India Business and Finance, September 5th

What happened in the Indian business world during the past week

The end of an era in Indian finance/There can be no Jamie Dimon in India.

A half-century ago Indira Gandhi directly (through nationalization) and indirectly (by regulation and threat) blew up the dynamic end of India’s banking system as part of an ill-fated experiment resulting either from philosophic socialism or toxic populism. If the latter was the motivation, she succeeded – the move was popular. If the motivation was the former, it failed in the way socialism always does, with lost economic vitality and a corrupt, inefficient, bedraggled, government-directed financial system. In the years preceding nationalization, resistance to the move was led by the head of the Indian bankers’ association who also ran the Central Bank of India, the first major financial institution owned and led by Indians. It was not a fair competition. He lost his role in the association and at his bank, winning the argument only over time as government management eroded the standing of the banks inside and out. The grandeur of the Central Bank itself remains only in a battered, once beautiful, headquarters in Mumbai’s old business center.

A year after Ms Gandhi’s death in 1984, Uday Kotak opened a tiny financial firm in a 300-square foot office near the the Central Bank’s headquarters. Initially, his new firm provided factoring of receivables, an appealing business because capital was scarce, lending spreads high and bill payment slow. Then came car finance, appealing because cars were scarce (so collateral was superb) and competition was limited to the other entrepreneurial financial institution of the time, Citibank, which was in turn was limited by myopic bosses in New York. The institution that ultimately emerged from these small beginnings, Kotak Mahindra Bank, has been a remarkable success. An initial investment of $120 would be worth $40m today. A share that cost 2.4 rupees in 2001 (the start of my public data set) now sells for 1771 rupees.

Kotak Mahindra’s  trajectory for most of its existence was consistently up, with the market value peaking at almost $50bn in October, 2021, shortly after a new rule imposed by the Reserve Bank of India (rbi) went into effect capping the tenure of bank bosses. That put a hard stop to Mr Kotak’s reign. He attempted to stay put was no success. On Saturday, September 2^nd, he announced his resignation, a move that was both shocking because under the rules he was permitted to serve until the end of the year and inevitable because the end of the year is in sight. America has no such rules and the rare bank boss who proves capable, such as Mr Dimon, can stick around.

His departure represents the end of a remarkable era in Indian banking in which the three men who were largely responsible for creating a dynamic new financial system out of the wreckage produced by Ms Gandhi have, within a brief period, all left their positions.  In 2020, Aditya Puri, who built HDFC Bank from nothing into one of the world’s largest institutions, was forced to leave because of another rbi edict. In July, Deepak Parekh, who in the 1970s quietly created what was to become a huge housing finance company (HDFC) and then other entities providing insurance and funds, left in July after consolidating his own institution with his biggest success, the bank he had started and brought in Mr Puri to run.

Two internal candidates to succeed Mr Kotak have been submitted to the rbi for required approval. The fact that succession, and compensation, must now be “blessed” (to use the local terminology) by a reserve bank whose own leader is chosen by India’s prime minister reflects how even if Ms Gandhi is long gone, the central government is back in charge.

India’s growth

The past week provided three ways of looking at India’s economic condition, all suggesting expansion.

1)    Abstract and conventional: India’s GDP rose 7.8% on an annual basis in the last quarter. The news was greeted with mild disappointment (it came a bit short of some expectations) and celebration (because it reinforces India’s position as the world’s fastest growing large economy).

2)    Abstract, focused and conventional:  A survey of manufacturing purchasing managers  showed growing, positive, activity.

3)    Not abstract and interesting. Unlike Delhi with its ambassadorial and lobbying clique and to some extent Bangalore with the heavy involvement of Microsoft, Google and the like, Mumbai is almost entirely devoid of foreigners. Shabbat services at the city’s Chabad House on Friday once again lacked a minion. The three outsiders who attended, however, were each suggestive of an expanding India.

a)    Business relocation: A baker from France, despairing of his country’s current economy, opened a bagel shop last week amid the chaos of Colaba Causeway, the frenetic remains of a once elegant shopping district.

b)    Export inspection: A kosher inspection agent from London in India to examine raw materials used for pharmaceutical products, food additives and similar wholesale ingredients that are being produced in India for the world in ever greater volumes.

c)     Industrial materials importer: An Israeli scrap metal dealer was in town because the sale of an occasional container of scrap had expanded to monthly and then weekly demand. Scrap metal dealers have under appreciated economist credentials. They buy where demand is falling and sell where it is rising. America and Europe have, he said, become tired while India is wide awake.

Government anti-free market actions show signs of success

1)    Could the revival of the permit raj be working?

Even the possibility is grating to admit in as much as such statism carries toxic baggage, but there is at least some short-term evidence that intrusive government action can be successful. Following the controversial decision by the government to require permits for the import of computers, it opened up applications for subsidies (“production-linked incentives) for domestic production. A prior effort to draw interest in computer production in exchange for these sorts of subsidies fell flat but in the aftermath of the government’s accouchement, 32 companies applied including Dell and HP. Missing from the group are two important names: Samsung and Apple, both large players in the global market and decisive producers of handsets in India (and thus linchpins of the government’s strategy to reinvigorate India’s manufacturing base). Many reasons, plausible and implausible, have been cited for their decisions not opt in. Perhaps they think they are already on the government’s good side and won’t have problems getting approvals for imports.

2)    State-owned business revival.

An analysis by the Mint newspaper on the market capitalization of partially-privatized state entities has a surprisingly twist. In 2010, companies controlled by the state accounted for 32% of the market capitalization of the Indian bourses. By March 2019, that had contracted below 10% and there was every expectation it would contract further as the private sector continued to take market share. It has not. As of August 28^th, government-controlled entities accounted for 11.3% of the market’s capitalization. Behind the rise has been a cleanup of bad loans (through government infusions) in the state-controlled banks; large profits and share price gains for government-controlled energy producers like Coal India because of high prices and high demand; and government spending on defense and infrastructure with local firms. In short, the state approach is, in a limited way, working, at least for now.

While the property market blows up in the rest of the world

Registrations for new properties reached a record level In August, with the 10,900 units, up 26% from August last year. Of these, 80% are residential. Quarterly data suggests about one-third are for properties under 500 square feet.

Enduring love

In 1932 Royal Enfield introduced the Bullet Motorcycle. On September 1^st, the newest edition of the Bullet was introduced. It has two-thirds the horsepower and two-thirds the top speed of the original bike. This is not conventional progress. The Enfield came out of the era of the Duesenberg and similarly forgotten manufactures. It is certainly the best loved English product to ever be sold in India; it might even be the best loved Indian product. There are at least 1,200 devoted riding clubs and rusty versions can be seen chugging through fields in Punjab, the dangerous roads of Ladakh and densely crowded city streets. The military even has a special team, the Tornadoes, that do stunts on bullets including setting a record in 2017 of somehow fitting 58 people on a single bike.

Globally, is there any other vehicle essential unchanged over 91 years? I’m not sure how many products exist over 91 years. The country’s youtubers were ecstatic over the new model. Inevitably, they showed a stock picture and a recording of the new bike’s sound. In an engineering feat, it was much like the irregular cough of someone waking up in the morning and needing to expel the pollen that had built up overnight, as opposed to the soft, steady, quiet thump that is common for modern vehicles. It sounded, in short, like it must have sounded in 1932, or 1942 or, you get the point. The bike’s fans were overjoyed.

For distribution in America