India Business and Finance, March 26th

What unfolded in Indian business during the past week

Colourful contractions

Monday, March 25th was Holi, a joyous Indian festival in which people dump brightly covered powder on one another and laugh (mostly). Unlike many other holidays which are spent shopping, during Holi most businesses take special care to close. The few that are open have added security. The measures are, it appears, to avoid being suffused in a joyous celebration of colour.

Innovative India

The India Institute of Technology (IIT) Madras registered 300 patents in the fiscal year ending March 2023, almost double the 156 it registered the year before. Registrations are currently running at an even faster pace . Accompanying the patent filings have been growing revenues for technology transfers. According to Businessline, a newspaper, these have grown from nothing three years ago to $240,000 two years ago to $2.2m last year.

Over the past five years, India’s share of the global value of Indian patents, based on estimates by PatentVector, an American-based consultancy, has gone from 0.1% to 0.3%, which sounds like nothing to nothing. In fact, there is an excellent case to be made that the numbers are like the droplets of oil found in the ground around Titusville, Pennsylvania during the 19^th century that were a hint of a gusher to come. India’s greatest resource is its IITs, which accept only a fraction of a percent of top performing applicants. In recent decades, many graduates have gone on to build companies elsewhere, particularly in America. Several years ago, patent filing requirements were simplified, with costs waived for universities, which in turn may now be a factor encouraging lucrative innovation. The implications are profound in the short-term (money), medium term (the products that emerge from those ideas – a few have already emerged) and long term (the brilliant graduates who in the past went away will be more likely to build at home).

Upstart India

Initial public offerings on the National Stock Exchange have broken the prior record set in 2008, with 75 launched during the current fiscal year, which will conclude at the end of March. The hot market has raised predictable fears of a bubble but underlying economic reports continue to be strong. The HSBC Composite Purchasing Managers Index drawn from surveys of 400 manufacturers and 400 service providers rose for the 32^nd consecutive month.

India V China

Mumbai’s 92 billionaires exceeded the 91 in Beijing to make it the billionaire capital of Asia, according to a report by Hurun Research. China still has many more billionaires than India, 814 compared to 271, but perhaps the most interesting aspect of the numbers is directional. Mumbai’s success came from 27 new members of the list, far offsetting the 3 who dropped out. In Beijing, there were 6 new members and 22 dropouts. All of which is to suggest ambitious Chinese companies might see a change in the location of big opportunities. And it just so happened that (see next item):

India and China merger

JSW, India’s largest steel company and (inevitably for a large Indian company) a conglomerate with interests in cement, paint, ports and other business, announced a tie-up with MG, the erstwhile British car company now owned by SAIC (Shanghai Automotive Industry Corporation), a Chinese state-owned company. The underlying ownership structure of the JV will surely be as important as how the resulting company is run and the cars it produces.

JSW will hold 35%, Indian financial investors 8%, employees 5%, dealers 3% and SAIC 49%. Clearly, a great deal of thought has been put into these equity allocations and the impact they will have on the incentives of key partners, including the Indian government, for reasons discussed below.

For JSW, the disruption caused by electric vehicles provides an opportunity to enter an industry it has thought about entering in the past. India’s car market is growing and in the Indian conglomerate world of endless adjacency, the automobile industry, with its usage of metals, paints and components, uses many things JSW already produces and would probably like to produce in the future. MG has technology that preempts a long learning curve and its vehicles are liked in India. Beginning at the end of 2024, the new company intends to launch a new vehicle every three or four months, a schedule that would rival any established competitor. Plans are to invest $6bn in the new entity, a number that is large for India though not for the global car industry. Discussions were held with Ford for the acquisition of a factory that was to be sold as part of a withdrawal from the Indian market announced in 2021 but Ford is now apparently considering reengaging with India and announced its own $12bn investment in electric vehicles.

For SAIC, JSW is an ideal Indian partner. It has resources, excellent government relationships, and apparent commitment.  MG’s standalone efforts in India have been hobbled because of its parentage. Indian government approval of new investment has been sluggish and it is widely assumed that it wants to develop a strong domestic vehicle market that can ultimately export and compete with China. So far, the government has signed off on the agreement as part of a large set of accommodations for foreign electric vehicle producers. The most important among these is the reduction of import tariffs to 15% from in excess of 100% for very expensive models such as those made by Tesla, in exchange for future domestic production.

The tariff waiver, however, is temporary; it is not clear whether other foreign companies with high priced cars, such as Mercedes and Audi, will accept the production requirement. And longer term, it is possible that India will treat Chinese companies as China has often treated foreign companies in the past. They are welcome, technology is transferred, and then squeezed out.

At the announcement, JSW’s Chairman Sajjan Jindal said he hoped for a “Maruti moment”, referring to the early 1980s when a joint venture between an Indian company and Japan’s Suzuki transformed the Indian car industry. Maruti Suzuki now control roughly half of the Indian car market. Suzuki however, is based in Japan, not China. Japan, unlike China, is not seen as a threat. The equity structure of the JSW-MG combination has been designed to make the whole acceptably Indian, but will it?. The companies involved are anything but naive. Still, they are pushing against deep Indian concerns about the Chinese economic model and India’s own contrary ambitions. The long run survival of the joint venture will depend on politics as much as operating capability.

What India wants

With little ado, the vast Norwegian soverign wealth fund has acquired $22bn in Indian equities. That makes it one of the largest investors in India, though it is only 2% of the fund’s overall holdings. This may be exactly the kind of investment India wants: unthreatening and patient. Large positions are familiar Indian blue chip names – three private banks (ICICI, Axis and IndusInd), the second largest IT services company (Infosys), pharma (Cipla and Sun), two vehicle manufacturers (Mahindra and Hero), and the Birla conglomerate (Grasim Industries). The most striking name on the list is Varun Beverage, a Pepsi bottler whose share price has gone through a stratospheric rise. The most striking name not on the list is Reliance Industries, run by the billionaire on the top of Hurun Research’s compilation, Mukesh Ambani.

What India (mostly) doesn’t want

The Bombay High Court threw out a customs department move to block “body massagers” from being imported into India based on a 1964 provision banning sex toys, reports The Times of India. The court ruled the department’s evaluation of “perceived uses” was “far-fetched.”

Beyond the products at the source of the case were two larger points. The first is the enormous power of the Indian customs department. It has taken almost two years for the consignment to be litigated and freed. Businesses say items are frequently held up by customs. I have had two separate gifts of baseball caps fall into the grasp of the customs department with the cost of extraction far in excess of the cost of the caps themselves. Circumventing customs is considered something of an art, a process that suggests, but cannot prove, the necessity of “brokerage payments” or bribes.

Secondly, the seizure under a 1964 rule that remains in effect reflects the deep cultural conservatism that remains in India. Women in Mumbai swimming in the Arabian Sea do so fully dressed in saris. The government recently imposed a huge tax on online gaming, presumably intending to kill it. Many Indian states are dry. The recent exemption for alcohol consumption in Gujarat that is prohibited by a law dating back to 1949 is only for a small enclave intended to be the equivalent of an offshore financial centre. For it to function there must be foreigners and after several years of canvasing suggestions, the government has apparently concluded that foreigners will only come to a place if it permits (at least some) vice.

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