Indian Prime Minister Narendra Modi cannot be complacent that the Adani Group’s market collapse has stolen his thunder.
Modi’s Bharatiya Janata Party (BJP) had planned to use this week’s annual budget to start discussions to stay in power after next year’s national elections. Modi’s plans to support bourgeois families and empower women were relegated to second-class headlines.
Leading the global news: A spectacular US$104 billion loss knocks Gautam Adani out of his position as Asia’s richest man.
The crash that started last week was enough to make Tesla founder Elon Musk blush. Short-selling Hindenburg Research accused the Adani conglomerate of “brazen” market manipulation and accounting fraud.
Sales accelerated in the days after Adani’s 413-page rebuttal — the company’s attempt to paint Hindenburg’s criticism as an attack on India itself — reassured no one.
Since then, Credit Suisse and Citigroup have stopped accepting Adani bonds as collateral for margin loans to clients. Financial institutions such as Barclays demanded capital increases as collateral for loans. Adani’s flagship company has also withdrawn plans for his record $2.4 billion stock sale.
All this is terrible timing for the Modi government, just as India was in the global headlines for beating China in some key respects.
One is Gross Domestic Product (GDP) growth faster than Xi Jinping’s economy. Another is that India produces more high-tech “unicorn” startups than China.
The Adani crash came at a time when demographers were tipping the size of the workforce in the direction of India. It also casts an untimely spotlight on what is going on behind the scenes at Indian companies that PM Modi has spent nearly a decade modernizing.
Gavekal Research analyst Udith Sikand said:
Sikand says: Whether or not Hindenberg’s particular claims are justified, the report’s publication could cause at least some investors to reassess their expectations of returns from the world’s fastest-growing major economies. It shines a spotlight on the governance of highly competitive Indian companies. ”
Modi’s BJP hoped to reframe its legacy since 2014 in this week’s budget spotlight. The plan was to underscore his reform team’s determination to cut record deficits, accelerate structural reforms and convince credit rating agencies that change was underway.
“Given long-standing perceptions that Adani’s rise to the top of India’s billionaire list was largely due to his intimate relationships, the allegations of scandal at the Adani group are a testament to Modi’s political opponents. It will come as a gift,” says Sikand. Relations with prime ministers who, like Adani, are from the western state of Gujarat. ”
Professor Ashok Swain of Uppsala University said: In August 2022, Covid pushed 230 million Indians into poverty, but Adani’s value reached his $137 billion. Why do you need the Hindenburg Institute to write a report? ”
Some have attempted to characterize the Adani crash as India’s “China Everlasting Moment.” The most notable similarity is how Adani pointed out a major crack in the Indian economy that many investors have downplayed.
Lucror Analytics analyst Leonard Law explains how such a chain reaction can begin. “The biggest risk would be if Adani Group faced a severe deterioration in access to funding, especially in highly leveraged entities,” he said. This is because when liquidity is at stake in any of the companies, there can be knock-on effects on funding access for the wider group. ”
That said, Lo added, “The group is likely to continue to raise funds from onshore banks and bonds for the foreseeable future.” One caveat worth noting: Chinese banks now have limited exposure to the Evergrand debacle that rocked the mainland real estate sector. It explains part of why we remain so bullish on systemic risk.
But there are many worries, says VK Vijayakumar, strategist at Geojit Financial Services. Three days after Hindenburg’s report sent his Adani plunge, the National Stock Exchange of India’s major bank index fell 6.3%, double that of the broader market, he notes. . Here’s why. “Concern about the Adani Crisis Affecting Banks. ”
CLSA believes that Indian public sector banks hold approximately 30% of Adani Group’s debt, compared to less than 10% by private lenders.
That said, Adani’s story hits Japan’s Shinzo Abe more than the Margaret Thatcher-like shock therapy Indian leaders promised over nine years ago that Modi’s report to reshape the Indian economy. It reminds me of
In December 2012, the late Japanese prime minister took office and launched a regulatory “big bang” to cut bureaucracy, reignite innovation, raise wages, empower women and attract international talent. ‘ promised.
After a few wins to the board, mainly urging corporate shareholders to say a little more, Abe let the Bank of Japan do the rest.
In his first term, Modi decided to open up several key sectors to increase global investment, such as aviation and defense. His party also implemented a national goods and services tax, but while Modi was touting a “new India” built around Asia’s third-largest economy, he almost did not take action.
India is not the only Asian country that has seen moves to emphasize dialogue over action, as Prime Minister Abe did. Xi’s first 25-year term in office has not delivered a reform boom that will boost private sector growth. It has also not occurred in South Korea, Malaysia, the Philippines, or Thailand.
But since the Asian financial crisis of 1997-98, bankruptcies on the scale of Mr. Adani’s are rare. And that puts India Inc in the global spotlight for all the wrong reasons.
The recent rise of tech unicorns has thrust India into the spotlight for good reason. Adani’s story is a reminder that too many old cracks remain as Modi tries to promote his “New India” story.
More Notable Facts: Age 85th India is still a full 20 lang behind China in Transparency International’s Corruption Perceptions Index. Under Modi, New Delhi’s press freedom rankings plummeted. In 2022 alone, Reporters Without Borders downgraded India from her 8th to her 150th.th from 142nd.
These are not economic-loving trajectories for the world’s investors, who are rapidly proliferating a variety of alternatives. Indian leaders must not draw false conclusions from the escalating financial storm affecting the economy, said Salil Tripathi, senior adviser to the Institute for Human Rights and Business think tank.
“The lesson of the Adani episode,” says Tripathi. Foreign investors aren’t just in awe of connections.
The real issue: In the financial year ended 31 March 2022, Adani Group’s total gross debt increased by 40% to Rs 2.2 trillion (approximately $27 billion).
The ferocious sell-off, especially after Adani had to pull back a big stock sale on Wednesday, has investors feeling there may be more to it than the smoke emanating from the Hindenberg-triggered fire. It suggests that
The turn of the stake sale alone was a very happy day for one of India’s most famous emirs. Ten days ago, Adani’s nearly $200 billion empire made him Asia’s richest tycoon. At one point, he surpassed Amazon founder Jeff Bezos to become the second richest billionaire in the world.
Now, “Like many things in India, Adani’s empire looks like Trump’s home,” said economist Johns Hopkins University, who advised the Indonesian government amid the Asian meltdowns of the late ’90s. Steve Hanke says
A silver lining to all of this is that Team Modi will use this moment of nearly 7% growth to accelerate its efforts to increase transparency, level the playing field and reduce poverty.
One test is to prove that the Modi government can reduce the fiscal deficit, which reached 9.2% of GDP in the first year of the pandemic. Maintaining that progress is essential for India to achieve a credit rating one notch higher than junk.
With the US growing modestly at best and Europe and Japan avoiding recession, this is a huge challenge. The good news is that the economic boom from China’s economic reopening since the Covid-19 era has helped fill that void in a powerful way. Can the Modi government sustain domestic growth and take advantage of rising demand from China?
How New Delhi deals with the tick crisis that is filling Mumbai boardrooms with smoke and the tough questions go a long way toward providing answers.
Follow William Pesek on Twitter at @WilliamPesek.