India Business and Finance, October 10th
What happened in the Indian business world during the past week.
Understanding what India permits
No one would accuse India of managing its economy based on the Adam Smithian faith in the benevolence of the butcher, brewer and baker, but it is striking how far the state is willing to go while maintaining at least the appearance of a disinterested, rules-based, system. Consider what has happened in the last week:
1) Favoured industry:
India’s current insolvency regime was adopted in 2016 and is broadly seen as having achieved real results – thus being a major step forward for the country – while being riddled with inefficiency, gaming and delays (traditional problems it was intended to resolve).
One industry that had appeared to have gamed the system for its benefit was aviation. India’s bankrupt airlines have held on to airplanes to the exacerbation of lessors. Asset-based lending, which has a natural home in transportation, depends on separating easily redeployed assets, like planes, from parent companies. This allows them to be cheaply financed. Efforts by India’s insolvent carriers, particularly Go First airlines, to keep their planes had thrown a spanner into this well-established system just as the country is eager to expand aviation and the country’s leading carriers, Indigo and India Air (Tata), have a mind-boggling 1,000 planes on order, with deliveries to soon begin trickling in (meaning money must be paid). The prospect of endless litigation would have inevitably increased financing costs, and no lender or lessor wants to be sucked into that. Last week, India’s central government unexpectedly revised the bankruptcy rules exempting airplanes from the insolvency process, allowing them to be repossessed by creditors. The new approach will surely, and positively, change the dynamics of the vast financing that Air India and Indigo must each be in the process of completing.
2) Unfavoured industry:
At the same time as the government was helping the airline industry, it effectively crushed the e-gaming industry, which not long ago seemed to be the one successful area of a private startup world filled with other ideas such as edtech and fast delivery, which have blown up for operating reasons. The sledgehammer on e-gaming came in the form of a 28% tax on wagers which will be applied extending backwards, reviving, in essence, the kind of retroactive taxation India has vowed to avoid. Regardless of the public discussion, the tax most likely reflects the fact that the current government doesn’t like a business that it considers to be gambling. The move will surely prompt furious last-minute lobbying and remind all other businesses that their future (and past) is in government hands. It could also prompt the companies to ponder how they can relocate to India’s free market entrepot, the United Arab Emirates. In theory this could create a bit of international tension since what is in essence in Indian business will be taking refuge off-shore, but India and the UAE are now in the midst of building a relationship and are unlikely to let something like this get in the way because bigger issues are at stake. India is short of investment, the UAE is flush, and negotiations are now unfolding to provide Emerati sovereign funds favourable tax and procedural rules to allow more money to flow across the Arab Sea.
3) Super-favoured industry:
The government has created a National Turmeric Board to promote the sale of India’s favourite spice, of which, I have learned, there are more than 30 varieties. Hard to imagine the government can do more than hundreds of millions of Indians who are part of the global diaspora but ….
4) Unfavoured country:
After a year-long dumping investigation initiated by the Indian operations of the British industrial vehicles company JC Bamford, the Indian bureau in charge recommended a flurry of tariffs on wheel-loaders, essentially a tractor with a big scoop up front. The category is tiny – imports were just over $100m – but the message was big. The highest tariffs, up to 82%, were reserved for Chinese-owned companies but the Chinese operations of Caterpillar were assessed a 19% duty and the Chinese operations of Volvo 35%, according to the Financial Express. There is a clear message for multinationals – if they are producing in China, India is going to begin seeing them as Chinese and subject to expanding barriers.
5) Favoured/unfavoured
Hindustan Motors, which stopped manufacturing the much loved and entirely perfect Ambassador car in 2014, announced, after almost a decade, it would sell off the remaining equipment in its West Bengal plant for scrap. It hoped to start production of an electric vehicle but ran into problems with the Bengali government (a story that by itself captures a century of decline). For reasons that are all but inexplicable, during its travails the Ambassador brand somehow ended up owned by Peugeot, which itself is part of a vast global amalgamation that doubtless (sadly) has other concerns. It may be impossible to describe to outsiders how important the Ambassador remains in India. A photograph was recently prominently run in a Sunday newspaper of a family today and a half-century ago. Everything changed but what was in the center - their ageless Ambassador.
Meanwhile, JSW, a major steel producer, is reportedly negotiating to advance its long-planned move into electric cars by purchasing a controlling interest in Shanghai Automotive’s MG car unit, an entity which, in the convoluted history of cars, created the original model for the Ambassador. MG, unlike Hindustan Motors, is clearly intent on surviving and has gained recent popularity in India. But given the government’s feelings about China (see above), that is surely impossible, were it to operate on its own. The key question is whether the involvement of one of India’s biggest conglomerates is enough to offset the Chinese involvement.
Employment
The chairman of the massive State Bank of India (SBI), Dinesh Khara, received a ten-month extension on what had been a three-year contract. SBI has a massive presence in India with far more branches, assets and people than any other institution. It recently announced record earnings. When Mr Khara joined the bank back in 1984, it was where the best college graduates hoped to work. That, however, is no longer the case. Low pay, short tenure at the top, and a perception of arrogance with the public and subservience to the bureaucracy has tarnished its reputation. Few in India think any of this will change. The institution remains too successful and, perhaps more importantly, too important to the government - at least for now
A new hierarchy of international banks
League tables for the top equity capital markets investment banks in India were calculated by Refinitiv, a data firm. Up top was Jefferies, an American firm that is making a serious effort in India. It has hired many of the analysts from CLSA, a Hong Kong-based firm that went through major changes after it was acquired by a mainland Chinese bank. Accompanying the capital markets success is the ubiquitous presence in the Indian media of its head of equity strategy, Chris Wood, formerly The Economist’s financial correspondent in New York and Japan and, for a brief moment, an utterly brilliant, iconoclastic, libertarian presence for The Economist in Washington D.C.
Hot stock of the moment
After winning the top prize at the recent Whiskies of the World contest (who knew that even existed?), the share price of Piccadily Agro Industries, which has distilleries in northern India, doubled. And that is just the visible end of a bigger transformation. Notwithstanding a thicket of rules limiting and, in places, banning, alcohol sales (including in the home state of Prime Minister Narendra Modi), as well as heavy taxation, the Indian whiskey market is the largest in the world and domestic production is taking off. There does not appear to be any government efforts to curtail this rise beyond the existing impediments but that could change - it has in the past - so expansion may, quite deliberately, come quietly.