India Business and Finance, May 2nd

Recent significant events in the Indian business world over the past week (and a bit)

What India loves

While technology has enabled hundreds of millions of Indians to receive entertainment inexpensively on smart phones, they continue to show up in cinemas to see movies. A report from Ormax Media estimated that the audience for Indian movies grew 29% in 2022, exceeding the period prior to the Covid lockdown by 8%. Hollywood, however, may have lost the plot. Of the 943m tickets sold, only 48m were for American productions.

What India loves that needs tough love

A report issued on April 5^th by Hong Kong authorities concerning possible carcinogenic chemicals in the spices produced by two India companies, MDH and Everest has belatedly generated widespread concern. Singapore has reportedly suspended sales and Australian and American authorities are looking into potential problems and on May 2^nd, as this Substack is being posted, India’s food regulator said it would begin nationwide inspections. One newspaper, the Hindu, said the possible scandal threatened half of India’s spice business; a website, Moneycontrol, posted an explainer headlined: “Indian spices in a pickle”.

India wants Indians to come home

Searches for new chief executives increasingly include members of the Indian diaspora whomight be induced to return. The Economic Times reports that over the past two years, 30%-to-50% of searches have extended overseas, up from fewer than 15% previously.  These searches typically encompass Singapore, Canada, London and the Middle East.

The big winners from India’s integration with the world: Big accounting firms

A study of financial audits of companies listed on the National Stock Exchange showed the market share of the big six Indian accounting firms (all of which have ties to big global accounting firms) rose to 67% in the fiscal year that concluded at the end of March, compared to 61% during the prior fiscal year. Among the issues raised by Hindenburg Research in January 2023 in its scathing report on the Adani Group was its reliance on small and relatively unknown accounting firms. While many factors play into the selection of an auditor, companies that have previously relied on local, cheaper and friendlier auditors may believe that in the current climate, they increasingly need an endorsement by known entities.

India’s military business

A study by the Stockholm International Peace Research Institute concluded India spent $84bn on its military in 2023, making it the fourth largest spender in the world with 3.4% of the total. America accounted for  37%, China 12%, and Russia 4.5%. Behind India were Saudi Arabia and Britain, each at 3.1%, Germany and Ukraine, each at 2.7%, France at 2.5%, and Japan at 2.1%.

New problems emerge in India’s new economy

India’s digital tech stack and its application to finance gets much deserved praise but it is not seamless. The market capitalization of Kotak Mahindra Bank, widely believed to be among the country’s best managed banks, dropped 13%, from $44bn to $38bn over three days after it was blocked by the Reserve Bank of India (RBI) from issuing credit cards and adding new customers through its fast digital applications, the primary way it expands its customer base. A key executive in the bank’s retail operations abruptly resigned. The reasons for the sanctions are somewhat unclear but it is widely believed they are related to weak data protection within the bank’s systems. Other Indian financial institutions have been cited on similar grounds, raising suspicions that the widely touted benefits of India’s digital highway may have serious potholes that need to be filled. A past report on the Indian banking system by BCG noted that Indian banks spent far less on technology than international banks. At least on the margin, that is likely to change. Kotak’s problems, according to the RBI, have existed for several years without being fixed. Kotak responded to the sanctions by saying it was working to address all concerns.

Ola is among the most prominent Indian startups, with a ride hailing service and a leading share of the electric vehicle business, with a 50% market share of the market for electric scooters. It has been in ongoing discussions about a public offering. Underneath the company’s growth, though, is the issue of profits, of which there are none. It is possible that this doesn’t matter as much in the scooter business, which some continue to see as having a brilliant future, but there may be less tolerance in ride hailing, which seems to have lost its lustre. Ola Cabs’ CEO, former Unilever executive Hemant Bakshi, who was appointed in January, has now resigned and 20% of the company’s staff will be made redundant.

The Financial Express noted that over the past 10 months 10 prominent venture capital executives at six prominent firms have departed, with most, in the newspaper’s words, to “strike out on their own”. In a story along similar lines, The Economic Times wrote that the top positions at 10 major startups have also turned over in the past year. The reason, the paper says, is an “emerging focus on profitability”. Given the continuing problems in this corner of the Indian economy, it is probably a good bet that there will be more executives striking out on their own and more top positions turning over as ongoing losses and an inability to raise more money from venture funds produces a change in control.

Indian pharma

Exports of pharmaceutical products increased 10% in the fiscal year ending March 31st, to $28bn. The increase comes after a slight decline in the prior year and despite multiple incidents of serious quality problems and a report that the government is now pushing companies to create new systems to recall substandard products. America is the most important market, accounting for 31% of sales, followed in size by low single digit shares for Britain and the Netherlands. Business Line reports that many new countries have now become markets including Sweden, Ireland, Latvia and Brunei, among developed economies, and Chad, Sudan, Haiti and Ethiopia among poorer countries. These reported sales come on top of unofficial sales. Visitors from Africa come to Mumbai with empty suitcases and return with them packed with medicines. I asked one buyer about quality issues. He responded that he uses a special broker who knows how to negotiate both on price and quality. 

Could India’s biggest company be flagging?

Earnings for India’s most highly valued company, Reliance Industries, missed estimates for the fourth quarter in a row, with a year-to-year decline of 1.8%. Full year revenues rose only 2.7%. The company attributed the quarterly earnings decline to the previous use of a tax credit but the overall picture suggests Reliance’s vitality has dimmed. That’s odd given the current environment. India’s economy is booming which enhances Reliance’s retail and telecommunications segments while its refining operations has benefited from acquiring discounted petroleum from controversial places like Russia that can be resold at global market prices.

India’s complicated relationships with other countries.

The news last week was filed with examples of just how varied India’s commercial relationships can be

Sri Lanka-India-Russia. The government of Sri Lanka awarded a contract to manage an international airport to a joint Indian-Russian firm. It is located near a Chinese-run Sri Lankan port.

Iran-Russia-India with America in opposition

America sanctioned three Indian shipping companies for enabling the sale of “unmanned aerial vehicles” to Russia.

India-Iran

Mint reported that India and Iran will sign a deal after the election concerning the development of the Chabahar Port. The project, which began in 2003, has been repeatedly disrupted because of American sanctions and Iran’s hostile relationship with western governments. The port is located in southeastern Iran on the intersection of the Gulf of Oman and the Indian Ocean and is seen as a key access point to Afghanistan.

India-Iran and Israel and the collateral consequences of a war far away

A cargo ship seized by Iran on the grounds that it was “Israeli-linked” included 16 Indian crew members whose fate was uncertain. They will, apparently, be free to come home when their contracts end.

India vexing America

The office of America’s Trade Representative issued a report faulting India for counterfeit medicines and auto parts along with online piracy and lack of intellectual property protection.

How socialist is India?

India’s recent growth against a backdrop of business-friendly statements from the current administration that stand in sharp contrast to earlier eras in India that were assertively socialist. But Indian socialism continues to percolate in the background.

In 1985, shortly before receiving an inheritance from his mother, Indira Gandhi, who had been assassinated, Rajiv Gandhi pushed through a law abolishing India’s 85% inheritance tax. The issue is under consideration once again thanks to a comment by Sam Pitroda, chairman of the Indian Overseas Congress, a wing of the domestic Congress Party, and the advocacy of higher estate taxes by America’s president Joe Biden, who has his own reservations about private property. Advocates, not surprisingly, cite the emergence of an Indian super rich contingent. Opponents assert that it would lead to capital flight and discourage savings and investment at a time when India is as hungry for that as it is for tax revenue.

In 1976, during Mrs Gandhi’s tenure as prime minister, the 42^nd Amendment of the Indian Constitution was passed. Included was a passage stating that “ownership and control of the material resources of the community are so distributed as best to subserve the common good.”  That might seem to be a historic, or at least academic, question. It is not. How far the government can go in terms of seizing and redistributing private property to pursue this goal is now being considered by a nine-member panel of the country's Supreme Court.

For publication in America