India Business and Finance, June 13th

What happened in Indian business in the week following the election

Non-chaotic India

Surprise, surprise, and then a surprise.

An election that raised the possibility of upending India’s ruling government and its approach to domestic policy and global affairs - and for a moment seemed to possibly do so - is increasingly seen as a non-event. Polls the day before the results were released showed a surprising victory for Narendra Modi’s Bhartiya Janata Party (BJP), sending stock prices up and suggesting an acceleration of a platform that came to power a decade ago. When the actual results then showed a surprising loss of seats for the BJP and even raised the prospect that Mr Modi himself might be gone, stock prices crashed. And then, when parties that were part of an existing alliance were smoothly incorporated into a presumably functional, but not particularly strong, coalition, stock prices reverted to where they had stood before. It is not unfair to say that an early read on the election is that nothing changed. Could India, which is almost synonymous with chaos, now reflect an orderly stability? Perhaps in retrospect, many people will conclude this was inevitable. In recent months, there may not have been a single person who felt that way.

Reflecting the preservation of the status quo, the swearing-in included the usual business elite who presumably received invitations they could not refuse. Mukesh Ambani, head of Reliance, India’s most valuable company, separated himself from the endless celebrity-infused pre-wedding parties for his youngest son to attend. He was joined by Gautam Adani, his rival as richest business mogul; Sajjan Jindal, head of the country’s largest steel company; Kumar Aditya Birla (textiles, telecom, cement); and Natarajan Chandrasekaran, head of Tata, the country’s largest conglomerate. A deluge of congratulatory if uninspired messages were posted by business organizations including the Associated Chamber of Commerce, the Confederation of Indian Industry and any large company that might consider doing business in a highly regulated environment, which is to say likely every big business.

Consistent with the appearance of stability, no changes will be made to leading ministries though some minor ones, notably aviation, agriculture and power, did receive new heads and that might matter. In aviation, India is adding a staggering amount of capacity and seeks greater access overseas while constraining the similar ambitions of foreign carriers in India. Many new airports will be built and routes, requiring land acquisition and connections to broader networks in which the government will be involved. Similar issues exist for the power industry which is going through a massive transition to expand capacity and at the same time change the source of generation from fossil fuels to renewables. Agriculture is always sensitive and recent disputes with farmers may have been one of the reasons holding back the BJP’s results.

To the extent Mr Modi has had to bring in new partners, they have come from already allied parties in Andhra Pradesh and Bihar, both of which are expected to receive central government assistance in return. This does not seem to have elicited criticism, at least so far, perhaps because both states are in particularly poor economic shape and are good candiates to be on the agenda of any national government. New infrastructure and efforts to bring in new businesses would be welcome. Share prices of companies based in these states rose in the days after the election, perhaps because of expectations of forthcoming favouritism (the cynical view) or in anticipation of broader investment enhancing the ability of business in the state to function efficiently (the optimistic view).

The first insight into the new government will come from a soon-to-be released budget which in India has inordinate importance spelling out priorities and a series of 100-day plans that, in the case of a decisive victory, were expected to have been released by now. In the prior term Mr Modi, with a majority government and many accomplishments, was still unable to push through key reforms on property, labour, land and agriculture. The legal architecture behind an ongoing reconstruction of financial links to the rest of the world remains somewhat of a mess. It won’t be easier to complete any of these things with a weaker hand in parliament, but some believe the narrow victory will prompt Mr Modi to become better at negotiating with opponents. Others think that if this is possible at all, it will add costs (that may verge uncomfortably on untoward payments) into the system as legislators trade their support for benefits. A third position, perhaps the most sensible, is that changes in India take a long time, third terms anywhere in the world rarely have large mandates, and the key issue is not whether India can solve its issues today or even in the months ahead but rather whether it remains on a productive path and that is the case.

More quietly, many in business are pleased about the results for a more personal reason. They like Mr Modi’s ability to use a sledgehammer to get things done, but fear having their own heads placed on the anvil. A weaker Mr Modi is less frightening.

Why business has liked Mr Modi’s tenure as captured in the changes of one number.

Along with the strong overall growth of India’s economy in recent years has been the even faster growth in profits. A report by Motilal Oswal, a brokerage firm, calculated that the percent of corporate profits to GDP for the benchmark Nifty 50 index (4.8% in the recently concluded fiscal year) is at its highest level since 2008 (when it was 5.2%), after which it trended downward in a fairly consistent line until bottoming at 2.1% in 2020.

The business of Indian sports

Mr Modi knows how to build his own brand. His photo is in the newspaper and on signs daily. But does India and in particular its sporting world? Among the oddest sites in Mumbai on June 9^th was bars-cafes-restaurants packed with enthralled fans cheering for India in its cricket match with Pakistan with many many people wearing New York Yankee hats. This cannot be explained. I say this not just because I support the Mets, the other New York team. Change is likely coming. A study released by Houlihan Lokey, an investment bank, concluded that the value of India’s professional cricket circuit, the Indian Premier League, rose 6.5% in the past year to $16.4bn and these teams are discovering the value of selling their names in the same way that has long been done by their equivalents in America. An online platform making fan jerseys for the teams says sales were up four-fold this year. A major manufacturer reported record sales of 140,000 jerseys, a number that sounds sort of large but in the context of India’s vast population, just a beginning.

Not sold on India

Because of the recent record prices on the Mumbai exchange and the poor showing of the exchanges tied to China, many analysts outside of India seem to believe that foreigners have shifted their purchases. In reality, whatever their feelings about China, they have been avoiding India. In the first week of June, Foreign portfolio investors dumped $2.1bn in Indian, continuing a process evident in May and April.

Indian quality

Many Indian businesses are acutely aware of criticisms about Indian quality and have taken huge steps to make improvements. This is visible in the assembly operations that produce iPhones and more broadly in machinery and vehicles, but pharma is a more complicated story. It is a huge component of the Indian economy and vital for the global health care, particularly in America where it provides something like half of the generic drugs. It is also a consistent source of quality lapses. In the past week, Lupin, a major producer, recalled 51,000 bottles of cefdinir, an antibiotic, being sold in America because of defective containers. 

An illicit business

Police arrested two people, one working for the government, who ran a “sex-determination” business. Tests would presumably be done to determine the gender of a child who, if female, would be aborted. In 1994 this practice was banned in India after surveys suggested female births were far lower than would naturally occur. The current data isn’t entirely clear, at least given search for good numbers, about whether this trend continues. The arrests, however, shine a light on a business that is believed by many to cooperate widely, if quietly. 

Entertainment

Mint, a newspaper,  took the opportunity of the reopening of one of Mumbai’s iconic movie palaces, the Eros Cinema, to note that 20% of theatres run by the Eros’s parent company, PVR Inox, will have a luxury format and that ticket prices at these can cost Rs500-700 ($6-to-$8.30) which a source quoted in the articles faults for being high enough to undermine the unifying quality of “films (which) are meant to be unifiers, not dividers.” 

India is, of course, a poor country and there is no subject that seems to avoid being caught up in debates over disparities in wealth, including the content of the movies themselves. Most of the viewership of movies and television shows likely is done through inexpensive smart phones using wifi accessed through networks that are inexpensive or “shared” (meaning at no cost at all). This form of distribution may have undermined the economic base supporting the average threatre. One defense of the nice theaters goes as follows. On a brutally hot, sunny, Indian day (meaning every day in April, May and June up until the monsoon) or a day when a dark skies pours down blankets of rain meaning most days during the monsoon (which is starting soon), these theaters – clean and cool and even roomy - are palaces for a wide swathe of the population that, though not poor, is far below the minimum need to qualify for an invitation to Mr Modi’s swearing in. Add in the fresh cheese-caramel-salted popcorn common in these theatres and the experience rises to a higher level. The movie industry provides many things in India - “unifiers” ideally, but for many (if not enough, a few hours away in an easier world.