Blackstone is finding fewer opportunities in India, where it says “serious governance issues” threaten to erode investor returns amid the slowest pace of economic growth in a decade. “The most prudent assumptions made of India are turning out to be highly optimistic”

Blackstone Sees Fewer Breaks as Singh Founders: Corporate India

Blackstone Group LP (BX) is finding fewer opportunities in India, where it says “serious governance issues” threaten to erode investor returns amid the slowest pace of economic growth in a decade. The world’s largest manager of alternative assets including private equity and real estate has been “very cautious” in Asia’s third-biggest economy because it is becoming more difficult for the government to make the right decisions, Akhil Gupta, chairman of Blackstone’s Indian unit, said in an interview in his office in Mumbai. “The most prudent assumptions made of India are turning out to be highly optimistic,” he said. “One doesn’t see a way out. I haven’t ever seen such pessimism when we talk to Indian company or government officials.”New York-based Blackstone is among investors deterred by a policy drift after a series of corruption allegations paralyzed Prime Minister Manmohan Singh’s administration. Frequent rule changes and litigations have undermined confidence in the $1.8 trillion economy that expanded 5 percent in the year to March 31, the least since 2003, versus an unprecedented average of 8.7 percent in the five years before the financial crisis of 2008.

Behind Kazakhstan

Gupta’s pessimism echoes that of Indian billionaire Kumar Mangalam Birla, who said in March that he would rather invest in countries such as Brazil and Indonesia. India slipped three levels to 59th in the 2013 World Economic Forum’s Global Competitiveness Index, behind Costa Rica and Khazakhstan. Brazil was ranked 48, while Indonesia was in the 50th position.

India’s government has changed policies since September to fight the weakest economic growth in a decade by easing investment rules in the aviation and retail businesses.

“We think inflows will resume,” Finance Minister Palaniappan Chidambaram said in an interview in Moscow this month. “There’s a good chance we can grow close to 6 percent.”

ArcelorMittal (MT), the world’s biggest steelmaker, and South Korea’s Posco (005490) this month scrapped $12 billion of proposed steel projects in India as land acquisition delays and slowing demand for the alloy diminished their viability.

The decision by the two companies is a blow to Singh, who is struggling to lure capital inflows from abroad and finance a record current-account deficit that pushed the local currency to an all-time low this month. He is scheduled to meet top business executives today to review steps needed to revive the economy.

‘Muddled’ Message

The benchmark S&P BSE Sensex (SENSEX) index of stocks has dropped 6 percent since peaking in November 2010, according to data compiled by Bloomberg.

“The governance issue has a cascading impact on everything else,” Gupta said. “It results in higher inflation, higher interest rates, low profitability, lower stock prices. I am not one who is betting on a turnaround soon.”

The Reserve Bank of India, which cut the benchmark repurchase rate three times this year after gains in wholesale prices eased, started tightening money markets to stem the slide in the rupee, which has plunged 8.1 percent against the dollar since March 31, the most among Asian currencies.

The RBI on July 15 raised the marginal standing facility and bank rates to 10.25 percent and set a cap on daily lending through the repo window. Deutsche Bank AG said the RBI’s unexpected policy reversal sent a “muddled” message to investors, while Mizuho Bank Ltd. said the central bank’s measures lacked coherence.

Factory Output

The measures by the RBI fueled a surge in bank funding costs, with three-month interbank money rates jumping to 10.28 percent on July 25, the highest since April 2012. Loans in India rose 13.7 percent in June from a year earlier, the least since 2009, while corporate bond sales plunged 96 percent in July.

Factory output slumped 1.6 percent in May, according to the latest available data, while retail inflation averaged 10 percent since April 2012. Standard & Poor’s last year lowered the sovereign outlook to negative and a step closer to junk.

“It is not just my view, but everybody is being cautious,” Gupta said. “Some of the deals that would have passed muster in a normal environment view, we won’t do it now. The number of deals that qualify for investments in this environment has significantly come down.”

Real Estate

Blackstone, the world’s biggest private-equity firm, oversees $229.6 billion in assets. It has invested about $2.9 billion in India, with about a third of the total in real estate, according to the company.

The firm on July 17 announced it invested about 3.3 billion rupees ($56 million) in Agile Electric Sub-Assembly Ltd. by buying out the stake owned by HBL Power Systems Ltd., making it the company’s fourth buyout in India and triggering an open offer for Agile’s unit Igarashi Motors India Ltd. (IGM)

HBL needed the money to expand its battery business, while Blackstone will bring in more funds to help Agile’s growth, said Padmanaban Mukund, managing director of Agile.

“I am long-term very bullish on India,” he said. “India has the best fundamentals for sustained high growth for any large economy with both supply- and demand-side demographics in its favor.”

Blackstone invested $300 million in Moser Baer Projects Pvt. for a “significant minority stake,” Gupta had said in August 2010. It bought a stake in Monnet Power Co., a unit of Monnet Ispat & Energy Ltd. (MISP), in July 2010.

Gupta said he won’t be making investments in the power sector for now because fuel-supply bottlenecks and mining restrictions due to environmental concerns have hurt electricity producers. A court-ordered ban on iron-ore mining has also starved steelmakers in the country.

Vodafone Tax

Birla, who runs companies with sales totaling $40 billion, said in March that frequent policy changes discourages spending, saying India’s country risk is “pretty elevated.”

“Chances are that for deployment of capital, you would look to see if there’s an asset overseas rather than India,” he said in an interview to Bloomberg TV India. “Global capital today is extremely mobile. Why will anyone invest in India?”

Vodafone Group Plc (VOD), the world’s second-largest wireless carrier, is still seeking to settle a $2.2 billion tax dispute with Indian authorities stemming from the 2007 purchase of Hutchison Whampoa Ltd.’s local operations. The nation’s Supreme Court ruled on Jan. 20, 2012 that the Newbury, U.K.-based company isn’t liable to pay the levies demanded by India.

‘Strategic Player’

In February 2012, the top court canceled 22 mobile-phone licenses held by local partners of companies including Norway’s Telenor ASA (TEL) and Russia’s Sistema JSFC, after the government auditor said the 2008 sale of the permits lacked transparency and ineligible bidders bought them at “unbelievably low prices.”

“For a strategic player with a long-term view of 30-year horizon, it’s a great time to come to the country,” Gupta said. “For a PE investor, it is difficult as you don’t know what’s going to happen. If growth doesn’t take place in two to three years, whole returns will be eaten away.”

To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Anto Antony in Mumbai at aantony1@bloomberg.net