India Business and Finance, August 21st
What has been happening in India's confusing ecosystem
India slowing
The single largest question for the Indian business and finance world at the moment is the country’s growth rate. Bit by bit, evidence is emerging that suggests a deceleration. Year on year net profit growth has dropped from 37% in the April-through-June quarter of 2023, to 33% in the subsequent quarter to 32% to 9% to – in the quarter that concluded at the end of June, 7%, according to calculations by Mint, a newspaper. While the downward trend is clear for profits, it is not for revenues. Over the same series of quarters, they have grown 7.3%, then 2%, then 8.7%, then 10.6% then 9.4%. Foreign investors may be picking up on this. They sold $2bn worth of Indian equities in the first half of August, a tiny number when measured against total holdings in excess of $500bn, but nonetheless suggestive of concern.
What’s up
There has been no surprise in the list of big earners. Top position is State Bank of India, followed by Reliance Industries, followed by HDFC Bank, followed by Tata Consultancy Services, followed by ICICI Bank. These are all closely followed because of their own importance and what they say about India’s economy. On August 29th Reliance will hold its annual meeting. At one time this was held outdoors with thousands of attendees, coming as close as India has ever come to a capitalist Woodstock but, in what perhaps does say something about shifting interests, this year there seems to be absolutely no anticipatory buzz. It will nonetheless run in the background at every financial firm in case details are released about public offerings for slices of the empire or there is a surprise, such as a shakeup in management.
In the broader reports on earnings, one sector that continues to stand out with strong growth in profits is pharmaceuticals, with ancillary information disclosed by the Ministry of Commerce and Industry indicating ever increasing exports. The key to the industry’s success is not entirely clear. In India it is highly fragmented, sells a commodity product, and must be distributed through highly regulated, often concentrated, overseas channels – all of which would seem to compress profits if not sales, but that is not the case.
Perhaps the same could be said about India’s small, fragmented, competitive liquor industry. Proprietary information from a trade group given to Mint said alcohol exports had grown from just over $200m in 2020 to almost $400m this year. Another industry said to be accelerating, according to The Economic Times of India, is men’s underware. Sales have begun to rise after six slow quarters. That, the paper said citing various theories of inferential indicators, might suggest broader consumption and growth, notwithstanding the trends cited above, may start accelerating as well.
What’s down
India’s exports of goods dropped 1.5% and its trade deficit widened in July. This is a source of genuine concern and perhaps not surprisingly, concerns primarily focused on China's role in both imports and exports. The most recent flash point is steel. Revenues for metal and mining companies dropped just over 1% and profits 9% at the same time as steel prices fell by a third, the cause likely being cheap imports from, of course, China.
While lower prices will be welcomed by at least three critical Indian industries– vehicle manufacturing, property development and infrastructure–they have resulted in India’s three biggest steel producers, JSW, Tata Steel and Steel Authority of India (SAIL) asking the government to reimpose new dumping duties, adding to those imposed in September. China Inc (meaning the combination of its companies and government) is increasingly assumed to be a single entity in the economy that must be actively managed so that benefits can be extracted and damage minimalized.
What may be up or down
Within a broad and somewhat confusing reconfiguring of its many indices, MSCI will include seven more Indian stocks in its standard index, expand the allocation of HDFC Bank, and reduced restrictions on the share held by companies in the Adani Group tied to their limited free float (meaning shares held outside of the controlling stockholder). The change will occur at the end of the month and it could result in another $3bn being invested in India’s stockmarket by “passive” funds, according to one estimate.
The change seems somewhat administrative and ignorable. It is not. The funds that follow the MSCI may be passive, but MSCI is, in a sense, an active manager whose decisions have the effect of reallocating capital to and from numerous companies and countries. This surely has implications for their cost of capital (though measuring the impact with any precision would be hard and perhaps impossible) and may even have an impact on shareholder votes as passive investment funds build large corporate holdings. That is an issue that is now understood in America but not discussed in India.
India is sensitive about foreign entities having an impact on its markets. Its regulatory apparatus already looks closely, in an unfriendly way, at the international credit rating firms and big auditors, notwithstanding their assertions of independent, disinterested decision making. Large stakes in MSCI are owned by BlackRock and the Capital Group, both large, American-based fund manager. Indices play a role in each of their businesses even though, in Capital’s case, its funds are actively managed. Both companies doubtless say they don’t meddle. India might wonder whether they nevertheless have a voice.
At the moment, interest in MSCI in India is limited to two issues: the practical, immediate impact of its decisions on the companies involved and whether those decisions suggest that India’s importance in the global economy has expanded. Next up will be more attention to how MSCI makes decisions. In India there is a particularly large discretionary component to the index because family control of many companies reduces the amount of tradeable shares, which can affect MSCI’s rankings in controversial ways. MSCI decisions will, if passive shareholding grows as it has elsewhere, affect shareholder votes. MSCI opines on many areas, including ESG and climate, that are at the very least debatable and many in India will find objectionable.
The somewhat surprising investor buying into India (regardless of the above)
Among the largest, if not the largest, foreign investor in India during the recently concluded quarter was the Canada Pension Plan Investment Board, with $838m. Though nominally independent, it is a semi-public institution, meaning it is aligned with, if not to say tied to, the Canadian government. And the Canadian government is in a very cold war, of sorts, with India because Canada houses a group that the Indian government views as harbouring revolutionary objectives in India. The tension has been aggravated by the June, 2023 assassination in Canada of one of the group’s leaders, and allegations by the Canadian government, rejected by India, that the Indian government was involved. Diplomats have been expelled from each country. Apparently, Canadian capital is seen in a different light.
Ecommerce and small stores
Ecommerce has had an impact on India as on everywhere else. Scooters carrying meals and small deliveries fill every gap between the cars stuck on the country’s clogged streets. A study cited by The Financial Express reckons that 75% of daily shopping continues to go through kirana stores, the tiny mom and pop shops that exist everywhere. Their strength, not surprisingly, is in the most inexpensive items though the study is striking in as much as it shows just how inexpensive these items are: 45% are priced at under Rs20 ($0.24) and only 15% of purchases are over Rs100 ($1.19)
Import substitution in action
Last week Classic Motorcycles, an independent company with a large stake held by Mahindra, introduced a new version of the old BSA 650 Motorcycle it revived in 2021 for sales in overseas markets. Although all the bikes are assembled in Indore, the initial version used an engine made by Rotax, an Austrian company owned by a Canadian company. Its engines are renowned for their durability and have been used in the past by BMW among other companies. The version of the BSA unveiled in India will use an Indian-made engine and this version will now be exported as well.
The official reason for the shift is the need to address stricter environmental standards. There is doubtless something to this and Indian companies don’t, as a rule, cite Indian industrial policy for decisions. But there is almost certainly another reason related to industrial policy. Had the Rotax engine been imported and not re-exported for sale, India’s high tariffs would have been imposed, vastly inflating the motorcycles cost and making it unfeasible to sell in India. There is a huge debate unfolding in India now about reducing tariffs on manufacturing inputs to invigorate the competitiveness of the broader economy. The BSA engine is an example of the other side of the argument – how tariffs result in import substitution and, ideally, the creation of products that can be exported.
Retrospective taxation
If there is any consensus in India about a universally bad approach to taxation, it is about the government’s willingness to do it retrospectively. And yet, it cannot be snuffed out. India’s Supreme Courts recently? granted rights to states to retroactively tax mining companies, reversing policies that had restricted these payments decisions? to the central government. Shares of all big miners and industrial companies – including the large steel producers – fell. The total bill could exceed $1.2bn and as with India’s other assessments of retroactive taxes, sent every company and citizen in the lens of India’s revenue service to wonder if, in the future, they will owe because of the past.
Elite deadbeats
The wait lists to join India’s faded colonial clubs are endless, perhaps none more so than the Delhi Gymkhana. This reflects not only their rare acreage in the midst of congested cities but their snob appeal and the sense that they represent superior values. All of this makes news of seamy internal disputes particularly appealing. The current dispute centres on the introduction of pre-paid smart cards. A member wrote an article for The Hindustan Times, a newspaper, saying this was an “ungentlemanly move” since “an unwritten but well-known code of conduct prevails”, including bill payment. People honour their debts and thus should not be asked to pay in advance. Sadly, the underlying presumption is not the case, writes the chairman of the club, who says the move “is a practical response to…routine non-payment of dues”. Since 202?, 2,933 people have defaulted on payments of Rs30,959,371 ($370,000). As a result, the memberships of 557 people have been terminated. The dispute is doubtless being followed as a rare window into the state of the Delhi elite.
Property right
Property rights in India are the source of unending fights. In a particularly extreme case, The Times of India reports that a civil court (location not disclosed) ruled that three babies sold via an illicit adoption service will remain under the custody of their current families, using the argument that the children were abandoned and placing them with the new families, regardless of the method involved, was in their interest.