India Business and Finance, November 7th
What happened in Indian business and finance during the past week
Where business can be done in India:
A Kolkata arbitration panel awarded Tata Motors $92m in compensation for the loss of a West Bengal plant built in 2006 in the idealistic hope of creating jobs in a depressed state while producing an innovative tiny car, the Nano, that could be affordable to a wide swathe of the Indian public. Ironically, the project had been supported by the communist-led state government in an ill-fated effort to reverse its anti-business reputation. Protests led by the party that subsequently came to power in West Bengal, the Trinamool Congress, forced Tata to relocate the operation to Gujarat, a state carving out a reputation as West Bengal’s economic antitheses under its then chief minister, Narendra Modi on his way to becoming Prime Minister.
The Nano ultimately failed, with the false start playing at least some role. Tata’s failure was seen as encapsulating the consequences of different ideological approaches. The area where Tata had hoped to operate in West Bengal is still poor, the area where Tata went has, even without the Nano, has seen growth. In the aftermath of the Tata experience, new land acquisition laws have been proposed with mixed success. Tata’s recent foray into iPhone assembly has been boosted by the responsiveness of the Tamil Nadu state government. But overall, it remains difficult to acquire large parcels for the industrial projects India needs to advance its manufacturing/export goals. West Bengal is pondering whether to pay the settlement to Tata in the hope it helps repair its anti-business reputation, or to appeal it.
What sorts of foreign business can be done in India:
Sweden’s Saab has become the first company to be granted the right to build a 100% owned arms production facility in India. It will manufacture the new version of shoulder-carried rocket launchers already used by the Indian military and currently produced domestically under license. Before the approval, Indian rules capped foreign ownership of arms producers at 74%. In allowing Saab to have a wholly-owned facility, India hopes to become not only a customer but an exporter. Other countries will doubtless push for their arms producers to have similar rights – an application from a French manufacturer is said to have been pending for several years. In granting Saab’s approval, it is likely that the Indian government felt that Sweden would be unlikely to to weigh in on how India might use these products, as would possibly be the case if a company was based in America, Russia or any number of other countries currently selling arms to India.
Government as poison pill
The Indian government owns an 8% stake in ITC, a conglomerate whose most profitable division dominates the cigarette market but which has also done increasingly well in hotels and consumer products. Sources told The Financial Express that the stake would be retained for “strategic reasons”. While it is odd that a government would be heavily invested in a public tobacco company, this is true as well in Japan. Still, why would India want to remain invested? Among the answers is that it sees ITC as a national champion and fears that selling its own stake could lead to a takeover by British American Tobacco, which owns 29%.
A learning curve
Competition to attend the Indian Institute of Management (IIM) Bangalore is intense–200,000 students with superb grades and test scores compete for 500 spots. No admission process in America is so competitive. A survey cited in the Economic Times says that this year IIM Bangalore moved up in the global rankings from 50th to 48th. It is the top-ranked business school in India, with IIM Ahmedabad rated 53rd, Calcutta 59th and the Indian School of Management 78th. Given the ferocious competition to get in, the remarkable intellectual capacity of those who are admitted and the tremendous success that many graduates are now finding in the west, it is perplexing why these schools do not rank at the very top of the lists. The commonly cited answers seem to be that facilities are often not particularly good, the teachers are not highly paid and there is insufficient research. But the biggest reason may be the long lag between production and the widespread recognition of the value of the product.
IT no longer drives wage increases
Willis Towers Watson predicted that in the coming year Indian salaries would rise 10%, just as they have this year. The coming increase would be the highest in Asia. The number reflects conflicting trends and is less useful than it may appear. Competition for talent among IT companies, perhaps the single largest factor driving higher wages, has vanished in the face of a slump in client demand for services. But other areas are seeing intense competition. There is a public battle for pilots between Akasa Airlines and Air India. One news story bemoans a sudden shortage of chefs for all the restaurants that have opened post shut-down. And anecdotally, at least, it appears there is increasing demand for factory labour.
The future of the business Indians care most about
Bloomberg reported that the Saudi government hoped to invest billions of dollars in a holding company that would control India’s wildly popular professional cricket league. How much is the attention of 1.3bn people, largely poor, worth today? And could the future of the Indian cricket league resemble what has emerged in Britain for football?
Do financial capitals control companies?
India has said it will be more tolerant of Indian companies listing overseas. There were a few overseas listings in the aftermath of the 1991 reopening of the economy but recently the primary securities regulator has been unequivocally opposed, believing that where a company’s shares are traded has a substantial impact on both how it is controlled and also in the creation of a vibrant domestic financial marketplace. The argument for overseas listing is that capital is far more costly in India than elsewhere which inhibits economic growth. The few companies that have dual listings often trade at a premium outside of India. Foreigners seeking to buy shares directly in the Indian market face innumerable hurdles and for ones that aren’t institutions, it may be all but impossible. While the decision to chip away at these rules has suggests India is changing, the way forward is far from clear and the bureaucratic forces that remain opposed are formidable.
No currency concerns here
The Indian rupee hit another low against the dollar. No one seems to be fussed, presumably because the inflationary impact and the diminution of purchasing power is less important than the boost to export competitiveness. The purchasing managers index is still positive but not as positive as last month, which was not as positive as a month before.
Charity, or not?
As an addendum to its wealth report, Hurun Research put out a list of the largest philanthropists in India. The primary list shows all the usual names in the usual places. A second list, which considers the ranking exclusive of a mandatory contribution demanded of large companies for “corporate social responsibility” (2% of net profits), transforms the list. The Ambani family, which controls Reliance, the country’s most valuable company, and stands at number three on the initial list, certainly drops out of the top ten (which is published) and less certainly, but probably, drops a great deal.
The CSR payment does not get the attention that it deserves, doubtless because it is difficult to track. The entity in charge of handing out money is often the spouse of the company leader. The recipients are inevitably described in warm terms but while this is justified in some cases, it is hard to know in others. In private meetings with many companies, I am told these payments play an important role in pacifying politicians. India is acutely sensitive to mis-uses of money purporting to be philanthropy. Even small contributions from foreigners must receive approval from the Reserve Bank of India and be channeled through a special account at the State Bank of India. It would be odd if the issues generating these concerns were solely a product of foreigners.
Indian/British capabilities
The remarkable success of Royal Enfield, once a failing British manufacturer but now a thriving Indian one, is well known. Now others are trying to find similar success. In 2020, TVS, another important Indian motorcycle producer with a vibrant sideline as the subcontractor for small displacement BMW bikes, purchased out of receivership the British motorcycle manufacturer Norton for £16m. Its intention is to position Norton as a competitor with the Italian, German and Japanese manufacturers to make the finest bikes in the world (meaning bikes that are really expensive). Indian companies do not usually attempt to compete in this realm. TVS has since invested in production and design in Britain while generating almost no sales. In the short-term, the deal looks like a failure. A Mahindra-affiliated effort to revive BSA, another once famous motorcycle manufacturer, using a more common strategy targeting the middle of the market, has similarly struggled, perhaps suggesting there is a limit to the value of nostalgia.
TVS has said it has a plan that will emerge over the next few quarters that may turn out to resonate in ways that go beyond the company. Though not known in Europe and America, TVS is seen in India as a particularly well managed company with high production standards and clever engineering that allow it to make very cheap vehicles that withstand very difficult conditions in not only India but Africa. In attempting to breach the top of the market, TVS is echoing an effort by Tata to rejuvenate Jaguar, which it bought in 2008. It has also failed to bear fruit, at least so far. There is a chance they both fail but if they do succeed it will be evidence of expanding Indian capabilities, and maybe of revived British capabilities as well.