India Business and Finance, October 4th
What happened in the Indian business world during the past week
Credible India–the promise vs the reality
1) Government
The managers of the FTSE Russell Index declined to follow JPMorgan and include India’s sovereign bonds in its Global Aggregate Bond Index. The move will dampen but not stop a potential surge of international investment into India from index funds and portfolio managers under pressure to take index-related positions.
The factors that led to the different JP Morgan and FTSE Russell decisions say a lot about how global business looks at India. The JPMorgan inclusion is tied to the current general enthusiasm which is tied to its relatively solid growth in a sluggish world, the need to replace Russia in the emerging market basket, and the prospect of a friendly alternative to unfriendly China (a take JPMorgan’s CEO Jamie Dimon advanced while in India on a visit that overlapped the decision). The FTSE Russell decision reflects the difficult reality of the Indian markets, with all the friction that comes from getting permissions, coping with complex taxes, remitting funds, reporting and even clearing (because India uses an incompatible system). Unlike the JPMorgan decision, the FTSE Russell’s call was not amplified by the government or the segment of business and the press that shouts out India’s accolades, and consequently it circulated in the markets but not among the public at large.
2) Private Companies
A review by Care Ratings, one of a handful of domestic Indian ratings agencies, found that for every company downgraded, 1.7 were upgraded, a conclusion that accords with the broad sense that the country’s business sector is reducing financial stress (leverage ratios have declined) and becoming healthier.
Other signals
1) Basic industries
In India, one of the closely tracked indices is “core growth”, comprising growth rates in a combination of the coal, crude oil, natural gas, refinery products, fertilizer, steel, cement and electricity industries. As with many broad measures, there is reason to find fault with this one – India’s involvement in crude and refined petroleum products is skewed by the pivotal role Reliance plays in the global refined market. But the index nevertheless has some information value. In August it rose 12%, following an 8.4% rise in July, suggesting an economy growing at an accelerating rate.
2) Public offerings
India had the highest number of IPOs in the first half of its fiscal year (meaning through September) since 2007. This has captured relatively little attention, perhaps because in recent years, start-up finance came from the private markets which are now in collapse. Or perhaps it is because globally, IPOs have been slumping and thus attention has strayed from the market. Normally a hot IPO market prompts waves of stories about entrepreneurs and broad changes, along with abundant data about how much money is being raised, where it is coming from and how it is being used. There has been none of that.
3) Record stockmarket
In an admittedly unusual but nonetheless revealing calculation, the Indian Express concluded that in the first half of the financial year (through September), the Indian market saw the highest percentage gain in market capitalization of any major stockmarket in the world, appreciating 22% (worth about $700bn).
What shouldn’t be up
1) High inflation; the new normal:
Among G20 countries over the past decade, Indian average inflation has trailed only Turkey and Brazil. What has changed is that even though India’s inflation remains near the top of the list for the past year (at just under 7%, behind only Turkey), the disparity with the rest of the world has shrunk.
2) Legal bills.
A subsidiary of the Economic Times of India reckons that legal fees paid by Indian firms rose 21% in the last fiscal year, with the biggest spenders being Reliance, Sun Pharma, Infosys and L&T. Sadly, the analysis, which uses reported data, doesn’t disaggregate penalties and the like. Because the Indian legal system is open (I sometimes wander into the Bombay High Court and the attending lawyers have coffee in the surrounding cafes and are chatty), this development doesn’t instil outright fear. But the Dickensian costs, delays and uncertainty of the legal system are corrosive to the trust needed for a society to prosper.
Business ethics
1) Drug trials.
One aspect of drug trials is eagerly sought out by patients. They are conducted at major research hospitals like Memorial Sloan Kettering, the Anderson Institute and Dana Farber and those who can participate get access to new, potentially lifesaving (or extending) treatments. But there is, perhaps, another side to drug trials. A study by a professor in Bengaluru looked at 424 clinical trials and concluded that Indians were used excessively to test potentially dangerous medicine.
2) Business Crime
A) Gold Smuggling
Mumbai police are involved in multiple prosecutions for gold smuggling. Since gold can be legally owned, traded and used as not only jewellery but bank collateral, the very notion that it can be the subject of criminal proceedings is mind boggling. Gold becomes illicit when imported without being reported and without tariffs being paid, which currently amount to 18%. This surcharge may be the single most unpopular and ignored tax in the country. It is common for many people entering the country to drape themselves in gold “jewellery” (which might or might not be legal) that is subsequently used as a method of exchange either directly or after being melted down locally. There are said to be regular runs across the Arabian Sea by speed boats filled with gold bars. It also is transported in liquids from which it can be easily distilled. The retail gold markets themselves welcome cash transactions and the gold itself serves as a popular alternative to the government-controlled digital payments that is bringing new efficiency to India but with it, feared state control.
B) Non-profit entities
A story in the Sunday Mid-Day newspaper about the leadership battles to run Mumbai’s many membership organisations says they are the subject of intense campaigns that can be deadly. In a particularly colorful case, a candidate for president of the Radio Club, an old sports club in Colaba, says his opponent attempted to have him murdered (police declined to prosecute). Control of these entities comes with the ability to assign capital projects, direct routine purchases and expedite memberships (all of which can be accompanied by side payments). Apparently similar factors play a role in wildly expensive elections to head the Indian outposts of well-known global "charitable" and service entities which have been quietly transformed at least in part into “dark” businesses. Any deeper, more authoritative, explanation awaits a Netflix series.