India Business and Finance, May 29th

What happened in the Indian financial world during the past week

Different Indias

“Rural India” is a short phrase to describe the vast number of people who live outside of cities and tend to be very poor. More than half of their income is spent on food. For this group, overall inflation remains higher than for their wealthier, urban compatriots (5.4% year-on-year, compared to 4.1%). But this underestimates the most relevant number–the 8% year-on-year increase in rural food costs. The government is acutely aware of food prices and is under pressure from the World Trade Organization over large increases in subsidies for power, irrigation and fertilizers, all intended to temper these increases. That such a vast component of the population has to spend so much (and so much more) on food may explain the lackluster growth numbers now being reported by consumer product companies (whose inexpensive products may still qualify as discretionary luxuries for the poor) and it may also provide at least some of the rationale for why anecdotal reports collected by The Economic Times from ecommerce companies show sales declines notwithstanding the robust overall expansion of gdp that India continues to report. 

How can this be?

Among the most remarkable achievements any student can reach is admittance into one of India’s competitive institutes of technology. To cite one example, more than 100,000 high achievers take a competitive exam in the hope of securing one of a few hundred seats at IIT Bombay. Typically, its graduates have their pick of jobs. But this year, 10% remain without positions as the school year concludes. Similar results are coming from the other top schools. There is no shortage of explanations. One is that in recent years, students, rather than responding to the entreaties of conventional companies, have become enamored by the idea of working at a startup. That ecosystem has recently collapsed and the venture capitalists who in recent years pushed their companies to hire and grow at any cost have disappeared. Another explanation is that India’s brilliant engineering students want to work in software and similar forms of advanced technology. At the moment, demand is in areas like electric vehicles and manufacturing - meaning hardware. That was old-fashioned in 2023 but forward looking 2024. And, perhaps inevitably, the delayed hiring raises concern about whether India’s notable overall growth might be slowing.

Trade

Another key series of numbers the government watches closely, and not happily, concerns trade, notably India's consistent and large merchandise deficits. Data showed the largest bilateral flows during the fiscal year that concluded at the end of March are with China, at $118.4bn, just above the $118.3bn with America. The components of the relationship are radically different. Of the overall bilateral trade with China, imports account for 86%. In the overall trade with America, only 34% is imports. And America is the only country among India’s top 10 trade partners in which India has a trade surplus.

In this light, lots of small announcements matter. Laptop imports from China, for example, which have been under the spotlight since an aborted Indian government plan last August to create a barrier through a licensing scheme, rose from $196m in February to $335m in March. There will surely be a reaction. Some companies are trying to get ahead of a crackdown. Dixon Technologies, a subcontractor, reached an agreement to make Google’s Pixel smartphones in India and display modules for Realme, a Chinese producer of smartphones and tables. These deals replace Chinese production. Other manufacturers are similarly being encouraged to shift production from elsewhere to India. Jaguar Land Rover, located in Britain but owned by Tata, the Indian conglomerate, will start assembling Range Rovers in India, a move that will allow them to come into the country without heavy tariffs and thus enable prices to be reduced by one-fifth.

At the same time, India is trying to develop exports. It has a $57bn trade deficit with Russia because of energy imports; exports are a comparatively trivial $4.3bn. The energy imports reflect India’s lack of domestic alternatives and the generational process of substituting renewable sources. While it is a stretch to imagine India can offset this with exports, it has seen strong growth, albeit in percentage terms; in the prior year, they were just $3.1bn. Sales increases were particularly strong for electrical machinery, iron, steel and fruit. More broadly, Indian companies that previously served only the domestic market are being encouraged to export and the message is being heard. Havells, an Indian producer of air conditioners and washing machines has begun shipping to America and hopes to expand sales to the Middle East.

Plusses and minuses of Indian communism

Kerala is consistently praised for having particularly strong education and healthcare, and thus draws unending praise from the international press. It is also part of India’s south, meaning it is located in the part of the country that has seen the most dynamic growth. But Kerala, self-described as “God’s Country”, has the highest unemployment rate for young workers, according to a new government survey. This is no surprise to businesses, who say that its state government, long dominated by various communist parties, makes it a difficult place to work. The lack of jobs has traditionally led many Kerala residents to find work overseas, notably in Gulf states such as the United Arab Emirates where they are prized for their non-ideological productivity and play a key role running or working in multiple industries.

Tweaking India’s appeal

One of the government’s major goals is to develop the tourism sector.  Religious travel has become a national selling point. Thomas Cook India, a travel agency, says Char Dham yatras (Hindu pilgrimages) are up 100% this year over last.  Any contribution is welcome. Tourism encompasses 80m jobs and generates 6% of GDP. Yet India has just 1.54% of the global tourism pie, meaning it underperforms its tourism potential, says The Business Standard,  How, then, to push it along? The newspaper says it  will require “working on the basics of making India cleaner and more habitable for all of its citizens.”

Printing money

The Reserve Bank of India (rbi) transferred a massive $25bn to the central government. That is almost three times the net income of India’s most profitable company, Reliance. The source of the bank’s profits is not entirely clear – presumably it comes from the interest on its reserve, much of which is kept in overseas government securities. As central banks become increasingly involved in driving economies these sorts of profits, and losses need to be better understood. It is tempting to think it is just an abstract component of government money but this year the dividend will play a significant role in financing India’s heavy annual fiscal deficit and, according to Fitch, a rating agency, could have implications for India’s borderline junk credit rating. As with any entity that produces a profit, the mechanism creates risks and even costs. Presumably, even if indirectly, it is a product of seigniorage, the printing of money, a consequence of which would be inflation (see item number one for the associated costs). If the returns are augmented by investment in securities, there are other consequences including the risk of the securities themselves losing money (which is unfolding now for central banks in other countries because of the deal consequences of quantitative easing and higher yields) and also the crowding out of other investments for which money could be used (a sensitive issue in India which has high capital costs).

Boss responsibility

Microsoft’s Chief Executive Satya Nadella was among eight executives personally fined by India’s Ministry of Corporate Affairs for not reporting “his” personal interest in LinkedIn, which is owned by Microsoft and whose head reports to Mr Nadella. Microsoft apparently replied to the government’s claim by saying that Mr Nadella merely works for Microsoft and operates with the approval of a board and shareholders and thus did not have a “personal interest” in terms of ongoing control. The Indian regulator disagreed, saying the senior Microsoft executive did have control or significant influence. On one hand, the Indian approach seems ludicrous; the head of Microsoft is merely the most significant cog in a corporate entity that is distinct from any person. On the other hand, as bosses in America and Europe routinely evade responsibility for corporate actions that unfolded under their highly paid leadership, there is something refreshing about the Indian approach: it underscores that with power comes personal responsibility.

Odd deal

Western companies operating in India often make investments in Indian companies for reasons that are not always clear but seen to be important. That was the case when Google and Meta, for example, invested in Jio, a subsidiary of Reliance which controls a significant amount of telecom and broadband distribution (which presumably they would not want to be locked out of). Flipkart, an ecommerce Amazon competitor acquired by Walmart in 2018 (but based in India) continues to lose money. In an odd deal, Google will buy a tiny sliver – perhaps 2% - with an investment estimated to be about $350m. Walmart’s interest in having outside minority investors to fund losses can be seen as a reasonable way to control the parent company’s costs and risks. Google’s interests aren’t immediately obvious, though there are many ideas. A partnership may, for example, lead to Flipkart using Google’s cloud service. For competitive reasons, Flipkart doubtless did not want to use Amazon’s cloud operations but it could have used Microsoft’s and beyond being a huge customer, the data provided by Flipkart, depending on its arrangement, could be hugely useful to Google.

Getting out

Notwithstanding India hype, many foreign companies are reducing their presence or getting out. Various reports suggest the parent company for Timken, a bearing manufacturer with roots in America, wants to reduce its share in the company’s Indian operation to just over 50%. Other reports say Siemens (German), Shell (Dutch-British), ReNew Energy (British) and Fortum Oyj (Finland) all want to sell renewable power assets.

Stardom

India won three big awards and the country’s movie industry went bonkers. This is India’s best showing ever.

The mini-van of India

In America big families are transported by ever bigger cars. That is not feasible in India and squeezing people on top of motorcycles is a national expertise. Reflecting this reality, an electric scooter company, Ather, has introduced a new, family-friendly model, the Rizta. Unlike other vehicle companies in the competitive Indian market that tout speed or range or brakes or suspension or style or any number of common attributes, the Rizta has come upon a potentially far more important selling proposition: the Industry’s largest seat.

Big story I missed.

In March, after 110 trials, a team of 75 chefs in Bangalore produced a 123-long dosa (sort of a tubular crêpe) breaking the record set in 2014 (which I also missed) of 54 feet.

For distribution in America