India Business and Finance, March 12th

The past week of chaotic but largely positive events in India's business world.

India in the world

A)   Trade.

 India signed a trade agreement on Sunday with the European Free Trade Association, a group comprising Switzerland, Iceland, Liechtenstein, and Norway. Details are still emerging, and the deal is neither usual nor straightforward, with the only consensus being that for India, this is an important step tied to a growing belief on the part of its government that its “make in India”, export-driven strategy requires reaching these sorts of deals. Its conclusion reflects a slow but determined move back to the bargaining table, albeit in highly structured, complex ways that serves as a precursor to a possible agreement with the European Union and beyond.

Among the many obstacles to these agreements are the country’s history of autarky dating back to Mahatma Gandhi’s swadeshi movement, launched in 1905 (though probably in place earlier), a belief that prior deals have been damaging and an abundance of domestic companies and trade groups determined to maintain barriers.

As part of the new agreement, Indian tariffs will be reduced on chocolate and watches over seven years, and tariffs will also be gradually reduced on wine starting with cheap varieties. None of these areas are particularly sensitive. Goods produced in Norway will escape India’s tariff net almost entirely, though this may say as much about the kind of goods Norway produces as it does about the new deal. In return, the European countries will reduce tariffs on India food exports; Indian professionals will get easier visa access (an odd element of Indian trade negotiations is a determination to ease the exit of its most valuable citizens), there may be cross recognition of professional certifications and, in an unusual condition, the European countries committed to invest $100bn into India over 15 years, in the process creating one million new jobs.

A second quirk in the deal included in the Indian government’s official release is its contention that the agreement will provide a base for Indian countries in Switzerland enabling them to extend “market reach” into the European Union, thus, in a sense, making the geographic significance of the deal extend by the countries directly involved.

B)   Intellectual property.

Appearing at a party for a new book on intellectual property written by a high court justice, Finance Minister Nirmala Sitharaman said the government wanted to be a “facilitator, a booster” of research and development and thus, implicitly, supportive of patents and intellectual property rights. To some extent, this support has been reflected in new rules and an expanding number of patents. But the small total is a reflection of not only a shift in approach but obstacles, including applicability periods that can be consumed by the waiting period for the patent to be granted (though the system is becoming more efficient) and blocked renewals.

The country’s contradictory views are most apparent in the pharma industry, where many of the new patents are being granted. Among the obituaries of the past week was one for Ranjit Shahani, the former managing director of Novartis who became widely known because of his involvement in a long-running (1998-2013), failed, effort to get protection for Glivec, an important drug used to treat cancer. The consequences of Mr Shahani’s (and Novartis’s) failure could be a case study on intended consequences (an ability to produce costly drugs cheaply in India) and unintended consequences (eviscerated national capacity for innovation). Quietly, many sophisticated research efforts in India were curtailed because of the decision, I was told while covering America several years ago. These kinds of losses are unquantifiable - who can price what does not happen? It is the classic problem put forward by Bastiat on opportunity costs but India y may have crushed exactly the kind of innovation it now wants to foster. After the Glivec decision in 2013, key scientists and projects moved to countries with high intellectual property protection, notably America.

C)   product quality.

Suspect success

The heart of India’s pharma success continues to come from generics, meaning cost-based competition that continues to be intertwined with quality lapses. Jefferies, a broker, put out a report this week citing government testing data on 64,000 samples from mid-April to mid-December that showed 4% were not of “standard quality” and 16 samples were “misbranded or spurious”. One way India copes with this is by allowing branded generics to play a role. This allows buyers to make decisions based on the reputation of the producer rather than having to rely on government inspectors who are given the impossible task of ensuring quality at thousands of Indian facilities. In America, which is a huge consumer of Indian-produced generics, purchases are done through just a few companies tied to health insurers. This denies customers - patients who are ill - to have a role in selecting what may be the single most important thing they buy. This undermines the entire notion of personal agency and because it undermines market signals, impedes quality improvements in the Indian pharmaceutical system.

Incipient success

Underlying much of India’s trade issues is the reality that it makes lots of shoddy products and does so inefficiently. They survive because of high tariffs and other barriers. This was true in the past in Japan and China and like those two countries, there are hints India is changing. Last week, TVS, an Indian motorcycle producer respected for the quality of its inexpensive products in India and Africa, announced it will start exporting to France. The bigger meaning is that TVS is willing to enter a mature market and compete with the world’s best producers. There aren’t many Indian examples of this – maybe Royal Enfield in the same field, but with a different value proposition. But if TVS does succeed, I believe the impact could be somewhat like what followed for Japan after the early success of Nikon, Honda and ultimately Sony, providing an inspiration for other Indian companies to do likewise.

Government-private initiatives for import substitution

Tata begins work on big semiconductor plants in Gujarat and Assam. These are major efforts backed by the government by India’s most trusted company. It is not clear that joining the global chip effort is a good use of Indian resources. There are already gluts emerging in the kinds of chips that these new facilities will produce and the areas in which there are shortages require an expertise that will take years to master (and thus will likely be satiated before this capability is realized). Still, Tata has been a surprise early winner in electric vehicles and there is tremendous confidence in its ability to accomplish difficult things.

The most important investor in India

GQG Partners has purchased a 0.8% stake in Airtel, India’s second largest cellphone company, from Singapore Telecommunications, for $700m. In just a single year, beginning with a massive contrarian bet on the then under-siege Adani Group, GQG has made a string of investments now valued at $22bn. If there is a theme to his investments, it is that the companies involved are often very large, they come with issues which GQG determines are exaggerated (in Airtel’s case, the fact that it is second to Reliance, a brutal competitor, and subject to government meddling). The moves are subsequently seen as obvious rather than novel and brave but they are, in fact, novel and brave and – by and large – so far correct.

 Can government govern companies?

The recent resurgence in profitability and share price for state-run entities (known as PSUs for public sector undertakings) has drawn much attention both because it has happened at all and because there is reason to question whether it can continue. A report by Institutional Investor Advisory Services, a consultancy, underlines the second question. While noting improvements in private sector governance, it slammed the lack of board independence of state-run firms, adding that they can operate like this because the government, in effect, gives an exception to itself.

Indian economic creativity and the law

The Indian rice bowl can now be filled with a new variety every week, according to a story in Businessline about the revival of resurrected varieties offered through a cooperative working through a digital network. Many of the grains are said to have medicinal qualities, particularly for stomach upsets and pregnancy. It would be hard to imagine a product set with more potential in the Indian market.

This sort of agricultural entrepreneurship is quietly happening elsewhere in India. Punjabi farmers may be best known for protesting in Delhi for protection and support. When I was in Punjab, I met a number of farmers who have been experimenting with different kinds of wheat, taking the innovative approach being applied to rice.  Holding back their efforts were rules supported by the farmer lobby to require wheat to be sold through government mandis (wholesale markets) which had no innovative capacity to deal with novel products. Consequently, the entrepreneurs who continued to experiment with the unusual crops sold outside of the legal system. I have never heard of any being prosecuted and I do inquire. My sense is that if a business is working in line with the broader Modi administration goals of improving the economy and the health of individuals, the government won’t intervene.

For distribution in America