India Business and Finance, January 4th
What happened in Indian business and finance while many people were on holiday
Money inflows surge
* Both FII and FDI jump. Foreign portfolio investors bought $5.2bn worth of Indian shares in the first half of December, the best showing in years. The top performing sector in the Indian stockmarket during 2023 was property (in contrast to China and the rest of the world), which was up 80%. But many others sectors did well, if not as well, with record share prices for companies in consumer goods ( eg Nestle India), banks (ICICI), IIT services (HCL), jewellery (Titan), cement (UltraTech), vehicles. (Mahindra, Maruti Suzuki), and pharma (Sun). The new purchases from overseas pushed the value of foreign investment in the Indian market to a record $723bn, though as a percentage of the market’s capitalization, it dropped from 29% in 2021 to 18% in 2023.
Just released figures covering October show that foreign direct investment has also risen - after a protracted decline. Almost $8.4bn came into the country, the most since April 2021 and the third month of sequential increases, hinting that finally, maybe, the long-hoped for growth in private investment had begun. Further evidence was a 15% increase in the number of new projects, a metric tracked by the Centre for Monitoring Indian Economy, with manufacturing accounting for almost all of the growth. While this was undoubtedly good news, it was tempered by the reality that the numbers are still off sharply from a year ago.
The new large investors in India are small investors.
The driving force in the Indian market has been individual investors using “systematic investment plans”, or SIPS, as they are commonly referred to, provided by mutual fund companies. A combination of these inflows and market gains resulted in the assets in Indian mutual funds expanding by 24% over the first 11 months of 2023. Part of their appeal to Indian investors is the usual magnetism exerted by a bull market. But equally important is how difficult Indian rules make it to send abroad. As a result, the choices for all but the clever tycoons boils down to real estate, savings accounts, gold and the local stockmarket. The local stockmarket is now having its day.
One other option, vast and barely understood, is private money-lending at staggeringly high interest rates (10% a month?) This has traditionally been a huge component of the Indian economy but much of the current success of the banking system has come from replacing this informal sector. Banks report that consumer lending – which really was at the heart of the informal market – is growing by a staggering amount. It was up 30% in November on a yearly basis.
The fight to be considered credible
One of the virtues of the transition to bank financing (see above) is relative transparency in pricing and standards. The struggle at this end of the market is echoed at the sovereign level with India’s unending confrontations with ratings agencies. In the most recent skirmish, a high-level government commission has just finished a major review, concluding that half of India’s border-line junk rating is determined by opaque, qualitative judgments, notably the World Bank’s governance indicators. India says these are not indicative of a country’s willingness to repay debt. Instead, it argues, the process should be entirely quantitative and transparent. Oddly, the commission and the ratings agencies likely agree but on this but the transition to clarity will be grudging, at best. Underneath the debate are two overriding factors – India pays high costs for credit (prompting the government’s concern about its credit rating) and, notwithstanding overt global praise, faces financial skepticism because of its consistently high fiscal deficits and suspicions about corruption and poor management. My interviews with ratings agencies, which should be straightforward and simple, are often painful as analysts fear being candid.
Sector growth
*Heavy industry.
Indian steel production grew 12% in the first 11 months of 2023. South Korea was the only other country to grow by double digits–11%--but it produces only half the volume of India. China’s growth was an anaemic 1.5% but its dominance is staggering. It produces 952m tonnes a year compared with India’s 128m tonnes and Japan’s 80m tonnes.
Travel and hospitality. Almost 13m Indians are thought to have flown in December, a record. The two major airlines, Indigo and Air India, along with an upstart, Mumbai-based Akasa Air, have begun to receive new planes. This is the visible tip of a booming hospitality industry, which is attractive to foreign companies. But they should be wary: a report in the Times of India says numerous major foreign carriers (British Airways, Etihad, Thai Airways, Qatar Airway, Lufthansa, Emirates, Oman Airlines, and Singapore Airlines) have been hit with tax examinations by the Directorate General of GST Intelligence, a move that is seen locally, regardless of the possible merits, as the Indian government tilting the playing field in favour of a resurgent domestic industry.
Financial markets
· Privatisation. New tallies show the government’s multi-decade strategy of selling state-controlled industries may have come to an end. Sales are running at a five-year low, with only 20% of the current fiscal year’s target achieved. This is likely the result of the improved results and returns these companies have been generating – an index of central government-controlled entitiess listed on the Bombay Stock Exchange was up in excess of 70% in 2023, five times the return of the broad-based Sensex index. Some blame can probably go to the divestment last year of the holding that had been symbolic of mistaken nationalization (Air India). It is hard to imagine the political will exists for another sales push, but if effectively done the proceeds could reduce the annual fiscal deficit which would, notwithstanding other factors, enhance India’s case for the kind of higher rating it wants for its sovereign debt (see above).
· Ola to launch IPO. Ola Electric filed for a public offering and announced sales numbers equivalent to 40% of the Indian market for its scooters, a remarkable achievement. Ola is led by Bhavish Aggarwal, a chief executive perceived to be of the ultra-aggressive, move-fast-and-break-things start-up school. The offering will be a major event in India because a) it is big (it values the company at $5.5bn), b) if completed it will be an illustration of the unicorn story that underpins some of the optimism about India’s growth, and c) it will provide a rare, lucrative, exit for venture investors. It is not, however, without risk. The most recent annual loss, according to the filing documents, was in excess of $2bn. Ola’s scooters have been faulted both for their quality, the availability of repairs (key issues in India) and for occasionally bursting into flames (providing widely watched youtube videos). There is no shortage of capable competitors.
Risks/Outliers
Extended truckers’ strike. Truckers in India went on strike, causing shortages in fuel and deliveries, in response to a new provision in the law that includes steep penalties for hit and run accidents. There is much to be discerned in this strike – the crazy way traffic and truckers move in India, with disregard for human life, certainly, but beyond that, the way people cross roads in the middle of the night and sleep beside the tarmac. And percolating below the surface are fears that any tough law can serve as a tool for a corrupt cop to terrorize a driver and extract a bribe. A representative for the All India Motor Transport Congress (the driver’s union) said 60-to-70% were off the job and most would quit if the law was not repealed.
In Maharashtra, a state that houses the country’s business and financial capital (Mumbai) and several other important cities (notably Pune and Aurangabad), state health officials announced they have found 6,600 cases of leprosy. In much of the world, the disease has disappeared.
Real economic warfare
A new commission has been created to determine how to split tax payments between the central government and the states. Because politics rests on the ability to distribute money, the stakes could not be higher. The respected chairman, Arvind Panagariya, previously held a senior role in the government and is now teaching at Columbia University in New York (the 7,300-mile distance presumably providing some insulation from what would otherwise be the single most lobbied office in India). Buried in the announcement may be a hidden agenda. Mr Panagariya was seen to be a genuine champion of privatisation and market-oriented reforms during his time in the government. Putting him in such a pivotal position may, in India’s complex governing system, allow him to push these again. He will be at the core of determining who gets money and the more there is to distribute, the easier it will be to make everyone happy. By reducing the scope of the government, he will also be able to increase the prospects for the country’s sovereign credit rating to improve (providing a structural answer to the issues noted above).
How to build a financial centre/Booze for bankers
A pet project of India’s prime minister, Narendra Modi, has been the creation of the Gujarat International Finance Tec-City (known as Gift City) in what had been wasteland in his home state. Though it has been granted an array of (complicated) tax benefits, progress has been slow. One commonly held belief is that this is because bankers, traders and big bosses won’t go anywhere they can’t drink and doing so is banned in Gujarat. In an act that surely reflects both how important the project is to Mr Modi, the state government has announced Gift City will no longer be dry.