Indian stocks are booming. Why is long-term investing lagging?

Indian stocks are booming.  Why is long-term investing lagging?

The Indian economy is booming. Stock prices are exploding and are among the best performing in the world. Government investments in airports, bridges and roads, as well as clean energy infrastructure, are visible almost everywhere. India’s total output, or gross domestic product, is expected to grow 6% this year, faster than that of the United States or China.

But there is a problem: investment by Indian companies is not keeping pace. The money that companies invest in the future of their businesses, for things like new machines and factories, is stagnating. As a fraction of the Indian economy, it is in decline. And while money is flowing into Indian stock markets, long-term investments from abroad are declining.

The green and red lights flash at the same time. Soon the government will have to cut back on extraordinary spending, which could weigh on the economy if private sector money doesn’t pick up.

No one expects India to stop growing, but 6% growth is not enough to meet its ambitions. Its population, today the largest in the world, continues to grow. His government has set a national goal of catching up with China and becoming a developed nation by 2047. That kind of progress will require sustained growth, close to 8 or 9 percent a year, most economists estimate.

The missing investment could also pose a challenge for Narendra Modi, prime minister since 2014, who has focused on making India an easier place for foreign and Indian businesses.

Mr Modi is on the campaign trail, facing spring elections and mobilizing the nation to applaud his successes. Weak investment is not a subject that foreign leaders, bankers or diplomats like to discuss, for fear of appearing as opponents. But investors are playing it safe as the economy signals both its strengths and weaknesses.

A widely shared point is that India stands to benefit from China’s slowdown, fueled by an ongoing real estate crisis. Geopolitical tensions between China and the West provide another opening for India, incentivizing foreign companies to shift production in China to other countries.

Sriram Viswanathan, an Indian-origin managing partner at Celesta, a Silicon Valley venture capital fund, describes investors “eager to fill the gap created in the supply chain.”

“This is, I think, an opportunity for India,” he said.

The World Bank praised India’s commitment to infrastructure spending, which intensified during the pandemic when the private sector needed rescuing. Since then, the government has redoubled its efforts, funding physical improvements to roads, ports and electricity supplies that once discouraged business investment.

But the World Bank, whose mission is to stimulate developing economies, says it is essential that these billions in government spending trigger a boom in business spending. Its economists speak of a “crowd effect,” which occurs when, for example, a new port next to a brand-new industrial park attracts businesses to build factories and hire workers. Last year, the bank said it anticipated an imminent pull, as it had predicted for nearly three years running.

“To accelerate the growth of confidence, public investments are not enough,” Auguste Tano Kouamé, World Bank country director for India, said at a press conference in April. “We need deeper reforms to encourage the private sector to invest. »

The lack of confidence partly explains why stock markets are setting records, even as foreign investors shy away from investing in the Indian economy through start-ups and acquisitions.

Stock markets in Mumbai, India’s economic capital, are worth nearly $4 trillion, up from $3 trillion a year ago, making them more valuable than those in Hong Kong. Small Indian investors have played an important role in this process, but stock trading is quick and easy, compared to buying and selling businesses. The recent annual average of foreign direct investment of $40 billion fell to $13 billion last year.

One reason companies are watching the situation and waiting to invest is Mr. Modi’s powerful national government.

On the one hand, businesses crave stability in political leadership, and India has rarely, if ever, had such an entrenched leader. He demolished the main opposition party in three major elections in the Hindi-speaking heartland in December and appears an ideal candidate for re-election this year. And Mr. Modi is decidedly pro-business.

His government plays a distinctly interventionist role in managing the economy, in a way that can make business participation dangerous.

In August, the government announced sudden restrictions on the importation of laptops, to boost domestic production. This sent businesses that relied on it into a tailspin, and the measure was almost as suddenly withdrawn. Similarly, in July the government imposed a 28% retroactive tax on online betting companies, gutting a $1.5 billion industry overnight.

Companies close to Mr. Modi and his political entourage are doing particularly well. The most prominent examples are Mukesh Ambani’s Reliance Industries and Adani Group, conglomerates that span many areas of Indian life. Their combined market power has become gigantic in recent years: Each company’s flagship shares are worth about six times more than they were when Mr. Modi became prime minister.

Some small businesses have been the target of high-profile raids by tax authorities.

“If you’re not the two A’s” — Adani or Ambani — it can be perilous to navigate the beaten path of Indian regulation, said Arvind Subramanian, an economist at Brown University who served under the government. of Mr. Modi as chief economic adviser from 2014 to 2018. “Domestic investors are feeling a little vulnerable,” he added.

The last nine years of the Modi government have improved many things in the business environment for all. Essential systems work better, many types of corruption have been brought under control, and the digitalization of commerce you have opened up new spaces for growth.

“What is really complex and interesting about this Modi phenomenon is that there is a lot of hype, bluster and manipulation,” Mr. Subramanian said. “But it rests on a core of achievements.”

Yet foreign officials responsible for bringing billions in investment capital to India complain that many of the traditional difficulties of doing business in India persist. Bureaucracy is the most frequently cited. Too many officials are involved at all levels of approval, and it remains painfully slow to obtain legal judgments, let alone enforce them.

Another factor holding back long-term investments is the underlying weakness of the “Indian growth story”. The most powerful source of demand, coveted by foreign investors and domestic companies, is among the richest consumers. Out of a population of 1.4 billion, about 20 million Indians are doing well enough to buy European consumer products, build luxury homes and bolster the high-end auto sector.

Most of the rest of the population is struggling with inflation in food and fuel prices. Banks provide credit to both types of consumers, but less to businesses, which fear that the vast majority of their customers will tighten their belts in the years to come.

“So far, there is no evidence that investors feel reassured about India,” Subramanian said.

But he remains hopeful. Annual growth, even if it is less than 6 percent, should not be neglected. New and improved infrastructure should eventually attract more private investment. And the benefits of consumer wealth, however unevenly distributed, could ultimately generate more revenue.

The biggest mystery is whether India can capture a significant share of global trade from China. The most high-profile example is Apple, the $3 trillion mega-corporation, which is slowly moving part of its supply chain out of China. Its expensive iPhone represents barely 5% of the Indian market. But currently, about 7% of the world’s iPhones are made in India – and JPMorgan Chase estimates that Apple intends to increase that to 25% by 2025. At that point, all sorts of things will become possible for India.

“We need to keep an open mind,” Mr. Subramanian said.

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David B.Otero

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