The EconomistAugust 17th 2019 Business 472 All this looks like an odd way to boost
India’s flagging animal spirits—the deeper
reason for corporate India’s malaise.
Anomalies in the country’s gdp numbers,
not all of which can be blamed on Mr Modi,
have raised suspicions that India’s growth
rate may have been significantly overstat-
ed. Indians are beginning to skimp on hair
oil, toothpaste and other essentials, hitting
retailers and consumer-goods firms. Col-
lapsing car and tractor sales in the past cou-
ple of months are reverberating down the
supply chain, from parts-makers to steel
companies. Demand for building materials
is so feeble that one industry bigwig says
his workers mostly perform maintenance
work. Exports are stagnant. Companies
caught up in China’s trade row with Ameri-
ca are relocating their supply chains to
Bangladesh and Vietnam, not India.
The budget—and the statist signal it
sends—is unlikely to encourage new
spending by either domestic firms or for-
eign ones. Business investment has been
sluggish since 2015, a year after Mr Modi
first took office, a state of affairs for which
the government is, again, not solely to
blame. Lots of firms borrowed heavily to
invest earlier in the decade, when India’s
economy appeared to be on a roll. Its subse-
quent wobble exposed a Himalaya of bad
loans, particularly at state-owned banks
which dominate lending. More recently, li-
quidity and solvency crises hit shadow
banks, which finance some businesses and
many consumer purchases, including cars
and motorbikes. Investments are the last
thing on struggling bosses’ minds.
Announcements of new capital spend-
ing tracked by the independent Centre for
Monitoring Indian Economy (cmie) fell
from 10.3trn rupees ($207bn) in the first
quarter of 2009 to 2.4trn rupees from Janu-
ary to March this year. Instead, companies
have returned a growing share of profits to
shareholders. Combined, the two trends do
not exactly amount to a vote of confidence
in India Inc’s prospects.
Powerful industries with lots of work-
ers and lobbyists, such as vehicle manufac-
turers who want a cut in the 28% sales tax
on their products, are seeking favour with
the government. Everybody else has to cut
costs, slash investments and cling on to
cash, chief executives grumble. Both listed
and unlisted firms’ return on equity, which
began Mr Modi’s first term well below a
peak in 2006-07, ended it lower still (see
chart). Profits at 399 of India’s biggest pub-
lic companies have declined by 3.7% a year
on average on his watch, according to Re-
finitiv, a data provider. The cmie calculates
that asset utilisation has dropped from
50% in the 2000s to below 40%.Tranquillity and mindfulness
Asked on July 8th about the post-budget
stockmarket rout, Ms Sitharaman replied
that she did not let this sort of thing “affect
my calms”. If so, warned one financier at
the time, “then the markets will fall until
her calms are affected”.
Whether or not the subsequent falls rat-
tled the minister herself, they appear to
have jolted the government. Its initial re-
sponse was to drag bosses in for confiden-
tial consultations, including at least one
attended by Mr Modi himself. The officials’
conclusion, says a person close to the
events, was that messaging was the pro-
blem, not the message. Ms Sitharaman was
dispatched to pose for photos, listening to
the concerns of bankers and captains of in-
dustry. This was a welcome change from
the Modi government’s previous insular-
ity. So was its promise, in response to pan-
icked pleas from companies, not to lock up
executives for stinting on social projects.
The central bank’s 35-basis-point cut in in-
terest rates on August 7th raised spirits. But
neither removes the desert of sand that still
silts up the wheels of Indian commerce.
Businesspeople who have spoken with
Mr Modi say he is clever and focused. In
private, they insist, he gets the need for a
less overweening officialdom. They praise
the bankruptcy code (though it was partial-
ly stymied by the courts) and excuse mis-
steps, such as a disruptive withdrawal from
circulation of certain banknotes. (They donot talk about his sometimes ugly Hindu
nationalism.) Some speculate, longingly,
that the business-bashing is part of a cun-
ning strategy to distance himself from the
wealthy in order, when the time comes, to
reform India’s stifling labour laws.
Yet they also confide that the prime
minister often asks not what the govern-
ment can do for companies, but what they
can do for the government. He is increas-
ingly viewed not as broadly pro-market but
selectively pro-business. His goodwill ex-
tends to companies whose goals align with
his own: bankers who offer cheap loans to
the poor, energy firms which furnish
households with gas and electricity, corpo-
rations which improve sanitation in vil-
lages near their factories. Favoured firms
are kept on life support with credit from
state-controlled lenders, leaving less capi-
tal for everyone else.
Such complaints aren’t widely heard,
not because they are rare but because they
are not made in public. Sotto voce, denizens
of India Inc say they fear retribution from
the authorities. Criticism can provoke a
call from an official that carries the implied
threat of lost contracts or withdrawn per-
mits, they say. After the suicide in July of
the founder of a coffee chain who claimed t
have been harassed by the tax authorities,
the term “tax terrorism”, first coined in
2014, has gained new traction. Indian en-
trepreneurs share stories of protracted in-
vestigations that cripple businesses.
Most of these problems are endemic in
India. Despite the liberalisation of the “Li-
cence Raj” in the early 1990s the country
has never quite let go of its deeply in-
grained interventionism. But the prime
minister, whose 13-year tenure as chief
minister of the western state of Gujarat
won him a reputation for sound economic
management, was going to be different,
members of the put-upon corporate class
hoped. As he begins his sixth year as India’s
prime minster, some of them are begin-
ning to wonder if the state’s success owes
more to go-getting Gujaratis than to their
erstwhile leader.^7Down and out in MumbaiSources: Datastream from Refinitiv; Bloomberg; Centre for MonitoringIndianEconomyS&P BSESensexstockmarketindex
1978-79=100Newinvestmentprojectsannounced*
RupeestrnIndia2018 201930,00032,00034,00036,00038,000NarendraModire-elected 40,000Budget
presentedReturn on equity
%*FinancialyearsendingMarch01020302006 08 10 12 14 16 18Sensexcompanies
All companies*
(20,000 public and private)0510152025302006 08 10 12 14 16 18 19Narendra Modi elected