India Business and Finance, June 6th

What happened in the business world during the bewildering election week

The Election

One thing, and perhaps only one thing, can be said to be universally felt about the results of the Indian election: the results were a surprise. Prime Minister Narendra Modi’s Bhartiya Janata Party picked up votes (but not seats) in places where this was unexpected (notably in the wealthy, growing, state of Tamil Nadu) and lost many more votes and seats in places it had expected to sweep (notably in poor but g

rowing state of Uttar Pradesh).

One inference from this result is that India is certainly not China and despite many accusations to the contrary, Mr Modi did not, and does not, lead a totalitarian country. That leaves open two broad question for which there is no consensual answer: why the BJP underperformed and what the consequences may be.

As to the first, much of the initial coverage attributed Mr Modi’s diminished majority to whatever the writer dislikes about Mr Modi. This is particularly true for the international press with which the administration, broadly, has had a relationship that is at best distant and often somewhat hostile. While the resulting analysis may prove to be correct, it may also be premature. Indian voting is at best bewildering. The election was often framed in terms of India’s relationship with the world and with its own broad sense of identity and, of course, religion and caste. But India is also a vast placed filled with, as the brilliant writer and observer V.S. Naipaul said in his 2010 book, a million mutinies. Often, these revolve around immediate concerns. Consider recent reports about what unfolded in the area surrounding the rebuilt Ayodhya Temple in Uttar Pradesh which had been a signature project of Mr Modi located in a state where his party has a dominant presence, and which has made huge economic strides during his second term. The reelection of the BJP candidate was considered a lock. Instead, the seat was won by a candidate from a local, socialist party. Some stories suggest that the temple reconstruction resulted in poor treatment of existing landowners and farmers who consequently turned to a local champion. True? Possibly. It will take months for a substantial understanding to emerge of what occurred in recent days.

As to the consequences of the election; here the debate is particularly sharp. Many applaud a weaker Modi administration, asserting that it will lead to a healthier collaboration between the country’s multiple parties while strengthening confidence in India as a democratic nation. Some in the business community believe the effectiveness of the BJP will be retained while its worst impulses (including its ability to push them around) will be constrained. Alternatively, there are three concerns:

* Populism versus productivity. Will the coalition that is a product of Mr Modi’s reduced mandate replace policies that may lead to growth (lower taxes and more infrastructure) with populist ones that are costly, addictive and statist?

* Will hard decisions become unfeasible? Bold moves are difficult for any government but more so in a poor country. Collaboration is positive in theory and will be applauded by every former government advisor that has been shunted aside by the Modi administration (of which there is no shortage in Delhi and American universities) who hope to be collaborators. In practice, sharing power is difficult to manage and comes with costs. The Modi Administration intended, for example, to reduce the fiscal deficit which would have many positive benefits such as reducing capital costs (the state crowds out private investment and deficits also result in the country’s low credit rating). But financial decisions require support and cannot be made if approval must be bought. Similarly, the disposition of state assets that flourished under Nehruvian socialism has largely stalled after the sale of Air India but was expected to resume under the protection of a strong electoral endorsement. Stripping away entities from the state requires pushing back against lots of entrenched interests encompassing those who directly benefit from rents and those who are philosophically socialist (India has lots of both). Can a government with anything less than a sledge-hammer mandate do this? And if hard decisions are made, what trade-offs will be required? Will they be possible to see (which could be jarring) or executed in dark corners (which is worse).

* Uncertainty. Finally, does the result lead to uncertainty? This is true both in the short term (what will the new government look like) in the long-term (will it be subjected to more internecine strife) and in the evisceration of an effective agenda. In the aftermath of the victory, the administration was expected to lay out 100-day plans that would involve policy changes and actions. No outsider knew precisely what would be in the 100-day plans, but no one seemed to doubt that this would happen and that execution would be strong.  It is not a stretch to believe the changes would have involved making progress on the three areas that have long been seen as holding India back – labour (in which a four-part consolidation of existing standards was passed in the 2019-2020 year but never gazetted, presumably because a stronger mandate in the coming term would assist in the needed enlistment of states), land laws (intended to facilitate industrial construction) and agriculture. But that is just the beginning. The reconstruction of India’s financial links with the world have been undergoing a protracted revision with the creation of a new international financial centre in Gujarat but the legal underpinnings had been left for the new term – and the new mandate. Fresh items emanating from each cabinet department were to have been added to the mix. All that, now, is up in the air.

Beyond the election

India remains hot

India’s GDP grew 8.2% in the fiscal year that concluded at the end of March. That is faster than expected and simply fast. Inevitably, there are caveats. Growth in the final quarter of the fiscal year was 7.8%, suggesting a bit of slowing (but still  a rate that is fast, and faster than expected). And inevitably, there are questions about Indian statistics and technical caveats about how GDP is calculated (with special wonky attention spent on the “deflator). The bigger issue is that for many reasons the growth doesn’t feel so fast. This may have played a major role in the election results. Some suggestion of what is going on might be found in how growth is being achieved. The strongest segment in the fourth quarter of the fiscal year (meaning the one that concluded at the end of March) was manufacturing, up 8.9%, which will thrill the government and suggests its efforts to push supply-side solutions for economic growth may be taking hold. But it does not have an immediate impact on India’s population, which remains largely agrarian and, on the top end, skewed toward software and services. Construction grew 8.7%, electricity 7.7%.  The Economic Times reports a shortage of truck drivers (suggestive of conditions heating up) while Mint reports business school graduates are being forced to accept lower salaries this year and this follows last week’s reports of slower hiring at the country’s technical schools (both suggestive of conditions cooling down). Foreign direct investment during the year was at its lowest since 2020, just before the lockdown. It peaked at $60bn in the fiscal year ending in March 2021 and was at $44bn in the most recent fiscal year. Car dealers complain of high inventories. So too do sellers of common consumer goods which are expanding at the worst rate in five years.

The bigger picture, though, continues to suggest health. As a result of growth and the prospect of better government finances, S&P Global raised the outlook for the credit quality of India’s debt, a move that the government has been demanding for a long time. Outlook changes are often followed by ratings changes within two years. India’s rating is currently border-line junk and its companies suffer from high capital costs. The shift in outlook raises expectations that both will improve. Underscoring this, at the same time as S&P boosted the outlook for India’s sovereign rating, it raised the outlook for six Indian banks.

Underpinning the announcement, however, was the expectation that economic policies would be stable. The election must have had an impact on this, if only because a new coalition government will possibly have a new approach. If a profligate coalition does undermine India’s financial progress, the outlook changes may be recalled as a peak moment of international optimism for India’s prospects.

Booming Industries

Of the future–Space. Agnikul Cosmos, a rocket company using a novel 3D printed engine, launched a successful test, the result of seven years of work by one-time students at IIT Madras. The effort is the visible tip of hundreds of new private companies that the government believes will be a $44bn business by 2033.

Of the present–Hospitals. Mint, a business paper, reckons 18,000 beds are being added by the top seven operators. That doesn’t seem like much, but it is the tip of a huge transformation in India’s capacity to provide modern health care. People in India who in the past would go overseas to be treated (often, as in my case, by an Indian doctor) are now staying in India for treatment and a vast number of people across income ranges are receiving ever more sophisticated care.  

Of the past and future–rickshaws

Sales of e-rickshaws are soaring. This marks the latest iteration of the vehicles that have migrated from hand pulled carts (still used in Kolkata) to ones power by petrol and then natural gas and now rechargeable batteries. Sales have grown from 89,000 units in 2020 to 152,000 in 2021, to 328,000 in 2022 and 509,000 in 2023.

Of the criminal world

Online credit card fraud has more than tripled in the past year to almost 30,000 cases.

Of the establishment

The Business Standard calculates that the rise of the Indian stockmarket has resulted in the number of Indian conglomerates worth more than $100bn expanding from five to eight. The new entrants to this club are Bharti Airtel, primarily involved in telecom, ICICI Bank, and the Birla Group, a company that dates back to the establishment of a cotton mill in 1857.

The end of a boom

 The backdrop soundtrack for Mumbai is not a Bollywood tune but the incessant sound of horns and engines. In a move that verges on the incomprehensible, police seized 4,850 vehicles and additional 1,350 sound-magnifying exhaust systems, all of which violated the city’s noise restrictions (who knew these even existed?). According to the Mid-Day newspaper, on June 3^rd the seized vehicles were crushed under a bulldozer before a blue-ribbon panel of politicians and police officers.

For distribution in America