India Business and Finance, April 23rd

The past week in India's maybe changing economy

India Business and Finance, April 23^rd.

A different india?

If a single word has come to signify why foreign companies should have nothing to do with India, it would be “Vodafone”. Just saying the name is enough for many business people to shudder and then avoid even considering any engagement. The last profitable year for the British telco’s Indian subsidiary was 2016 and even that was merely a positive blip in a wrenching process of trying to build a business in hostile territory.

Problems began after the  acquisition in 2007 of controlling interest in telecom operations of Hutchison Whampoa, a Hong Kong-based company. It was a moment that, much like now, optimism about India’s prospects was high. Such sentiments proved transient, with Vodafone’s experience serving as a common example. Soon after the acquisition closed, the Indian tax authority went after Vodafone for Hutchison’s capital gain. After years of costly and distracting litigation, Vodafone prevailed before India’s Supreme Court but in response, the government enacted a novel retroactive tax. That too failed after years of litigation, in part because of an arbitration panel, in part because India’s government came to see it was terrifying the investors it hoped to attract. The resolution, however, was likely too little, too late, and the tax case was soon augmented by other challenges, notably the entry of Reliance, a conglomerate with an unmatched ability to navigate the Indian political, judicial and regulatory system that managed to avoid many of the costs and constraints that had constrained Vodafone.

Not surprisingly, given its circumstances, Vodafone’s service deteriorated. To have it as a provider (I do) is to suffer from dropped calls and the inability to get data at times even when the signal appears to be strong. A once leading market share shrivelled, making it number three in a market seen to have room for two.  The conventional wisdom has been that Vodafone’s failure is just a matter of time and that made an announcement that it would raise $2bn in the Indian stock market to be initially viewed with incredulity.

Investors have, however, come forward, most importantly GQG Partners, a fund based in Florida that made a fortune a year ago betting against the skeptics on the Adani Group of companies. The mere mention of its involvement prompted a rethink. GQG was not, after all, an investment bank hawking an offering. It is a buyer in search of value in unconventional places. Vodafone certain qualifies as an unconventional place.

A new line of thought emerged.  Yes, Vodofone is troubled but even after years of steady attrition it retains perhaps 19%r of the country’s cell phone subscribers. Bharti Airtel has a market share slightly in excess of 30% but a valuation 10 times higher. Could that be sensible? As part of a complicated semi-bailout, the government accepted equity in Vodafone in lieu of payments for past dues and now owns one-third of the company. It is at least plausible that the government views this partnership not as an unwanted investment but as a strategic play to ensure the top two players do not become overly powerful conduits for information. Under this scenario, the environment for Vodafone should improve. After the elections, many now expect tariffs to be raised, in only a bit, but still sufficient for Vodafone to be profitable. The new capital raised in the offering will suffice for needed investment (so no more dropped calls). There have been many lessons in the Vodafone debacle but, perhaps, the environment has changed in India as well and in the same way Vodafone provided a litmus test of conditions in the recent past, its current prospects may reflect India’s present and near-term future.

Investment

That said, foreign portfolio investors are pulling back from India. The flow of money into debt that has been strong since India was added to global indices declined in April by Rs61bn ($740m). There has been heavier selling by equity investors and it dates back further. In a possibly related development, the Rupee has been hovering around a new low - close to 84 to the dollar - continuing a long-term trend of slow decline. There are many possible reasons for a weak currency, most of which do not reflect optimism about economic performance.

New high for new companies

Still, some of the news is quite positive. Data for the first 11 months of the 2024 fiscal year (April through February) shows 168,715 new companies were registered, up 6% from the prior year. Maharashtra had the largest percentage of new companies, 18%, followed by Uttar Pradesh, 18%. February was a particularly active month, with more than 17,000 registrations. In the same 11 months, closures dropped dramatically to below 19,000 compared to just below 81,000 during the same period last year.

 Analytical India

The number of security analysts registered to work in the Indian stock market has grown from 27 in 2015, just after new rules regulating analysts came into effect, to 1,176 as of February.

No one is good enough.

India’s securities regulator, SEBI, rejected all three candidates that had been nominated to run India’s commodities and derivatives exchange. The decision underscores who really runs India’s financial markets and no one has missed this point. 

The overall economy

Power consumption for the first half of April was up 10% over the same period last year and coal imports were up 23% over the first three months of the calendar year. Both hint at underlying economic growth and, of course, the broader costs associated with coal consumption.

India-China Trade

The merchandise trade numbers between China and India are closely watched by the Indian government largely because they are so skewed and despite a statistical anomaly resulting from a low base, that hasn’t changed. In the fiscal year concluding at the end of March, India imported $102bn, up 3.3%. India’s exports to China were $16.67bn, up 8.1%.  The fastest growing India exports to China were iron, cotton, quartz, aluminum and human hair – in short none of the higher value exports in which India hopes to make headway.

News from the top of the world

The new source of Japanese money: India

The Times of India’s coverage of India’s northern border has produced some curious stories. One noted booming demand for the argeli plant, which comes from a remote area on the Indian-Nepal border. It is, apparently, a key source material for yen notes and no longer sufficiently available in Japan. Nepal has taken the first move in exporting it to Osaka for conversion into currency.

Vote harvesting India style

In America, at least some of the acrimonious debate about voting is tied to claims about the difficulty some people have casting their ballot. India sets the standard for this sort of thing and the difficulties that can emerge. On the Indian side of the border in Darjeeling, the process requires poll workers to drive 54km from a poling station and then trek uphill for seven hours, their equipment carried by mules. This year, however, mules have been banned because of concerns they might transmit diseases to other animal.

Power in India’s financial centre

It is often noted that in capitalism the rich become powerful and in socialism the powerful become rich. In India, this switches back and forth depending on who has leverage at a particular moment. This is playing out in Mumbai at the Royal Willingdon Sports Club, a rare plot of green (with a golf course) in the congested city that was founded in 1918 by Lord Willingdon, then governor of Bombay. Getting into the club is costly and just short of impossible. Placing an order is even harder as elderly waiters seem to hear only those who joined at birth. That cost alone would seemingly consign membership to the wealthy and traditionally well-placed. But like many old institutions in Mumbai, the underlying real estate is under constant threat of seizure by the local government and that power comes with its own rewards. A recent deal to extend the club’s lease apparently involves granting 50 lifetime memberships to whomever the chief minister of Maharashtra (the state in which Mumbai is located) wants, along with three additional memberships annually. The opposition party running to represent the city in the upcoming elections vowed to scrap that plan, contending that the current government is “looting Mumbai of its finances, culture and pride”. It is an odd issue for a campaign and one doesn’t have to sympathize with the club members or the opposition to conclude that the business of Indian elections involves issues that might extend beyond the interests of the common voter.

For distribution in America