Indian Prime Minister Narendra Modi can’t be happy about the Adani Group market meltdown stealing his thunder.
Modi’s Bharatiya Janata Party (BJP) had planned to use this week’s annual budget to launch its argument to remain in power after next year’s national elections. Yet Modi’s plans to trim debt, support middle-class families and empower women were relegated to second-tier headlines.
Leading the global news: the epic US$104 billion loss knocking Gautam Adani from his perch as Asia’s richest man.
The crash that began last week has been enough to make Tesla founder Elon Musk blush. Short seller Hindenburg Research accused Adani’s conglomerate of “brazen” market manipulation and accounting fraud.
Selling accelerated in the days after Adani’s 413-page rebuttal — in which the company tried to color Hindenburg’s critique as an attack on India itself — comforted no one.
Since then, Credit Suisse and Citigroup stopped accepting Adani’s bonds as collateral for margin loans to clients. Institutions like Barclays Plc demanded increased shares as collateral against loans. Adani’s flagship company also pulled plans for a record $2.4 billion share sale.
All this is terrible timing for Modi’s government just as India was basking in global headlines about it besting China in a couple of vital respects.
One is faster gross domestic product (GDP) growth than Xi Jinping’s economy. Another is India producing more tech “unicorn” startups than China.
The Adani crash comes as demographers were tipping the workforce scales in India’s direction. It also shines an ill-timed spotlight on troubles under the surface of an India Inc that Modi has had nearly 10 years to modernize.
“The accusations of fraud at one of India’s biggest companies come at an especially inconvenient moment,” says analyst Udith Sikand at Gavekal Research.
To a significant extent, Sikand says, “the damage has been done. Whether Hindenburg’s specific allegations are shown to have merit or not, the report’s publication throws a spotlight on corporate India’s governance that is likely to cause at least some investors to reassess their expectations of returns from the world’s fastest-growing major economy.”
Modi’s BJP had hoped to use attention surrounding this week’s budget to reframe its legacy since 2014. The plan was to highlight his reform team’s determination to trim a record budget deficit, accelerate structural upgrades and convince credit rating companies that change is afoot.
“Now,” Sikand says, “the allegations of scandal at the Adani Group will come as a gift to Modi’s political opponents, given the long-standing perception that Adani’s rapid rise to the top of India’s billionaires’ list is primarily attributable to his close relationship with the prime minister, who, like Adani, hails from the western state of Gujarat.”
As professor Ashok Swain at Uppsala University puts it: “Before Modi became BJP’s prime ministerial candidate in September 2013, Adani’s worth was $1.9 billion. In August 2022, while Covid pushed 230 million Indians into poverty, Adani’s worth went up to $137 billion. Why does anyone need Hindenburg Research to write a report?”
Some have tried to characterize the Adani crash as India’s “China Evergrande moment.” The most notable similarity is how Adani might point to bigger cracks in the Indian economy that many investors downplayed.
Analyst Leonard Law at Lucror Analytics explains how such chain reactions can begin. “The biggest risk is if Adani Group faces a severe deterioration in access to financing, particularly at its highly leveraged entities,” he says. This, at a moment when a liquidity crunch at any one of the entities may have a ripple effect on financing access for the wider group.”
That said, Law adds, “the group can likely continue to raise funds from onshore banks and bonds for now.” One caveat worth noting: Chinese banks ended up only having limited exposure to the Evergrande fiasco that shook the mainland property sector. That explains in part why many of India’s sell-side analysts remain reasonably bullish on Adani’s broader systemic risk.
Yet worries abound, says strategist V K Vijayakumar at Geojit Financial Services. In the three days after the Hindenburg report sent Adani plunging, he notes, the main banking index of the National Stock Exchange of India fell 6.3%, double the broader market. The reason, he adds, is “concerns of the Adani crisis impacting the banks.”
CLSA reckons that India’s public sector banks hold about 30% of Adani Group’s debt versus less than 10% for private lenders.
That said, the Adani saga is a reminder that Modi’s report card for remaking the Indian economy is smacking more of Japan’s Shinzo Abe than the Margaret Thatcher-like shock therapy the Indian leader promised nine-plus years ago.
In December 2012, the late Japanese prime minister took office promising a regulatory “big bang” to slash bureaucracy, reignite innovation, increase wages, empower women and attract top international talent.
After putting a couple of wins on the board – mostly encouraging corporate shareholders to speak out a bit more – Abe left the rest to the Bank of Japan.
Modi moved in his first term to open some key sectors to increased global investment, including aviation and defense. His party also implemented a national goods-and-services tax. Mostly, though, Modi talked big about a “new India” being constructed around Asia’s third-biggest economy, but acted little.
India isn’t the only place in Asia where this Abe-esque more-talk-than-action dynamic can be found. Xi’s first two five terms in office didn’t come with a reform boom to champion the growth of the private sector. Nor has it emerged in South Korea, Malaysia, the Philippines or Thailand.
But corporate stumbles on Adani’s scale have been a rare occurrence since the 1997-98 Asian financial crisis. And it’s putting India Inc in the global spotlight for all the wrong reasons.
The tech unicorn stampede of recent years had India in the limelight for the right reasons. The Adani saga is a reminder that all too many of the old fissures remain as Modi tries to trumpet the “new India” narrative.
Among the facts that deserve more attention: at 85th place, India is still fully 20 rungs behind China in Transparency International’s corruption perceptions index. Under Modi, New Delhi’s press freedom rankings have plunged precipitously. In 2022 alone, Reporters Without Borders downgraded India eight positions to 150th from 142nd.
These are not the kinds of trajectories that endear an economy to global investors who have a fast-increasing array of alternatives. Indian leaders must not draw the wrong conclusions from the intensifying financial storm bearing down on their economy, notes Salil Tripathi, senior adviser to the Institute for Human Rights and Business think tank.
The “lesson of the Adani episode,” Tripathi says, is “you can’t globalize and not expect global entities to question you. International investors aren’t awed by connections” alone.
The real problem: in the financial year ended March 31, 2022, Adani Group’s total gross debt rose 40% to 2.2 trillion rupees (nearly $27 billion).
The ferocity of the selloff, particularly following Adani having to withdraw its blockbuster share sale on Wednesday, suggests investors sense there might be more than just smoke emanating from the fire that Hindenburg started.
The share sale U-turn alone was quite the comeuppance for one of India’s most celebrated chieftains. Ten days ago, Adani’s roughly $200 billion empire made him Asia’s wealthiest tycoon by a long way. At times, he has even overtaken Amazon founder Jeff Bezos as the world’s second-richest billionaire.
Now, “like many things in India, Adani’s empire looks like a house of cards,” says Johns Hopkins University economist Steve Hanke, who advised Indonesia’s government amid Asia’s late-90s meltdown.
The silver lining in all this would be for Team Modi to use this moment of nearly 7% growth to accelerate efforts to increase transparency, level playing fields and reduce poverty.
One test is for Modi’s government to prove it can narrow a budget deficit that reached 9.2% of GDP during the first year of the pandemic. Maintaining that progress is vital to India scoring a credit rating higher than one rung above junk.
That will be quite a challenge as the US grows modestly at best and Europe and Japan are skirting recession. The good news is that the coming economic boom from China’s reopening from the Covid-19 era is helping to fill the void in powerful ways. Can Modi’s government maintain domestic growth and harness rising demand from China?
The ways in which New Delhi deals with the Adani crisis filling Mumbai boardrooms with smoke – and difficult questions – will go a long way to providing answers. And whether the India versus China debate has any legs at all.
Follow William Pesek on Twitter at @WilliamPesek
