India Business and Finance, July 25th

What happened this week in Indian business

Hope the Substack was missed while I was away. I have returned to a monsoon sodden Mumbai where the best business opportunity is in umbrella sales.

The best-read boring document in the world

For anyone tied into India’s formal economy, the single most important annual statement by the government is the publication of its budget which this year was announced on July 23^rd.  It touches everyone from gold smugglers (an apparently expansive group whose margins will now be squeezed by the reduction in tariffs from 15% to 6%) to the 100m people who have begun investing in the country’s hot stockmarket (who must now pay higher taxes on capital gains) to buyers of products costing in excess of $12,000 (who will pay an added 1% sales tax) to small tax payers (who will now see more of their earnings exempted.

Clearly the administration of Narendra Modi took away a message from its disappointing seat count in the recent election that resulted in the need for a coalition. It concluded that a critical segment of the Indian population believed it was not participating and benefitting from India’s fast growth and that required visible steps. The most prominent features of the new budget were to pay off the new coalition partners in Bihar and Andhra Pradesh (both poor states) and to announced incentives for expanding employment.

Previously, the approach of the Modi Administration was to focus on improving operating environment in India which it felt would prompt increasingly successful companies to hire more people and broadly lift the country’s prosperity. To be fair, much of this underlying effort will continue even if the measures are no longer as evident. One key continuing provision is heavy spending on new infrastructure, which will make India an easier place to produce and to live. Another key provision is to keep spending within limits and thus reduce the country’s high fiscal deficit which, over time, will reduce the high costs businesses must pay for capital.

But more direct actions were clearly seen to be needed. The headline efforts of the new budget are intended to push employment. There will, for example, be subsidies available for the first month salaries of new employees. And large Indian companies will be able to use a bit of their mandatory corporate social responsibility expenditures (2% of net profits) for apprenticeships (a step that implicitly acknowledges social responsibility for business is business. The ghost of Milton Friedman will be pleased.).

Whether sustained hiring occurs will likely hinge more on whether the initial plans of the government finally bear fruit. What has likely been lost in the process is emphasis and priorities. Earlier in the year, it was widely expected that the third Modi administration would initiate, finally, big, long-awaited economic changes. These begin with longstanding reforms of India’s land and labour law. That goal remains but the process now hinges on “collaboration between the Centre and the states, and building consensus”, said Finance Minister Nirmal Sitharaman. While true now, and true before (the states play a large role in labour and land laws), her comment underscores that a Modi administration in a coalition is in no position to demand change and must work through an Indian political system prone to bogging down. Similarly, before the election there were hopes, if not expectations, of more cohesive, workable rules for trade and foreign investment. Now, these have been added to the vast pile of urgent items to be dealt with in the future. Maybe.

Within the vast budget were numerous other tweaks of debatable merit. Taxes on foreign companies will be reduced from 40% to 35% reflecting both India’s desire to attract global business (Ms Sitharaman said it would prompt foreign companies to enter) and its half-hearted approach. The lower rate will still be substantially higher than the 25% paid by domestic companies and is far higher than the rate in other jurisdictions, meaning foreign companies that do come to India will push complicated transfer pricing and royalty payments and any other trick to shift their profits anywhere else.

Some important past errors were rectified, notably the removal of an “angel tax” that treated investments in startups like taxable earnings and thus damaged investment which the government says it wants. Conversely, while making this more feasible in one area, it went the other way in another, increasing the tax on short-term capital gains on stock investments was increased from to 20% from 15% on short-term capital gains and 12.5% from 10%. That will have a meaningful impact on returns. Some key market insiders believe the increases are a source of relief because in recent weeks worse seemed distinctly possible but that is hardly a cause for joy, only relief. The stockmarket dropped 1% which may have captured the response: a bit down.

Reasons to be optimistic about India

The financial system

Business news this week has focused on the budget, but it is worth noting that Indian Banks have reported remarkably good earnings. HDFC Bank, the country’s largest private financial institution, reported a 35% increase in net earnings over the prior year; smaller and previously troubled Yes Bank’s first quarter profits rose 47% over the prior year.

India’s foundation

The order book for Larsen & Toubro, India’s largest construction/engineering firm, has hit record levels which can be read as a good indicator of years-worth of big construction projects to come.

Entrants

India’s business capital is experiencing its second heaviest July rainfall on record, surpassed only by last year. The city is a mess with potholes that look like ponds. That has made it more difficult for most but not all. The city’s business district, referred to as BKC (the Bandra Kurla Complex) is near the Mithi river, which typically serves as a polluted drain that reluctantly pushes sewage into the Arabian Sea. The monsoon has flushed it out and a recent arrival who climbed up from the river onto the shore near the business offices was a crocodile who clearly found the new environment to be amenable.

India’s take on the outside world

A section of the Economic Survey devoted to climate change and sustainability faults the western consumption of toilet paper, red meat and energy guzzling artificial intelligence along with the broader consequences of a market economy. “Earth has enough for needs but not for greed” is the title of a section. As India rises as a world power, expect more lessons to come.

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