Henny Sender is the founder and managing partner of Apsara Advisory, a strategic consultancy for financial services companies. She was previously a managing director at investment company BlackRock.
India, seemingly, has never looked better. Gross domestic product growth for the fiscal year ending next month is expected to reach 7.3%, making India the world's fastest-growing major economy.
By contrast, a decade ago, India was among the first countries to succumb to the "taper tantrum" of investor flight when U.S. Federal Reserve officials suggested they would begin tightening monetary policy.
Now, though, after almost two years of Fed rate hikes, India's economy is proving among the most resilient to the forces cooling global growth.
Yet analysts are increasingly hard-pressed to come up with reasons to invest in Indian stocks because valuations have already gotten so high relative to other markets -- yet share prices keep going up. Meanwhile, Indian government bonds are getting included in major global benchmark indexes despite continuing restrictions on capital flows, setting the stage for large-scale fund inflows.
Despite the money streaming into India's securities markets, rosy forecasts for continued strong economic growth and signs of some supply chains moving from China, net foreign direct investment into India has plummeted to the lowest level in a decade. As a share of GDP, net FDI inflows for the 12 months through September were lower than they have been since 2005, according to Shilan Shah of Capital Economics.
Optimistic announcements of fresh investments have not been followed by actual flows. In July, Taiwan's Foxconn Technology Group pulled out of a $19.5 billion semiconductor manufacturing joint venture with local conglomerate Vedanta Group. Last month, Sony withdrew from a deal valued at $10 billion to merge its local operations with those of Indian broadcaster Zee Entertainment.
"The unfortunate bottom line is that the slowing of FDI has continued and now lasted a year," J.P. Morgan economists wrote in a recent report.
The plunge in foreign direct investment raises concerns because India badly needs to generate manufacturing jobs for its youth. The so-called demographic dividend that a young population can bring will materialize only if young people can be gainfully employed.
Under Prime Minister Narendra Modi, New Delhi has launched a series of campaigns, including Make in India and the Production-Linked Incentive Scheme, to persuade carmakers, consumer electronics producers and other companies to set up factories in the country.
But in the eyes of some analysts, the government's investment push has been offset by countervailing moves to raise import barriers, discriminatory treatment of foreign companies as well as arbitrary policy changes and enforcement actions, especially in area of taxes.
Capital Economics' Shah cites New Delhi's move in August 2022 to close off a policy loophole under which Indian companies previously sent funds to offshore subsidiaries for the purpose of investing the money back into India at a preferential tax rate. He added that higher U.S. interest rates have also altered companies' calculus of the potential risks and returns of putting their money to work in India.
But for companies like Sony, which are looking to tap into India's burgeoning consumer market and not simply avail themselves of cheap labor, another important factor is in play.
Under Modi, the country's economic structure has become increasingly oligopolistic, with groupings of local conglomerates exerting dominance over many sectors and boxing out new entrants. In most cases, this business elite inherited control of the companies they run and are not themselves entrepreneurs.
An activist holds a placard featuring Adani Group Chairman Gautam Adani during a protest in New Delhi in February 2023.
© Reuters
At the same time, this elite has drawn closer and closer to the government. The prime example of this has been Gautam Adani, whose strong connections to Modi, stemming from their mutual ties to Gujarat state, have contributed to perceptions at home and abroad that the playing field for infrastructure investments is rigged in favor of business people with the right connections in New Delhi.
The local conglomerates have become so powerful that they have far less reason to seek international capital than they did even a few years ago. "They don't really like or need to dilute their stakes anymore," a senior executive at Bank of America previously based in Mumbai told me. "They are largely self-sufficient."
Indeed, the Indian business establishment has a long history of seeking government aid to block out new competitors, whether foreign or local. In colonial times, there was what was known as the License Raj. In the early 1990s, industrialists joined together informally as the "Bombay Club" to push back against market-opening reforms.
What is concerning today is that the elite coterie is becoming more entrenched, discouraging local entrepreneurs and foreign investors.
After a 12-year effort, South Korean steelmaker POSCO in 2017 abandoned a $12 billion plan to set up a mill in what is now Odisha state. The plan had been dogged by protests and lawsuits that claimed the project would harm the rights of Indigenous people and the environment. Many believe local steelmakers helped finance the campaigns to keep POSCO out.
Similarly, local carmakers today are lobbying hard to stop officials from making a deal with Tesla. The U.S. EV maker has been considering setting up a factory in the country but has demanded that it receive tariff waivers to import cars from production sites in other countries until the new plant is up and running.
In such cases, local industrialists have argued that the government would create too much risk if it brings in new market entrants.
"They can argue that if the competition becomes too intense and they become unable to generate profits, then they can't service their loans and will default," a local fund manager in Mumbai said. "That then [would] weaken the state-owned banks from whom they borrowed, which would create a problem for Delhi."
Yet it is only the narrow coterie of local industrialists who are profiting from the status quo. New players would bring new investment that in turn would create jobs, spur improvements in the quality of goods and services offered, and bring down prices. India as a whole is bearing heavy invisible costs from allowing the business elite to lean against the door to foreign investment.
