India Business and Finance, September 27th
What happened in the Indian business world during the past week
India Business and Finance, September 27th
India’s revived statism
The Indian government received broad criticism for resurrecting its corrosive “permit raj” in the aftermath of an August announcement that permits would be required, with immediate effect, for imported computers. Impeding the flow of computers would, among other problems, undermine its crucial software industry. In the aftermath of the criticism, the requirement was delayed and then modified, albeit, according to the Business Standard newspaper, in a way that blended policy incoherence with the imposition of the despised earlier system under another new name (‘import management system”). Many, including supporters of the government, labelled the move an embarrassment. But the government may have nonetheless achieved its broader goal of shifting assembly of computers to India.
Earlier, it had tried to lure computer companies with production-linked incentives, meaning cash subsidies based on sales revenues from local output. There was little interest because the payments did not outweigh the added difficulties. After the announcement concerning the requirement of permits and the possibility that they might be locked out of selling into the vast, growing, Indian market, dozens of companies rethought their position and submitted applications. Included in this group were industry giants Dell and HP. There were two notable holdouts. Now one of them, Samsung, has joined the crowd. That leaves only Apple among the majors to abstain. And Apple, because of its expanding production of iPhones in India, has little to fear (for now) from a grateful government and will likely get whatever permit it needs.
The government is doubtless delighted by the outcome. It is now at least imaginable that India could be become a hub for computer assembly as it is becoming for handsets. That was not the case in July. It would be dishonest to conclude that this is not a success. It is. Pushing around global companies is not easy. But it is a success that comes with a cost that is particularly insidious because it is impossible to quantify. The government’s move underscores that dealing with India means dealing with a country whose rules can change at any moment. Big companies may have the influence to delay changes and the ability to accommodate demands but upstarts, particularly ones without sophisticated government relations departments, probably can’t. This is true both for ones abroad and at home whose potential ability to produce almost anything outside of traditional Indian crafts, meaning anything that needs an imported ingredient, is asphyxiated by the need to cope with tariffs, restraints and, with the precedent being established for computers, special permissions. A consequence is that entrepreneurial energy is lost along with innovation and creates what the French economist Bastiat labelled as problems that are not seen but nonetheless destructive and real.
The difficult evolution of a troubled, promising local industry
India’s aviation regulator suspended Air India’s chief safety officer after an inspection in July found multiple lapses. “Ways of working that were once considered acceptable” aren’t anymore, said the company’s new chief executive, in a statement that was both encouraging and jarring. It wasn’t the only bit of unsettling aviation news. Akasa Air, a startup that has quickly gained traction, noted it was having problems because scores of pilots have abruptly resigned and both Air India and Indigo, by far the dominant local carrier, have added no procedures to protect against pilot fatigue. Jets leased by Go First, an airline currently in bankruptcy, are reported to be rusting on the ground while they wait to be redeployed. At least 40 of Indigo’s 320 jets are said to be grounded because of problems with Pratt &Whitney engines, along with perhaps 100 other jets in the overall Indian commercial airline fleet (18% of the total) suffering from this or other problems. If something awful happens, the industry and country will not be able to say there were no warnings. Meanwhile, India’s aviation sector is not only growing domestically in response to strong internal demand but also establishing new international routes, aided by government limitations on flights by foreign carriers servicing India.
How in the investment world, simply measuring things changes everything
After years of lobbying by the Indian government, JP Morgan will include Indian government bonds in its emerging market index and there is hope/expectation other indices, such as one branded as Barclays (but compiled by Bloomberg) will do the same. In theory, an index works like a temperature gauge. It shows changes but does not have an impact. In reality, the index by itself is an active component in the investment process, changing who owns what.
Reports suggest that inclusion could result in anywhere from $20m to $40bn of global infusions into the Indian debt markets. This is either just a bit (the overall size of the market is well in excess of $1trn) or a staggering amount (inflows so far this year are a bit over $3bn and in the past three years more has gone out than come in). Some economists estimate that the capital infusion could reduce interest rates by 45 basis points, or in excess of 7% which by itself suggests the oddest of all things, an economic free lunch. Perhaps not surprisingly, this possibility has dominated press and investment firm reports. Indian capital costs are high. Now, they may be less high.
There will, however, be other consequences. An infusion of outside money could strengthen the rupee, both depressing inflation (that’s good) and increasing the cost of local production (that’s bad). The move will take place over a period of months beginning next year but the mechanical challenges have yet to be addressed. There could be many. Bringing money into and out of India is a messy process at best. There are reporting requirements, registration requirements, and all sorts of taxes applied to transactions. Big investment houses are in India because they can deal with this sort of thing (at a cost). Small ones can’t and are not. American brokerage firms enable ordinary customers to buy foreign securities in dozens of countries but not in India.
The possibility that there will be lots of investment firms with no choice but to buy Indian bonds if they want to match a key index has set the local financial firms, and the local subsidiaries of global firms, into product creation mode. Funds of various sorts (with fees, of course) should soon emerge. The process won’t be seamless or cheap which is to say matching an index in reality will differ from compiling an index on paper. Clever investors will probably create some sort of derivative product offshore to capture the movement and returns of the Indian bond market without holding the underlying securities. This will drive the Indian government/regulator crazy since it could add international volatility to Indian interest rates without bringing fresh capital.
The best response to this would come in two parts. First, India could declutter the rules around its securities markets, making it simple and cheap to access. At the same time, the government, given the risk of having skittish foreign investors on board, might become more careful about funding its annual budget through deficits with all the debt issuance that requires. If that were to be the case, the “free” lunch would be earned and the index inclusion will have the unintended but welcome consequence of making India a financially stronger country.
Indian cinema
The current quarter is a blockbuster. Revenues are already up 65% over 2019. The tally included a strong response to western movies (Oppenheimer, Barbie, Mission Impossible) and many made in Bollywood and other Indian regional production centres. It is tempting to compare India’s movie business to others around the world, many of which are troubled. But India’s - internally derided for being utterly corrupt, nepotistic and, in the case of Bollywood (as opposed to its lesser-known equivalents in the south), past its prime – is also passionately loved and, like the heroes in its movies, seemingly indestructible.
The iPhone index
There has been much buzz about India assembling iPhones domestically and as a consequence, Apple’s decisions to enable people in India to gain access to the newest models at the same time as everyone else (until now there has been a significant lag). The new iPhone 15 is out but the key number clever Indians care about is not the domestic date of distribution but rather the price differential with other markets. After tariffs, taxes and other frictions, an iPhone 15 costs 63% more in India than America and 39% more than in the United Arab Emirates. Pick up a few for friends (common practice but I think not permitted) and the difference is enough to cover the cost of flights.
These sorts of high tariffs and taxes may explain why domestic investment is stagnating
Recently released government statistics show that foreign direct investment in India grew 6.95% in the fiscal year concluding at the end of March. Over the same period, overseas investments by Indian companies grew by 19.5%. According to Molital Oswal, a local broker, domestic investment by private Indian companies has dropped in each of the past two quarters.
But something positive is going on
While it is not altogether reassuring to look at tax collection as a proxy for growth, it has the advantage of reflecting actual payments rather than the mélange of guesses and estimates and inferences used to compile numbers like GDP. Direct taxes collected from businesses and individuals is up 23% since the beginning of the fiscal year on April 1st, compared to last year.
An unequivocal Indian boom
Perhaps a better way of looking at India’s growth is to find an indicative company. The usual choice in India is Hindustan Unilever since its vast distribution channels touch most Indian consumers. But here’s another corporate indicator: Since April, the share price of Premier Explosives has risen from 435 rupees to 1,036 rupees. It is one of a handful of similar Indian companies, the largest being Solar Industries (“complete blasting solutions”) whose businesses have taken off because of increased Indian spending on defense and construction and because western countries are taking a stricter line on producing things that blow up.