaders with mixed feelings about the rules determining who can control real estate; and their own self-interest in retaining the one property the crowd of hawkers do control in abundance: votes..
Yet another Indian risk
Among the products that are illegal in several Indian states is a braided nylon cord made in China known as manja. I am always struck by why a product like this should be banned but then struck again when I learn there are very real reasons - genuine danger. It turns out in this case that the twine is used for the risky sport of kite flying. The hobby seems to be particularly popular this time of year and a driver was reported to have been killed when he was knocked off his scooter by a kite cord that had become entangled in a lamp post, apparently a common problem. In another kite-related instance, two people were killed in separate locations when they fell off building terraces while flying their kites.