Mumbai: Who needs reforms?
A year into office, the government has disappointed on hopes it would usher in a new wave of economic liberalization.
Foreign firms and investors, however, are getting on with business undeterred. Despite the dimming of reform expectations, India’s long-term potential is too compelling to ignore.
The economy is booming, funds are pouring in, and overseas firms from Toyota Motor Corp to Standard Chartered and Wal-Mart Stores are investing to tap surging demand, cheap labour, a 300 million-strong middle class and a demographic outlook more attractive than China’s.
“Lots of companies want to be in India now, so they don’t really have to open up new sectors to attract money,” said Andrew Holland, CEO for equities at Ambit Capital in Mumbai.
“It could be a lot quicker if they opened up a bit like China, but they obviously want to control it a lot more.”
Freed from its alliance with the communists, the Congress government-led by Manmohan Singh was re-elected last year amid high expectations for reforms but has refrained from liberalizing foreign investment in retail and financial services.
The window to do so will narrow as state elections approach.
Still, the economy is poised to grow 8.5% this year and 9% the next, behind only China. Cellular carriers are adding 16 million users a month and April car sales rose 40% year-on-year -- growth trajectories that exceed China’s.
A young population -- nearly 31% of Indians are under 15, compared with 20% in China -- and a much lower level of urbanization mean that even though China is a larger and richer economy, India arguably offers more upside for investors.
To exploit that potential, automakers such as Volkswagen are investing a combined $5 billion in India, while Wal-Mart and Tesco are working around restrictions through wholesale outlets and joint ventures to access a market where organised retail makes up just 6% of the total.
Foreign direct investment in the first 11 months of the fiscal year that ended in March was $33 billion, which if the trend holds would be an all-time high.
Overseas portfolio investors, who must be selective in a market that tends to be expensive, poured nearly $24 billion into India in the same period, also on track for a record.
Indian stocks trade at nearly 15 times forward earnings, the second-highest in Asia after Sri Lanka, but UBS expects returns on equity (ROE) to improve, helped by domestic consumption. UBS expects the ROE for Sensex index firms to rise to 17% in this fiscal year and 17.5% the year after from 15.8% last year, driven largely by manufacturers.
The Elephant’s March
While China awes by doing big things quickly, change in the largest democracy moves at the proverbial elephant’s pace.
In the most recent parliamentary session, the government was bogged down by a no-confidence motion, a cricket scandal, and the embarrassing realisation that it lacks the cohesion or muscle to push through even modest legislation without a struggle.
“Quite a bit of the political capital is being deployed on what I might call the social agenda ... because that is seen to be politically kind of popular,” said Suman Bery, director general of the National Council of Applied Economic Research.
Plans to build much-needed roads and power plants miss targets, corruption and red tape remain endemic, and state and local decision-making adds layers of complication.
Much of the vibrancy of India’s economy stems from 1991 when a group of top officials, including then-finance minister Singh, threw off the crippling “Licence Raj” and opened up the economy.
Subsequent reforms have been incremental and uneven. China, by comparison, has been more broadly welcoming of overseas investment, using inflows and foreign technology to build itself into an economic juggernaut even as key sectors such as telecom remain state-run and off-limits to foreign players.
Pro-market moves have not ground to a full halt. India is selling minority stakes in state companies, trying to get its deficit under control and is in the process, albeit belatedly, of streamlining its tax structure. It may also finally submit petrol and diesel prices to market control.
Given political realities, reforms are sometimes indirect.
The airline industry, once synonymous with shoddiness, is now fiercely competitive. Unable to privatize loss-making Air India, the government instead threw the sector open to local rivals, a typically Indian work-around solution known as “jugaad.”
Industries that are largely outside government control, such as IT and pharmaceuticals, have thrived. IBM alone employs 70,000 in India.
“As far as fund managers are concerned, as far as industry is concerned, I think you just ignore the government because it’s quite immaterial,” said Oxus Investments chairman Surjit Bhalla.
Shifting rules and prevailing uncertainty mean companies in India need creativity, persistence and thick skins.
South Korea’s Posco has endured three years of delay for a $12 billion steel plant in Orissa state on protests from farmers. Instead of giving up, even after officials were briefly taken hostage by villagers, it hedged its India bets with plans to build another plant in more business-friendly Karnataka.
It takes an average of 1,420 days to enforce a contract claim in India, compared with an average 462 days among Organisation for Economic Development and Co-operation countries. Enforcing a contract in India costs about 40% of the claim’s value, double the OECD level, World Bank data shows.
Even established players have difficulties. UK mobile giant Vodafone, already contesting an India tax bill estimated by media at $2 billion, this week booked a $3.3 billion charge due to competition and the spiralling cost of spectrum.
“What India needs is investment and good technology and this will not come in an environment with too many operators and fragmentation of investment,” CEO Vittorio Colao complained.
Successful foreign investors in India learn to adapt.
McDonald’s Corp, unable to sell hamburgers in the land of the sacred cow, offers the “Chicken Maharajah Mac”.
UK-based Standard Chartered, constrained by rules limiting the rollout of foreign bank branches, is nonetheless raising up to $750 million as the first foreign firm to list through Indian depositary receipts -- a move that is less about raising capital than it is about lifting its profile in its No. 2 market.
Issuing IDRs will also stand it in good stead with New Delhi.
“This is a clear demonstration, a powerful symbol of our commitment to India’s future,” StanChart CEO Peter Sands said.