How India’s Growth Ended In Tears

How India’s Growth Ended In Tears



It’s enough to make a poor man cry and a wealthy investor sprint for the exit. From the back of a van in Delhi’s chaotic Karol Bagh market, opposition politicians are selling discounted onions to disgruntled voters ahead of next year’s general election. The humble red onion, heart of the vegetable curry most Indians depend on, has more than trebled in price in the last few weeks and opposition leaders hope the increase will take a large bite into the Congress-led government’s remaining support.Peeling back its bashed, husky outer skin to its tear-jerking inner layers reveals not only the story of why its price has risen so sharply in the last month, but why the rupee has bombed in the foreign exchange markets and how India’s all-action ‘growth story’ has become a real weepy.

Last week, as the rupee tumbled below 63 to the US dollar and crashed through the 100 rupees to the pound barrier, onions were an unaffordable 80 rupees per kilo. The government may need to import them to increase supply and push back prices, but that option will become more expensive as rupee rates fall lower every day.

The immediate cause of the increase was the heavy monsoon rains in Maharashtra which left the vegetables rotting in the ground, but the price may not have soared so high had the government been strong and decisive enough to reform its agricultural sector when it first planned to in 2009.

It hoped foreign supermarkets like Tesco and Walmart would come in and revolutionise India’s backward agricultural sector. Forty per cent of all Indian produce rots on clunky bullock carts and rough baked roads before reaching the market. When they arrive, farmers get a tiny fraction on the retail price as as they pass through at least five agents, each taking their cut. Of the eighty rupees per kilo they were selling for last week, the farmer’s share was just eight.

India needs new smooth roads, cold-chain storage and modern transport logistics to replace sweaty bullock carts, and direct sales from farmer to retailer to stabilise prices, increase farm incomes and reduce food inflation – one of the country’s most politically sensitive issues.

The Indian government came close to collapse when it first announced its plan to allow foreign supermarkets to set up shop in late 2011. But it backed down after a key coalition partner threatened to resign and bring down the government with it.

By the time the government decided to push through the reform regardless last year, all the main supermarkets had been frightened off by the instability they had seen, and requirements to source 30pc of their goods from local suppliers.

The speed of India’s sudden decline has taken many, including hopeful ‘partners’ like Britain, by surprise. Barely three years ago, as Britain and the United States were staring at the worst recession in eight decades, India’s economy was growing at 8.5pc, a pound could buy only 65 rupees and ministers casually talked of double digit growth by 2011.

They planned to spend a trillion dollars on upgrading roads, building new airports, ports, and faster trains. The spoke of opening up their pension, banking, legal, defence and education sectors, and creating new low-tax special economic zones where firms could set up base without going through the dense undergrowth of Indian bureaucracy.

Since then, very few of those trillion dollars have been spent, major power projects have been halted, and bills to lift other barriers to foreign investment are gathering dust as India’s opposition regularly walks out of parliament in protest. Special Economic Zones have been abandoned and GDP has plunged to 5pc – not enough to maintain living standards when India’s population becomes the world’s largest within the next 15 years.

So, like Tesco and other supermarket chains, potential investors are holding back and watching.

Subodh Agarwal, co-founder of Mergers and Acquisition specialists Euromax Capital, made his fortune as an early champion of the Indian growth story. He began from Mumbai, India’s financial capital, and eventually set up shop in London, Singapore and Dubai, playing a role in the great Indian take-away which saw some of its biggest firms buy British business icons like Corus Steel, Jaguar Land Rover and Whyte and Mackay distillers.

Today, he thinks he may have to close his loss-making Mumbai office, and blames the government for frittering away a golden opportunity. “Even Indians are not investing in India. Indians have lost faith in their own economy because of non-governance,” he said.

It has failed to encourage longer term investment in essential infrastructure and instead made it easier for speculators to dip in and out. He believes the government should have introduced bonds for investors in infrastructure development but instead penalised major investors like the British mobile phone giant Vodafone, which was hit with an unexpected $2 billion tax bill after it acquired Indian rival Hutch in 2007.

It was just one of a series of decisions which made investors fear their money may not be safe in India.

That fear has frightened away investors when it has never needed them more to reduce a current account deficit which has “ballooned” to 4.8pc. Inflation is just under 9pc but will now rise steadily as the rupee continues to fall. Mr Agarwal believes the rupee will continue its slump to 77 to the dollar and beyond, pushing inflation to above 13pc within a few weeks. He believes India’s hopes of recovery depend on a strong, decisive government emerging from the next election.

“We need a stable government to develop a long term financial plan and policies to encourage long term money, say dollar infrastructure bonds,” he said. Investors will wait until the market has bottomed out, and the country’s leadership offers strong governance. The crisis is “entirely political” he said. Most political analysts however expect the next government to be another fragile coalition.

G.P Hinduja, whose family group owns Ashok Leyland, one of India’s largest truck and car manufacturers, said the fundamentals of the Indian economy remained sound, but negative perceptions of the government had thrown India into a negative cycle.

It appears that the government failed to see the warning signs of problems ahead when investment by Indian firms started to slow and taken continued growth for granted.

“Reforms got slowed down as a result, retrogressive steps such as retrospective application of tax laws were taken, large investment projects were held up for environmental and other reasons, with the government unable to take tough decisions because of coalition compulsions. Along with this, scams in various areas were exposed,” he said.

The government needs to breakout of the vicious circle it’s now in by clearing a number if major infrastructure projects, reassure international firms it will not apply laws retroactively, and resist pressure to reject environmental clearances for mining and industrial projects.

India’s Current Account Deficit could be reduced by issuing sovereign bonds and a “voluntary disclosure scheme to incentivise money held abroad to return,” he said.

With the election expected early next year, however, few decision makers are thinking of the long term, and neither are the voters who crowded around the Bharatiya Janata

Party’s vegetable van in Karol Bagh last week to buy onions at a bargain 35 rupees a kilo. Like their political rulers, they’re getting what they can while it’s going.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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