Why India Inc. is no longer interested in India?

Mar 5, 2013

In this issue:
» India's GDP growth slows down again
» Perils of cheap money for private equity firms
» China to overtake US in oil imports
» Will the rally in penny stocks last?
» ...and more!

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If recent statements made by noted bankers and corporate leaders are anything to go by, there is a serious problem with the investment climate in the country. First, the Reserve Bank of India (RBI) in its Economic Survey has expressly stated the lack of progress on this front. Indian economy is burdened with many stalled projects. Further, new projects have also failed to take off. But that is not all. There are two prominent Indian businessmen who have expressed their displeasure with the way the business climate has been shaping up in India.

The first was none other than the erstwhile chairman of the Tata Group, Mr. Ratan Tata. In December 2012, Mr. Tata had clearly warned the government of driving away foreign investment from India. He had also stated that the government is effectively driving the big business houses of the country to look outside the country for growth.

And now head of the Aditya Birla Group, Mr. Kumar Mangalam Birla has stated that he would rather invest in other countries including Brazil and Indonesia. This is simply because frequent policy changes in India discourage capital spending in the country. What is more, with the Group being present in 36 countries around the world, Mr. Birla has expressed that such uncertainty and lack of transparency in policy has not been witnessed anywhere. And given that capital is mobile and can move anywhere, Mr. Birla argues that he sees no reason why he should not invest abroad if India does not support investments back home.

These are issues that the Finance Minister must consider seriously. The country cannot afford to not have investments. Especially if it has aims of growing at 9% plus in the future. And there are just too many hurdles. There are problems of land acquisition, bureaucracy and no clarity on any king of meaningful policy making. Even when policies get announced, execution becomes an issue. This is because of never ending political infighting which is all about assuming power. Hardly much thought is given to the economic well being of the country. To top it all are financial problems. With deficit rising, the government's hands are tied. Thus, there has not been much room to spend on developmental activities. The Finance Minister in his latest Union Budget speech clearly emphasized the need to attract foreign direct investment (FDI) into the country. But if this kind of apathy is allowed to go on for too long, forget FDI coming in, more and more Indian companies will rather prefer shifting capital out of the country.

Do you think that there is an increasing possibility of Indian companies investing less in the country and instead investing abroad? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
India's GDP growth in the December 2012 quarter left a lot to be desired. Coming in at 4.5%, this was lower than even the 5% plus growth reported in the previous two quarters. But today's chart of the day shows that, despite the slowdown, growth in India was still better than most of its peers in the developed world. This then only serves to highlight how poorly the global economy as a whole has been performing. Indeed, even China, which tops the table, has seen growth at below 8%, which is lower than what it grown in the past. While it will take a while for the developed countries to recover, countries such as India and China will have to make the environment back home more conducive for propelling growth in the future. India, specifically, will have to work on effective implementation of policy reforms, cutting down fiscal deficit and reducing consumer inflation.

Data Source: The Economist

Cheap money. Most of the problems the global financial markets are staring at currently can be traced back to these two words. Rock-bottom interest rates are pushing yield-hungry investors away from safe havens. While most Indians are sticking to gold, high risk investors in the West are seeking extraordinary returns. Hence safe haven assets like US Treasuries no longer elicit interest. The ready availability of cheap money is pushing up the prices of companies that private-equity firms might want to buy. Further as per Economist, even the valuations of such high risk buyouts are touching new highs. The PE valuations that investors are willing to pay were last seen in the pre-subprime crisis period. This buoyancy in valuations should in fact be a signal of caution for private equity firms. They should in fact refrain from buying risky businesses at expensive valuations. However, there is a human tendency to not learn from past mistakes. And we will not be surprised if the private equity funds once again become the first victims of the US stock market bubble burst.

Penny stocks. There is no official definition of penny stocks in India but these are typically stocks with very low prices. As per Economic Times, these stocks have piqued investor interest. Why? Because 200 of them have seen their prices appreciate by up to 1000%. And that too in the short period since 2012. The reason for this sudden run up - the promoters and small market operators are trying to lure investors into these stocks. There has been absolutely no change in fundamentals of these stocks during this period. To a layman such a run up may present an attractive opportunity. Naturally expecting the price to go up even further he would be willing to put his money into the stock. But when prices are 'jacked' up by promoters and operators, further run ups are not always the case. Eventually when the euphoria fades, rationality is bound to return and then, stock markets have to value companies based on what they are truly worth. When this happens, all gains can vanish as fast as they had appeared. Investors would be better off to stay away from such stocks. It is better not to get fascinated by rising prices. Instead concentrate on the fundamentals and intrinsic value of the stocks. That is the only way to create long term wealth.

The US has been the largest net importer of oil in the world since the last 4 decades. But with growing energy demand from China it seems that the dragon nation is likely to overcome US as far as importing oil is concerned. In the month of December 2012, the US's net oil imports dropped to 5.98 m barrels a day. This is the lowest ever figure since February 1992. However, the same for China surged to 6.12 m barrels a day.

Reduction in imports signifies that US is slowly becoming energy independent. The shale revolution has increased the production in US. As a result, exports have increased. This has lowered the country's net imports. Getting self reliant to meet the energy needs is a good sign for US. It will no longer be subject to the vagaries of the OPEC oil cartel. But being independent might come at a price. Until now since it was importing huge quantities of oil from the OPEC nations it was able to influence or have a say in their foreign policies. Reducing imports will reduce the influence of US in these countries. One may well see China taking a lead here now.

Last year you must have seen your power bills going up. In fact, 2012 was the first year when every state in India hiked electricity prices. But you would be wrong if you thought that was it. Prepare yourself for another round of tariff hikes.

Let us explain why. Customs duty on imported steamed coal has been increased. There has been an increase in railway freight as well. In addition, price pooling of coal would make domestic coal more expensive. It must be noted that under this new mechanism, power producers would have to pay a weighted average prices of domestic and imported coal. All these factors have led to a further increase in power generation costs. And this increased burden would eventually have to be borne by consumers.

It is believed that states where power utilities are bearing huge losses will see the steepest hike in power prices. One of the conditions imposed by the Centre in the financial restructuring package announced last year was to announce tariff hikes every April. As such, consumers in states such as Rajasthan, Uttar Pradesh, Madhya Pradesh, Andhra Pradesh, Punjab, Haryana and Tamil Nadu are now expected to witness stiff tariff hikes.

The Indian equity markets continued to gather momentum during post the noon trading session. At the time of writing, the BSE-Sensex was up by nearly 250 points or 1.3%. Barring stocks from the consumer durables sector, buying activity was seen across the board with stocks from the realty and metal spaces leading the pack. Asian stock markets ended the day on a firm note with China, Hong Kong and Japan up by 2.3%, 0.1% and 0.3% respectively.

 Today's investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." - Peter Lynch

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9 Responses to "Why India Inc. is no longer interested in India?"

Ramachandran Thirumurthy

Mar 6, 2013

It is not at all surprising that India Inc. would like to shift their investment preferences away from India. The house of the Tatas that has its origins in the spirit of serving the country shown by the venerable doyen of Indian industry Shri Jamshedji defying British colonial hegemony on all businesses in India is perhaps not in tune with the prevailing ethos of doing business in India or anywhere else for that matter. This ethos is underpinned by corruption, sleaze and, under-planned and therefore unsustainable exploitation of all resources. There is a lot of collusion between global and local players, including industrial houses, the bureaucracy and the political powers that enabled big businesses to grow and reap a rich harvest since the liberalization of the early nineties. The trickle down effect of this growth was not to the extent that economic pundits of capitalism expected. Actually studies show clearly that the wealthy became more wealthy and the lowest strata in the economic hierarchy are more or less where they were before liberalization, except in certain parts of the country. Studies also show that the number of Indians who made it to the famed Forbes list topped the number of millionaires and billionaires of the emerging economies of the world in the past two decades.
Ever since investigative journalism became vigorous in India, with or without intended or unintended help and support of institutional or civil society corruption busters, ever since the visual media in particular aggressively started grilling the players in the arena, and ever since the highest court in the country started pursuing cases arising from corruption and other acts of malfeasance, it is no more business as usual in India, or for that matter any other part of the world, in view of the fact that in today's global village any trend like the corruption busting trend is bound to go global, as it has indeed done so already. Moreover, more and more global leaders are starting to realize that corruption, sleaze and, politics based on them, don't mix with any healthy and equitable economic system, be it capitalism or communism or a mixture of both. There is also the fact that the International Convention Against Corruption, the Transparency International and International Money-laundering Information Network are gaining trans-border traction.
In this scenario the most likely prognosis for the ills afflicting the investment climate in India for India Inc. is to stay the course in investing in India sans shady deals and opaque maneuvering. GST is on the anvil. Corporate laws are going for a makeover shortly. The Lok Pal bill and the Whistle Blower Protection Bills may finally take shape. All this will make for freedom from corruption and therefore greater cost effectiveness and professionalism of businesses. Many positive minded and business friendly state political dispensations are in place already and more are following this trend. This will cut down red tape. Whatever party or parties come to power at the Centre, it is unlikely that they will continue to nurture tax havens-enabled tax avoidance or evasion, or P-note driven stock market bonanzas as in the past. The fruits of such staying the course for India Inc., might be slow in coming but once they start coming they will be very durable and on solid foundations. The reason for this is that genuine market competition, with proper competition oversight mechanisms, will emerge. This will ensure that India Inc., who are second to none in the world in innovation and the spirit of healthy competition, will chart a wholesome and sustainable growth story that will set an example for other emerging markets. CAGR of businesses is only one motivator of business. Daring to break free from not so healthy ways of doing business as in the past could be a more powerful motivator for those men and women who have the vision to go for the higher levels of motivation like self actualization that Abraham Maslow outlined in his classical theory of the Hierarchy of Needs. Here is one or two from him :

“The most stable, and therefore, the most healthy self-esteem is based on deserved respect from others rather than on external fame or celebrity and unwarranted adulation.”

“If I were dropped out of a plane into the ocean and told the nearest land was a thousand miles away, I'd still swim. And I'd despise the one who gave up.”

“It isn't normal to know what we want. It is a rare and difficult psychological achievement.”

Like (1)

Umesh Sharma

Mar 6, 2013

Foreign investment is welcome if it helps our economy In return the investors should be happy if they are able to make a better return on their capital than what they would get in their own country.In short it should be a win win situation.Our policymakers can make a great contribution in this direction by specifying the sectors like deep sea exploration,harnessing of solar energy,agriculture based industries increasing the output and creating jobs etc.We certainly do not need investment in our share markets or in retail business where the foreign entrants would be more of a nuisance than help.Politicians should not allow such intrusion in the guise of reforms and try to get their cut in the bargain.The investments in the latter sectors would be mostly speculative and will harm us in the longer run

Like (1)

vinod k jhunjhunwala

Mar 6, 2013

Hindi term "seth" which means a rich man ,is the corrupted version of Sanskrit 'Sreshta" which means the best person ! Kings in ancient India used to honor the best businessman in his kingdom by awarding the title of "Nagar shresta" the best businessmen or Shresta of shrests . Leftist ideology when introduced in India , vilified businessmen and industrialists. So much so that "Bania" became an abuse of sorts !West Bengal and Kerala ,under Communist regime ,hounded out Businessmen/Industrialists. Bengal which used to be top industrial state ,thus became a pauper state. There are/has been many left ideologues in Congress and in bureaucracy ,who keep on implementing anti-business policies. After liberalization (Forced by IMF during Rao's regime ) it has become possible for Indian industrialists to invest in foriegn countries. They are using the opportunity even in this global slump period. If things brighten ,flight of capital may be even faster.

Like (1)

Gopal Kalpathi

Mar 5, 2013

For every honest businessman who would like transparent and clean administration and governance there are umpteen number of the class(read businessmen) who would like it continue in the same inefficient and corrupt manner. Every one know the reason.

The only way the political class can be made to realize their responsibilities towards their electorates and constituencies is the corrupt politicians should not be patronized by the business houses. The businesses should themselves take up social development rather than leave it to the government. Let me ask, do all the businesses who clamor for clean government and bureaucracy themselves clean?

Talking about politicians, their primary aim will never change - to get elected and be in power. So why fret about them? Lastly, but not the least, the major impediment to our development is the same as it was 6 decades ago. Lack of education(read appropriate), infrastructure and basic human values, which incidentally were guaranteed to all Indians by the constitution. It is not the lack of the means, but the lack of the will and that will surely need a disruptive incidence which the same old cycle of democracy is not delivering.

Let us rise an Indian Spring.

Like (1)


Mar 5, 2013

I appreciate the sentiments of Kumarmangalam and his views are that of more or less all small, Medium or Large Industrialists
The apathy, non committal Govt policies ,unbearable corruption and above all dont care attitude by bureaucracy and Government and politicians towards Industrialists and business men ,who generate wealth for this country has created lots of frustration and depression among all of us .

Like (1)


Mar 5, 2013

Let these Big businessmen who prefer China and other countries go and invest there. These Big B's father,grandfathers got special preferences and water, everything and for throwaway price,and now they have big muscles and cash stashed and too big to fail, please go and park outside, we need only new people to occupy that space.

Like (1)


Mar 5, 2013

Yes. Big companies will definitely go out of country to seek opportunities to expant their regimes. There is chaos here at every stage. Corruption at even a very small level is increasing. After sixth pay commission the rate of corruption has increased in comparison with the remuneration. As an investor I have stopped investing in Indian companies. Even I am loosing by investing in mutual funds. God save India.

Like (1)


Mar 5, 2013

This was the problem which has in existence after the days of independence. The railway minster wants the coach factory in his state, he wants all the train to go to his town before reaching Delhi. The days are not too far when some minster will want a shipbuilding yard in a place near to deserts, if he happens to be a shipping minister from that constituency.

Warren Buffet had long before said that capital will go to the place were the cost is the least! But this lesson is not for our leaders who cannot look beyond their nose nay whom to blame but our self because we vote them! One should learn to say vanate matram devoid of any pride of being Indian.

Like (1)


Mar 5, 2013

Its like rudderless for India inc and there if there is something missing seriously that is the kind of thirst in Indian policy maker to bring changes in running flop show.Nothing is wrong enough can't be changed to favorable we do not need Lokpal but really need effective/charismatic Leadership. As there is one state from the same nation attracting not only Indian but Investor from all over the world without being affected with any economic downturn.

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